<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, 2000
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 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)
(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 JULY 31, 2000
----- -------------
COMMON STOCK $.01 PAR VALUE 40,250,904
--------------------------------------------------------------------------------
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations................................1
Consolidated Balance Sheets..........................................2
Consolidated Statements of Cash Flows................................3
Consolidated Statements of Comprehensive Loss........................4
Notes to Consolidated Financial Statements...........................5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................10
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK................................................18
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS...................................................19
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...........................19
Item 3. DEFAULTS UPON SENIOR SECURITIES.....................................19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................19
Item 5. OTHER INFORMATION...................................................20
Item 6. EXHIBITS AND REPORTS ON FORM 8-K....................................20
SIGNATURE.............................................................................21
EXHIBIT INDEX.........................................................................22
</TABLE>
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUE $ 300,136 $ 185,626 $ 588,089 $ 316,854
COST OF REVENUE 215,250 142,860 422,685 247,456
--------- --------- --------- ---------
GROSS MARGIN 84,886 42,766 165,404 69,398
--------- --------- --------- ---------
OPERATING EXPENSES
Selling, general and administrative 83,364 41,553 162,631 70,849
Depreciation and amortization 27,075 12,514 49,245 21,490
--------- --------- --------- ---------
Total operating expenses 110,439 54,067 211,876 92,339
--------- --------- --------- ---------
LOSS FROM OPERATIONS (25,553) (11,301) (46,472) (22,941)
INTEREST EXPENSE (33,343) (17,523) (63,285) (34,293)
INTEREST AND OTHER INCOME 8,102 2,756 15,711 6,011
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (50,794) (26,068) (94,046) (51,223)
INCOME TAXES -- -- -- --
--------- --------- --------- ---------
NET LOSS $ (50,794) $ (26,068) $ (94,046) $ (51,223)
========= ========= ========= =========
BASIC AND DILUTED NET
LOSS PER COMMON SHARE $ (1.27) $ (0.92) $ (2.41) $ (1.80)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 40,103 28,486 38,964 28,402
========= ========= ========= =========
Other Data:
EBITDA $ 1,522 $ 1,213 $ 2,773 $ (1,451)
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED)
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 541,623 $ 471,542
Restricted investments 13,155 25,932
Marketable securities 13,678 --
Accounts receivable (net of allowance for
doubtful accounts of $38,315 and $36,453) 201,297 165,384
Prepaid expenses and other current assets 76,565 56,994
----------- -----------
Total current assets 846,318 719,852
PROPERTY AND EQUIPMENT - Net 369,402 285,390
INTANGIBLES - Net 561,586 402,030
OTHER ASSETS 51,169 44,101
----------- -----------
TOTAL ASSETS $ 1,828,475 $ 1,451,373
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 196,699 $ 169,527
Accrued expenses and other current liabilities 141,177 123,453
Accrued interest 39,402 32,420
Current portion of long-term obligations 19,575 16,438
----------- -----------
Total current liabilities 396,853 341,838
LONG-TERM OBLIGATIONS 1,250,690 913,506
OTHER LIABILITIES 9,045 4,543
----------- -----------
Total liabilities 1,656,588 1,259,887
----------- -----------
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 150,000,000
shares; issued and outstanding,
40,241,614 and 37,101,464 shares 402 371
Additional paid-in capital 518,928 417,060
Accumulated deficit (318,435) (224,389)
Accumulated other comprehensive income/(loss) (29,008) (1,556)
----------- -----------
Total stockholders' equity 171,887 191,486
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,828,475 $ 1,451,373
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (94,046) $ (51,223)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and accretion 49,426 21,670
Sales allowance 8,292 8,361
Stock issuance - 401(k) Plan 75 118
Minority interest share of loss (69) --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (38,260) (23,709)
(Increase) decrease in prepaid expenses and
other current assets (19,050) (24,241)
(Increase) decrease in other assets (3,029) (3,476)
Increase (decrease) in accounts payable 10,153 13,354
Increase (decrease) in accrued expenses,
other current liabilities and other liabilities (10,077) 38,193
Increase (decrease) in accrued interest payable 6,974 9,859
--------- ---------
Net cash used in operating activities (89,611) (11,094)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (92,447) (45,395)
Sale (purchase) of restricted investments 12,778 12,062
Purchase of marketable securities (15,005) --
Cash used for business acquisitions, net of cash acquired (51,426) (92,594)
--------- ---------
Net cash used in investing activities (146,100) (125,927)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases and other (3,857) (20,419)
long-term obligations
Proceeds from sale of common stock and exercise of
stock options 2,467 1,396
Proceeds from issuance of long-term obligations 324,735 192,500
Deferred financing costs (10,000) --
--------- ---------
Net cash provided by financing activities 313,345 173,477
--------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (7,553) (3,973)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 70,081 32,483
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 471,542 136,196
--------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 541,623 $ 168,679
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET LOSS $ (50,794) $ (26,068) $ (94,046) $ (51,223)
OTHER COMPREHENSIVE INCOME/(LOSS) -
Foreign currency translation adjustment (15,752) 591 (26,130) 1,875
Unrealized Gain/(Loss) on marketable securities (16,724) -- (1,322) --
--------- --------- --------- ---------
COMPREHENSIVE LOSS $ (83,270) $ (25,477) $(121,498) $ (49,348)
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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 six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2000.
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) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation --The consolidated financial statements include
the accounts of the Company, its wholly-owned subsidiaries and all other
subsidiaries over which the Company exerts control. All material
intercompany profits, transactions, and balances have been eliminated in
consolidation. There are minority shareholders representing outside
ownership of 49% of the common stock of Matrix Internet, S.A. ("Matrix"),
49% of Cards & Parts Telecom GmbH ("Cards & Parts"), 49% of CS
Communications Systems GmbH and CS Network GmbH ("Citrus"), 63% of Bekkoame
Internet, Inc. ("Bekko"), 9.9% of A-Tel GmbH ("A-Tel"), and 40% of Direct
Internet Pvt., Ltd. ("DIPL"), all of which the Company has a controlling
interest. All other investments in affiliates are carried at cost.
Marketable Securities --Marketable securities are classified as
available-for-sale and are recorded at current market value. Net unrealized
gains and losses on marketable securities are excluded from earnings and
are reported as other comprehensive income/(loss) until realized.
New Accounting Pronouncements --In March 2000, the Financial Accounting
Standards Board issued Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25," which clarifies the application of Opinion 25 for
certain issues including: (1) the definition of an employee for purposes
of applying APB Opinion 25, (2) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (3) the accounting consequences
of various modifications to the terms of a previously fixed stock option
or award and (4) the accounting for an exchange of stock compensation
awards in a business combination. The Company does not expect that the
adoption of this interpretation will have a material impact on the
Company's consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. The guidelines in
SAB No. 101 must be adopted, and the Company intends to adopt such
guidelines, by the fourth quarter of 2000.
(3) ACQUISITIONS
In June 2000, the Company acquired 100% of CTE Networks ("CTE"), a
long-distance reseller for $3.4 million (subject to additional purchase
price adjustments), with payments through June 30, 2000 amounting to $2.0
million in cash and 50,269 shares of the Company's common stock. The terms
of the acquisition agreement provide for additional consideration to be
paid if the acquired company's results of operations exceed certain
targeted levels. Such consideration will be paid in cash and shares of the
Company's common stock and the maximum amount of additional consideration
remaining at June 30, 2000 is approximately $20.3 million and will be
payable, if earned through December 31, 2000. Any additional consideration
paid will be recorded as goodwill when payment is made.
In May 2000, the Company acquired 90.1% of A-Tel GmbH ("A-Tel"), a German
reseller of voice traffic to small-and medium-sized enterprises ("SMEs"),
for $1.4 million in cash.
In May 2000, the Company acquired 100% of InterNeXt S.A. ("InterNeXt"),
a value-added Internet Service Provider ("ISP") with national facilities
in France, for $13.8 million (subject to purchase price adjustments), with
payments though June 30, 2000 amounting to $10.7 million in cash and
33,446 shares of the Company's common stock. The maximum amount of
remaining consideration payable at June 30, 2000 is approximately $2.1
million.
In May 2000, the Company acquired 100% of Global Sales Pty., Ltd. ("Global
Sales"), an agent serving the Company's retail operations in Australia, for
$1.3 million in cash.
5
<PAGE>
In April 2000, the Company gained a controlling interest in Direct Internet
Pvt., Ltd. ("DIPL"), an India-based company providing Internet services,
with an investment of $2.6 million in cash.
In March 2000, the Company acquired 37% and control of Bekkoame Internet,
Inc. ("Bekko"), a Japanese facilities-based ISP for $10.9 million in cash.
In March 2000, the Company acquired Eco Software, Inc. ("Shore.Net"),
a U.S. based, business-focused ISP for $44.5 million, comprised of
$23.5 million in cash and 477,886 shares of the Company's common stock.
In February 2000, the Company acquired 51% of each of CS Communications
Systems GmbH and CS Network GmbH ("Citrus"), a reseller of voice traffic
and seller of telecommunications equipment and accessories for $1.0
million, comprised of $0.9 million in cash and 2,092 shares of the
Company's common stock.
In February 2000, the Company acquired over 96% of the common stock of LCR
Telecom Group, Plc ("LCR Telecom"), and subsequently the Company acquired
the remaining shares for a total of 100%, in exchange for 2,216,632 shares
of the Company's common stock valued at $73.4 million. Acquisition expenses
increased the total purchase price to $76.2 million. The purchase price is
subject to adjustment and may be increased to a total of 2,277,092 shares.
LCR Telecom operates principally in European markets and is an
international telecommunications company providing least cost routing,
international callback and other value added services, primarily to small-
and medium-sized enterprises.
In January 2000, the Company acquired Infinity Online Systems ("Infinity"),
an ISP based in Ontario, Canada, for $2.3 million, comprised of $1.2
million in cash and 29,919 shares of the Company's common stock.
The Company has accounted for all of these acquisitions using the purchase
method of accounting and accordingly, the net assets and results of
operations of the acquired companies have been included in the Company's
financial statements since the acquisition dates. The purchase price,
including direct costs, of the Company's acquisitions was allocated to
assets acquired, including intangible assets and liabilities assumed, based
on their respective fair values at the acquisition dates. The purchase
price allocation for the 2000 acquisitions are preliminary.
(4) MARKETABLE SECURITIES
In connection with a strategic business arrangement with Pilot Network
Services ("Pilot"), in January 2000, the Company made a $15.0 million
strategic investment in Pilot pursuant to which the Company purchased
919,540 shares, or 6.3%, of Pilot's common stock at a price of $16.3125 per
share, and received a warrant to purchase an additional 200,000 shares at
$25.00 per share. At June 30, 2000, the unrealized loss on this investment
was $1.3 million.
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(unaudited)
--------- ---------
<S> <C> <C>
Goodwill $ 477,054 $ 340,272
Customer lists 138,233 95,192
Other 3,834 1,914
--------- ---------
Subtotal 619,121 437,378
Less: Accumulated amortization (57,535) (35,348)
--------- ---------
Total goodwill and other intangible assets, net $ 561,586 $ 402,030
========= =========
</TABLE>
Amortization expense for Goodwill and Other Intangible Assets for the six
months ended June 30, 2000 was $22.8 million.
6
<PAGE>
(6) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(unaudited)
----------- -----------
<S> <C> <C>
Obligations under capital leases $ 19,780 $ 21,072
Senior notes 1,168,988 868,807
Equipment financing 43,042 29,406
Other long-term obligations 38,455 10,659
----------- -----------
Subtotal 1,270,265 929,944
Less: Current portion of long-term obligations (19,575) (16,438)
----------- -----------
Total $ 1,250,690 $ 913,506
=========== ===========
</TABLE>
In February 2000, the Company completed the sale of $250 million in
aggregate principal amount of 5 3/4% convertible subordinated debentures
due 2007 ("February 2000 Debentures") with semi-annual interest payments.
On March 13, 2000, the Company announced that the initial purchasers of
the February 2000 Debentures had exercised their $50 million
over-allotment option granted pursuant to a purchase agreement dated
February 17, 2000. The debentures are convertible into approximately
6,025,170 shares of the Company's common stock based on a conversion price
of $49.7913 per share.
During the year ended December 31, 1999, NTFC Capital Corporation and
Ericsson Financing Plc provided to the Company $30.0 million and $34.3
million, respectively, in financing to fund the purchase of network
equipment, secured by the equipment purchased. At June 30, 2000, $30.0
million was utilized through NTFC Capital Corporation and $10.3 million
was utilized through Ericsson Financing Plc. Borrowings under these credit
facilities accrue interest at rates ranging from 10.93% to LIBOR plus 5.8%
and are payable over a 5-year term. At December 31, 1999, approximately
$24.4 million was utilized through NTFC Capital Corporation.
In March 2000, the Company entered into a strategic business alliance
agreement with Hewlett-Packard Company pursuant to which Hewlett-Packard
will provide products and services to enable the Company to develop data
centers in Europe, Australia, Japan and Brazil. Hewlett-Packard also
agreed to purchase up to $50 million in convertible debt. Such debt will
bear interest at a rate of 9.25% per annum and is convertible into the
Company's common stock at a price of $60 per share. The Company has the
right under certain circumstances to require Hewlett-Packard to convert
the debt to equity. As of June 30, 2000, Hewlett-Packard funded $25
million of this investment, which is included in other long-term
obligations. Until converted, the debt will be secured by equipment
purchased from Hewlett-Packard with the proceeds of the investment.
7
<PAGE>
(7) 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 and assets of the North America
segment include shared corporate functions and assets, which the Company
does not allocate to its other geographic segments for management
reporting purposes. Summary information with respect to the Company's
segments is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
(unaudited)
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
NET REVENUE
North America $ 131,903 $ 90,696
Asia-Pacific 79,683 56,084
Europe 88,550 38,846
--------- ---------
Total $ 300,136 $ 185,626
========= =========
INCOME/(LOSS) FROM OPERATIONS
North America $ (13,777) $ (9,184)
Asia-Pacific (2,985) (1,698)
Europe (8,791) (419)
--------- ---------
Total $ (25,553) $ (11,301)
========= =========
<CAPTION>
June 30, December 31,
(unaudited)
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
North America $1,257,702 $1,069,716
Asia-Pacific 195,564 182,748
Europe 375,209 198,909
--------- ---------
Total $1,828,475 $1,451,373
========= =========
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES
In December 1999, the Company agreed to purchase approximately $23.2
million of fiber capacity from Qwest Communications which will provide the
Company with an ATM+IP based nationwide broadband backbone of nearly
11,000 route miles of fiber optic cable in the U.S. as well as private
Internet peering at select sites in the U.S. and overseas. In March 2000,
the Company agreed to purchase an additional $22.2 million of fiber
capacity and other services.
On December 9, 1999, Empresa Hondurena de Telecommunicaciones, S.A., based
in Honduras, filed suit in Florida State Court in Broward County against
TresCom and one of TresCom's wholly-owned subsidiaries, St. Thomas and San
Juan Telephone Company, alleging that such entities failed to pay amounts
due to plaintiff pursuant to contracts for the exchange of
telecommunications traffic during the period from December 1996 through
September 1998. The Company acquired TresCom in June 1998 and TresCom is
currently the Company's subsidiary. Plaintiff is seeking approximately $14
million in damages, plus legal fees and costs. The Company filed an answer
on January 25, 2000 and discovery has commenced. Because it is only in the
early stages of discovery, the Company's ultimate legal and financial
liability with respect to such legal proceeding cannot be estimated with
any certainty at this time. The Company intends to defend the case
vigorously.
The Company is subject to certain other claims and legal proceedings that
arise in the ordinary course of its business activities. Each of these
matters is subject to various uncertainties, and it is possible that some
of these matters may be decided unfavorably to the Company. Management
believes that
8
<PAGE>
any liability that may ultimately result from the resolution of these
matters will not have material adverse effect on the financial condition or
results of operations or cash flows of the Company.
(9) SUBSEQUENT EVENTS
None.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Primus is a facilities-based global total service provider offering
bundled international and domestic Internet data and voice services to
business and residential retail customers and other carriers located in
the United States, Canada, Brazil, the United Kingdom, continental Europe,
Australia and Japan. The Company seeks to capitalize on the increasing
demand for high-quality international communications services, which is
being driven by the globalization of the world's economies, the worldwide
trend toward telecommunications deregulation and the growth of global data
and Internet traffic. Primus provides services over its network, which
consists of (i) 23 carrier-grade switches, including 19 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 300 points of presence ("POPs") and Internet
access nodes in additional markets within our principal service regions;
(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, together with the capacity the Company
leased on an Intelsat satellite. Utilizing this network, along with resale
arrangements and foreign carrier agreements, the Company provides quality
service to approximately 2.1 million customers.
Net revenue is earned based on the number of minutes billable and is
recorded upon completion of a call, adjusted for sales allowance. The
Company generally prices its services at a savings compared to the
major carriers operating in its principal service regions. The
Company's net revenue is derived from carrying a mix of business,
residential and carrier long distance traffic, data and Internet
traffic and in Australia, also from the provision of both local and
cellular services. The Company expects to market its services to
customers with significant international long distance usage, including
small- and medium-sized businesses, multinational corporations, ethnic
residential customers and other telecommunications carriers and
resellers.
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, cost of revenue increasingly will be comprised of fixed
costs.
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 from
outside of the United States; therefore, changes in foreign currency
exchange rates have had and may continue to 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.
10
<PAGE>
OTHER OPERATING DATA
The following information for the three months ended June 30, 2000 and
1999 (in thousands) 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.
<TABLE>
<CAPTION>
------------------------------------------------------------
Three Months Ended June 30, 2000
(unaudited)
------------------------------------------------------------
Minutes of Long Distance Use
Net ---------------------------------------------
Revenue International Domestic Total
--------- ------------- --------- ---------
<S> <C> <C> <C> <C>
North America $ 131,903 428,977 482,442 911,419
Asia-Pacific 79,683 38,318 160,742 199,060
Europe 88,550 314,990 255,968 570,958
--------- --------- --------- ---------
Total $ 300,136 782,285 899,152 1,681,437
========= ========= ========= =========
<CAPTION>
------------------------------------------------------------
Three Months Ended June 30, 1999
(unaudited)
------------------------------------------------------------
Minutes of Long Distance Use
Net ---------------------------------------------
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>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AS
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1999.
NET REVENUE increased $114.5 million or 61.7% to $300.1 million for the
three months ended June 30, 2000, from $185.6 million for the three months
ended June 30, 1999.
North America: Of the total Company's net revenue increase of $114.5
million, $41.2 million was associated with North American
operations, representing a growth rate of 45.4%. The growth reflects
increased traffic in business and ethnic residential retail
operations and in carrier operations, and includes the operations of
the Company's 1999 and 2000 acquisitions including Telegroup (since
the June 1999 acquisition), AT&T Canada (since the May 1999 customer
base acquisition), TelSN (since the June 1999 acquisition), Matrix
(since the November 1999 acquisition) and Shore.Net (since the March
2000 acquisition).
Asia-Pacific: The Company's Asia-Pacific net revenue increased $23.6
million or 42.1% from $56.1 million for the three months ended June
30, 1999 to $79.7 million for the three months ended June 30, 2000.
Part of the net revenue increase in the Asia-Pacific region was from
the provision of local access in Australia, which resulted from
unbundling of the local loop for residential customers, as well as
the continued growth in the Company's voice business. Additionally,
data and Internet growth in Australia and the acquisition of Bekko
(since the March 2000 acquisition) contributed to the increase in
net revenue.
Europe: European net revenue increased $49.8 million, growing 128.0%
from $38.8 million for the three months ended June 30, 1999 to $88.6
million for the three months ended June 30, 2000. The European net
revenue increase is primarily attributed to the addition of
Telegroup (since the June 1999 acquisition), LCR Telecom (since the
February 2000 acquisition), Cards &
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Parts (since the September 1999 acquisition), Citrus (since the
February 2000 acquisition), InterNeXt (since the May 2000
acquisition) and A-Tel (since the May 2000 acquisition). The
additional net revenue growth resulted from increased retail
business and residential traffic in Germany and the United Kingdom.
Carrier services also increased in Germany, France, Spain and
Switzerland from the same period in 1999.
COST OF REVENUE increased $72.4 million, from $142.9 million for the three
months ended June 30, 1999 to $215.3 million, for the three months ended
June 30, 2000. As a percentage of net revenue, the cost of revenue
decreased by 530 basis points from 77.0% to 71.7% 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, and the addition of expense from
acquired operations including LCR, Telegroup, the LTN and Wintel Companies
and AT&T Canada.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $41.8 million to
$83.4 million, or 27.8% of net revenue, for the three months ended June
30, 2000 from $41.6 million, or 22.4% of net revenue, for the three months
ended June 30, 1999. The increase is attributable to the impact of
increased advertising, marketing and sales expenses, expansion of the
Company's data and Internet business and the impact of the Company's
retail acquisitions which include LCR, Telegroup, and AT&T Canada.
DEPRECIATION AND AMORTIZATION EXPENSE increased by $14.6 million to $27.1
million for the three months ended June 30, 2000 from $12.5 million for
the three months ended June 30, 1999. The increase is associated with
increased amortization expense related to intangible assets arising from
the Company's acquisitions and with increased depreciation expense related
to capital expenditures for fiber optic cable, switching and other network
equipment being placed into service in addition to the impact of the
Company's retail acquisitions.
INTEREST EXPENSE increased from $17.5 million for the three months ended
June 30, 1999 to $33.3 million for the three months ended June 30, 2000.
The increase is primarily attributable to the $300 million 5 3/4%
Convertible Subordinated Debentures due 2007 ("February 2000 Debentures"),
the $250 million 12 3/4% Senior Notes due 2009 ("October 1999 Senior
Notes"), the $45.5 million 11 1/4% senior notes due 2009 ("Telegroup
Notes"), and additional capital lease and equipment financing.
INTEREST INCOME increased to $8.1 million for the three months ended June
30, 2000 from $2.8 million for the three months ended June 30, 1999. The
increase is a result of the net proceeds from the Company's debt and
secondary equity offerings.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AS COMPARED
TO THE SIX MONTHS ENDED JUNE 30, 1999.
NET REVENUE increased $271.2 million or 85.6% to $588.1 million for the
six months ended June 30, 2000, from $316.9 million for the six months
ended June 30, 1999.
North America: Of the net revenue increase, $106.6 million was
associated with North American operations, representing a growth
rate of 69.8%. The growth reflects increased traffic in business and
ethnic residential retail operations and in carrier operations, and
includes the operations of the Company's 1999 and 2000 acquisitions
including Telegroup (since the June 1999 effective date of the
acquisition), AT&T Canada (since the May 1999 customer base
acquisition), the LTN and Wintel Companies (since the March 1999
acquisition), TelSN (since the June 1999 acquisition), Matrix (since
the November 1999 acquisition) and Shore.Net (since the March 2000
acquisition).
Asia-Pacific: The Company's Asia-Pacific net revenue increased $54.1
million or 53.8% from $100.5 million for the six months ended June
30, 1999 to $154.6 million for the six months ended June 30, 2000.
Part of the net revenue increase in the Asia-Pacific region was from
the provision of local access in Australia, which resulted from
unbundling of the local loop for residential customers, as well as
the continued growth in the Company's voice business.
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Additionally, data and Internet growth in Australia and the
acquisition of Bekko (since the March 2000 acquisition) contributed
to the increase in net revenue.
Europe: European net revenue increased $110.5 million, growing 174%
from $63.5 million for the six months ended June 30, 1999 to $174.0
million for the six months ended June 30, 2000. The European net
revenue increase is primarily attributed to the addition of
Telegroup, LCR Telecom and Cards & Parts operations. The additional
net revenue growth resulted from increased retail business and
residential traffic in Germany and the United Kingdom. Carrier
services also increased in the United Kingdom, Germany and France
from the same period in 1999.
COST OF REVENUE increased $175.2 million, from $247.5 million for the six
months ended June 30, 1999 to $422.7 million, for the six months ended
June 30, 2000. As a percentage of net revenue, the cost of revenue
decreased by 620 basis points from 78.1% to 71.9% 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, and the addition of expense from
acquired operations including LCR, Telegroup, AT&T Canada and the LTN and
Wintel Companies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $91.8 million to
$162.6 million, or 27.7% of net revenue, for the six months ended June 30,
2000 from $70.8 million, or 22.4% of net revenue, for the six months ended
June 30, 1999. The increase is attributable to the impact of increased
advertising, marketing and sales expenses, expansion of the Company's data
and Internet business and the impact of the Company's retail acquisitions
which include LCR, Telegroup, and AT&T Canada.
DEPRECIATION AND AMORTIZATION EXPENSE increased by $27.7 million to $49.2
million for the six months ended June 30, 2000 from $21.5 million for the
six months ended June 30, 1999. The increase is associated with increased
amortization expense related to intangible assets arising from the
Company's acquisitions and with increased depreciation expense related to
capital expenditures for fiber optic cable, switching and other network
equipment being placed into service placed into service, in addition to
the impact of the Company's retail acquisitions.
INTEREST EXPENSE increased from $34.3 million for the six months ended
June 30, 1999 to $63.3 million for the six months ended June 30, 2000. The
increase is primarily attributable to the $300 million 5 3/4% Convertible
Subordinated Debentures due 2007 ("February 2000 Debentures"), the $250
million 12 3/4% Senior Notes due 2009 ("October 1999 Senior Notes"), the
$45.5 million 11 1/4% senior notes due 2009 ("Telegroup Notes"), and
additional capital lease and equipment financing.
INTEREST INCOME increased to $15.7 million for the six months ended June
30, 2000 from $6.0 million for the six months ended June 30, 1999. The
increase is a result of the net proceeds from the Company's debt and
secondary equity offerings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from cash used in operating
activities, purchases of network equipment including switches, related
transmission equipment and international and domestic fiber optic cable
transmission capacity, satellite earth stations and satellite 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, bank debt, equipment financing
and capital lease financing.
Net cash used in operating activities was $89.6 million for the six months
ended June 30, 2000 as compared to net cash used in operating activities
of $11.1 million for the six months ended June 30, 1999. The increase in
operating cash used was comprised of an increase in the net loss mostly
due to an increase in interest expense, an increase in accounts receivable
due to higher revenue in 2000, and a decrease in accounts payable.
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Net cash used in investing activities was $146.1 million for the six
months ended June 30, 2000 compared to net cash used in investing
activities of $125.9 million for the six months ended June 30, 1999. Net
cash used in investing activities during the six months ended June 30,
2000 includes $92.4 million of capital expenditures primarily for the
expansion of the Company's global network as compared to $45.4 million
during the six months ended June 30, 1999. Additionally, $51.4 million of
cash was used during the three months ended March 31, 2000 to acquire
Shore.Net, Infinity, Citrus, Bekko, DIPL, Global Sales, InterNeXt, A-Tel
and CTE. Cash was also used to purchase $15.0 million of marketable
securities of Pilot Network Services.
Net cash provided by financing activities was $313.3 million for the six
months ended June 30, 2000 as compared to net cash provided by financing
activities of $173.5 million for the six months ended June 30, 1999. Cash
provided by financing activities in the six months ended June 30, 2000
resulted primarily from $290.0 million of net proceeds from the sale of
the February 2000 Debentures, as well as $25.0 million from the
Hewlett-Packard investment, partially offset by $3.9 million of payments
on capital leases and other long-term obligations.
The Company believes that the net proceeds from the 2000 Convertible Debt,
together with its existing cash and available capital lease and equipment
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, possible
acquisitions and other cash needs for its operations, including
iPRIMUS.com, through the end of next year, 2001. The semi-annual interest
payments due under the 1997 Senior Notes through August 1, 2000 had been
pre-funded and 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 switches and
distribution channels 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. However, the Company may also be required to
reduce its expansion and capital expenditures in the event it cannot raise
additional capital when needed. Additionally, if the Company's plans or
assumptions change, including those with respect to the development of the
network and the level of Primus's operations and 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. Except as described herein, Primus presently has no
binding commitment or binding agreement with respect to any material
acquisition, joint venture or strategic investment. However, from time to
time, the Company may be party to one or more non-binding letters of
intent regarding material acquisitions which, if consummated, may be paid
for with cash or through the issuance of a significant number of shares of
the Company's common stock.
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:
Limited Operating History; Entry into Developing Markets. The Company was
founded in February 1994, began generating revenue in March 1995. The
Company intends to enter additional markets or businesses, including
establishing an Internet business, where Primus has limited or no
operating experience. Accordingly, the Company cannot provide assurance
that its future operations will generate operating or net income, and the
Company's prospects must be considered in light of the risks, expenses,
problems and delays inherent in establishing a new business in a rapidly
changing industry.
Limited Operating History; Entry into Internet and data business. Primus
has recently begun targeting businesses and residential customers for
Internet and data services through its subsidiary iPRIMUS.com and other
recently acquired ISPs. The Company has been expanding and intends to
continue to expand, its offering of data and Internet services worldwide.
Primus anticipates offering a
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full-range of Internet protocol-based data and voice communications over
the global broadband ATM+IP network which the Company is beginning to
deploy over its existing network infrastructure. Primus has limited
experience in the Internet business and cannot provide assurance that it
will successfully establish or expand the business. Currently, the Company
provides Internet services to business and residential customers in the
United States, Australia, Canada, Brazil and Germany, and offers Internet
transmission services in the Indian Ocean/Southeast Asia regions through
its satellite earth station in London.
The market for Internet connectivity and related services is extremely
competitive. Primus's primary competitors include other ISPs that have a
significant national or international presence. Many of these carriers
have substantially greater resources, capital and operational experience
than Primus does. The Company also expects it will experience increased
competition from traditional telecommunications carriers that expand into
the market for Internet services. In addition, Primus will require
substantial additional capital to make investments in its Internet
operations, and it may not be able to obtain that capital on favorable
terms or at all. The amount of such capital expenditures may exceed the
amount of capital expenditures spent on the voice portion of its business
going forward.
Further, even if Primus is able to establish and expand its Internet
business, the Company will face numerous risks that may adversely affect
the operations of its Internet business. These risks include:
competition in the market for Internet services;
Primus's limited operating history as an ISP;
Primus's reliance on third parties to provide maintenance and
support services for the Company's ATM+IP network;
Primus's reliance on third-party proprietary technology, including
Pilot's HDI security protocol, to provide certain services to
Primus's customers;
the Company's ability to recruit and retain qualified technical,
engineering and other personnel in a highly competitive market;
Primus's ability to adapt and react to rapid changes in technology
related to the Internet business;
uncertainty relating to the continuation of the adoption of the
Internet as a medium of commerce and communications;
vulnerability to unauthorized access, computer viruses and other
disruptive problems due to the accidental or intentional actions of
others;
adverse regulatory developments;
the potential liability for information disseminated over Primus's
network; and
the Company's need to manage the growth of its Internet business,
including the need to enter into agreements with other providers of
infrastructure capacity and equipment and to acquire other ISPs and
Internet-related businesses on acceptable terms.
Finally, Primus expects to incur operating losses and negative cash flow
from its Internet and data business as the Company expands, builds out and
upgrades this part of the business. Any such losses and negative cash flow
are expected to partially offset the expected positive cash flow generated
by the voice business and effectively reduce the overall cash flow of
Primus as a whole.
Managing Rapid Growth. The Company's strategy of rapid growth has placed,
and is expected to continue to place, a significant strain on the Company.
In order to manage its growth effectively, the Company must continue to
implement and improve its operational and financial systems and controls,
purchase and utilize additional transmission facilities, and expand, train
and manage its employees, all within a rapidly-changing regulatory
environment. Inaccuracies in the Company's forecast of traffic could
result in insufficient or excessive transmission facilities and
disproportionate fixed expenses.
Substantial Indebtedness; Liquidity. The Company currently has substantial
indebtedness and anticipates that it and its subsidiaries will incur
additional indebtedness in the future. The level of the
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Company's indebtedness (i) could make it more difficult for it to make
payments of interest on its outstanding debt; (ii) could limit the ability
of the Company to obtain any necessary financing in the future for working
capital, capital expenditures, debt service requirements or other
purposes; (iii) requires that a substantial portion of the Company's cash
flow from operations, if any, be dedicated to the payment of principal and
interest on its indebtedness and other obligations and, accordingly, will
not be available for use in its business; (iv) could limit its flexibility
in planning for, or reacting to, changes in its business; (v) results in
the Company being more highly leveraged than some of its competitors,
which may place it at a competitive disadvantage; and (vi) will make it
more vulnerable in the event of a downturn in its business.
Historical and Future Operating Losses; Negative EBITDA; Net Losses. Since
inception, Primus had cumulative negative cash flow from operating
activities and cumulative negative EBITDA. In addition, Primus incurred
net losses since inception and has an accumulated deficit of approximately
$318.4 million as of June 30, 2000. The Company expects to continue to
incur additional operating losses and negative cash flow as it expands its
operations and continues to build-out and upgrade its network. There can
be no assurance that the Company's revenue will grow or be sustained in
future periods or that it will be able to achieve or sustain profitability
or positive cash flow from operations in any future period.
Acquisition and Strategic Investment Risks. Acquisitions, a key element in
the Company's growth strategy, involve operational risks, including the
possibility that an acquisition does not ultimately provide the benefits
originally anticipated by management, while the Company continues to incur
operating expenses to provide the services formerly provided by the
acquired company, and financial risks including the incurrence of
indebtedness by the Company in order to affect the acquisition and the
consequent need to service that indebtedness.
Integration of Acquired Businesses. There can be no assurance that the
Company will be successful in identifying attractive acquisition
candidates, completing and financing additional acquisitions on favorable
terms, or integrating the acquired business or assets into its own. There
may be difficulty in integrating the service offerings, distribution
channels and networks gained through acquisitions with the Company's own.
Successful integration of operations and technologies requires the
dedication of management and other personnel which may distract their
attention from the day-to-day business, the development or acquisition of
new technologies, and the pursuit of other business acquisition
opportunities.
Intense Competition. The long distance telecommunications industry is
intensely competitive and is significantly influenced by the marketing and
pricing decisions of the larger industry participants. Competition in all
of the Company's markets is likely to increase and, as deregulatory
influences are experienced in markets outside the United States,
competition in non-United States markets is likely to become similar to
the intense competition in the United States. Many of the Company's
competitors are significantly larger and have substantially greater
financial, technical and marketing resources and larger networks than the
Company, a broader portfolio of service offerings, greater control over
transmission lines, stronger name recognition and customer loyalty, as
well as long-standing relationships with the Company's target customers.
In addition, many of the Company's competitors enjoy economies of scale
that result in a lower cost structure for transmission and related costs
which could cause significant pricing pressures within the industry.
Dependence on Transmission Facilities-Based Carriers. The Company's
ability to maintain and expand its business is dependent upon whether the
Company continues to maintain favorable relationships with the
transmission facilities-based carriers to carry the Company's traffic.
International Operations. In many international markets, the existing
carrier will control access to the local networks, enjoy better brand
recognition and brand and customer loyalty, and have significant
operational economies, including a larger backbone network and
correspondent agreements. Moreover, the existing carrier may take many
months to allow competitors, including the Company, to interconnect to its
switches within its territory. There can be no assurance that the Company
will be able to obtain the permits and operating licenses required for it
to operate, obtain access to local transmission facilities or to market
services in international markets. In addition, operating in international
markets generally involves additional risks, including: unexpected changes
in regulatory
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requirements, tariffs, customs, duties and other trade barriers;
difficulties in staffing and managing foreign operations; problems in
collecting accounts receivable; political risks; fluctuations in currency
exchange rates; foreign exchange controls which restrict repatriation of
funds; technology export and import restrictions; seasonal reductions in
business activity.
Dependence on Effective Information Systems. The Company's management
information systems must grow as the Company's business expands and are
expected to change as new technological developments occur. There can be
no assurance that the Company will not encounter delays or cost-overruns
or suffer adverse consequences in implementing new systems when required.
Industry Changes. The international telecommunications industry is
changing rapidly due to deregulation, privatization, technological
improvements, expansion of infrastructure and the globalization of the
world's economies. In order to compete effectively, the Company must
adjust its contemplated plan of development to meet changing market
conditions. The telecommunications industry is marked by the introduction
of new product and service offerings and technological improvements. The
Company's profitability will depend on its ability to anticipate, assess
and adapt to rapid technological changes and its ability to offer, on a
timely and cost-effective basis, services that meet evolving industry
standards.
Network Development; Migration of Traffic. The long-term success of the
Company is dependent upon its ability to design, implement, operate,
manage and maintain the Network. The Company could experience delays or
cost overruns in the implementation of the Network, or its ability to
migrate traffic onto its Network, which could have a material adverse
effect on the Company.
Dependence on Key Personnel. The loss of the services of K. Paul Singh,
the Company's Chairman and Chief Executive Officer, or the services of its
other key personnel, or the inability of the Company to attract and retain
additional key management, technical and sales personnel (for which
competition is intense in the telecommunications industry), could have a
material adverse effect upon the Company.
Government Regulation. The Company's operations are subject to constantly
changing regulation. There can be no assurance that future regulatory
changes will not have a material adverse effect on the Company, or that
regulators or third parties will not raise material issues with regard to
the Company's compliance or non-compliance with applicable regulations,
any of which could have a material adverse effect upon the company.
Natural Disasters. Many of the geographic areas where the Company conducts
its business may be affected by natural disasters, including hurricanes
and tropical storms. Hurricanes, tropical storms and other natural
disasters could have material adverse effect on the business by damaging
the network facilities or curtailing telephone traffic as a result of the
effects of such events, such as destruction of homes and businesses.
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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 have had and may continue to have a significant effect
on the Company's results of operations. For example, the Company
estimates that the total adverse impact of foreign currency exchange
rate changes from the first quarter 2000 reduced the second quarter
2000 reported revenue by approximately $9 million. 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 to mitigate foreign exchange risk.
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, (iii) January 1999 $245.5 million 11 1/4% senior notes due January
2009, (iv) October 1999 $250 million 12 3/4% senior notes due October
2009, and (v) February 2000 $300 million 5 3/4% convertible subordinated
debentures due 2007. As of June 30, 2000, the aggregate fair value of the
1997, 1998, 1999 and 2000 senior notes approximates their face value.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 9, 1999, Empresa Hondurena de Telecommunicaciones,
S.A., based in Honduras, filed suit in Florida State Court in
Broward County against TresCom and one of TresCom's wholly-owned
subsidiaries, St. Thomas and San Juan Telephone Company,
alleging that such entities failed to pay amounts due to
plaintiff pursuant to contracts for the exchange of
telecommunications traffic during the period from December 1996
through September 1998. The Company acquired TresCom in June
1998 and TresCom is currently the Company's subsidiary.
Plaintiff is seeking approximately $14 million in damages, plus
legal fees and costs. The Company filed an answer on January 25,
2000 and discovery has commenced. Because it is only in the
early stages of discovery, the Company's ultimate legal and
financial liability with respect to such legal proceeding
cannot be estimated with any certainty at this time. The
Company intends to defend the case vigorously.
We are involved from time to time in litigation incidental to the
conduct of our business. We believe the outcome of pending legal
proceedings to which we are a party will not have a material,
adverse effect on our business, financial condition, results of
operation or cash flow.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) In June 2000, the Company acquired 100% of CTE Networks
("CTE"), a long-distance reseller for $3.4 million (subject
to additional purchase price adjustments), with payments
through June 30, 2000 amounting to $2.0 million in cash and
50,269 shares of the Company's common stock. The terms of
the acquisition agreement provide for additional
consideration to be paid if the acquired company's results
of operation exceed certain targeted levels. Such
consideration may be paid in cash and shares of the
Company's common stock and the maximum amount of additional
consideration remaining at June 30, 2000 is approximately
$20.3 million and will be payable, if earned through
December 31, 2000. Any additional consideration paid will
be recorded as goodwill when payment is made. The Company
issued the shares in reliance upon Section 4(2) of the
Securities Act of 1933. CTE was previously owned by a
limited number of stockholders.
(b) In May 2000, the Company acquired 100% of
InterNeXt S.A. ("InterNeXt"), a value-added Internet
Service Provider ("ISP") with national facilities in
France, for $13.8 million (subject to purchase price
adjustments), with payments though June 30, 2000 amounting
to $10.7 million in cash and 33,446 shares of the Company's
common stock. The maximum amount of consideration payable
at June 30, 2000 is approximately $2.1 million. The
Company issued the shares in reliance upon Section 4(2)
of the Securities Act of 1933. InterNeXt was previously
owned by a limited number of stockholders.
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
14, 2000, the stockholders of the Company, holding 40,052,901
shares of record, (i) elected Mr. Herman Fialkov and Mr. David
E. Hershberg as directors of the company (ii) approved an
amendment of the Company's Employee Option Plan to increase the
number of shares reserved for issuance upon exercise of options
granted thereunder from 5,500,000 to 7,800,000 (iii) approved
an amendment of the Company's Director Option Plan to increase
the number of shares reserved for issuance upon exercise of
options granted thereunder from 338,100 to 600,000 and to allow
for certain automatic option grants to directors, and (iv)
approved an amendment to the
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Company's Certificate of Incorporation to increase the
number of authorized shares of the Company's common stock from
80,000,000 to 150,000,000. The voting results were as follows:
32,357,517 and 32,327,437 shares were in favor of Mr. Fialkov
and Mr. Hershberg, respectively, no shares against either Mr.
Fialkov or Mr. Hershberg, and 156,342 and 186,422 were withheld
against Mr. Fialkov and Mr. Hershberg, respectively. The vote
approving the amendment to the Company's Employee Option Plan
and the amendment to the Company's Director Option Plan were
22,885,322 and 17,086,505 shares for, 1,951,811 and 7,768,152
shares against and 72,712 and 54,155 shares withheld,
respectively. The vote approving the amendment to the Company's
Certificate of Incorporation was 30,887,454 shares for,
1,613,982 shares against and 25,967 shares withheld. John G.
Puente, Douglas M. Karp, K. Paul Singh and John F. DePodesta
continued as directors of the company after the meeting.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (see index on page 21)
(b) Reports on Form 8-K
Form 8-K dated August 3, 2000, announcing the company's
financial results for the quarter ended June 30, 2000.
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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 14, 2000 By: /s/ Neil L. Hazard
-------------------- ------------------------------------
Neil L. Hazard
(EXECUTIVE VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND CHIEF
ACCOUNTING OFFICER)
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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; Incorporated by reference to Exhibit 4.1
of the Registration Statement on Form S-1, No 333-30195 (the
"1997 Senior Note Registration Statement").
4.3 Form of Indenture of Primus, as amended and restated on
January 20, 1999, between Primus and First Union National
Bank; Incorporated by reference to Exhibit 4.3 of the 1998
Form 10-K.
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 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
4.3 of the 1998 Form 10-K.
4.8 Specimen 11 1/4% Senior Note due 2009; Incorporated by
reference to Exhibit A included in Exhibit 4.7.
4.9 Rights Agreement, dated as of December 23, 1998, between
Primus and StockTrans, Inc., including the Form of Rights
Certificate (Exhibit A), the Certificate of Designation
(Exhibit B) and the Form of Summary of Rights (Exhibit C);
Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form 8-A, No 000-29092 filed with
the Commission on December 30, 1998.
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4.10 Form of legend on certificates representing shares of Common
Stock regarding Series B Junior Participating Preferred
Stock Purchase Rights; Incorporated by reference to Exhibit
4.2 to the Company's Registration Statement on Form 8-A, No
000-29092 filed with the Commission on December 30, 1998.
4.11 Supplemental Indenture between Primus and First Union
National Bank dated January 20, 1999; Incorporated by
reference to Exhibit 4.3 to Amendment No. 1 to the Company's
Registration Statement on Form S-4, No. 333-76965, filed
with the Commission on May 6, 1999.
4.12 Amendment 1999-1 to the Primus Telecommunications Group,
Incorporated Stock Option Plan; Incorporated by reference to
Exhibit 10.14 to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-4, No. 333-76965,
filed with the Commission on August 2, 1999.
4.13 Specimen 11 3/4% Senior Note Due 2004; Incorporated by
reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-4, No. 333-90179, filed with the
Commission on November 2, 1999 (the "November S-4").
4.14 Indenture, dated October 15, 1999, between the Company and
first Union National Bank; Incorporated by reference to the
November S-4.
4.15 Specimen 12 3/4% Senior Note due 2009; Incorporated by
reference to Exhibit A to Exhibit 4.14 hereto.
4.16 Indenture, dated February 24, 2000, between the Company and
First Union National Bank; Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
4.17 Specimen 5 3/4% convertible subordinated debenture due 2007;
Incorporated by reference to Exhibit A to Exhibit 4.16
hereto.
10.1 Amendment No. 1 to Stockholder Agreement among Warburg,
Pincus, K. Paul Singh, Primus, and TresCom, dated as of
April 16, 1998; Incorporated by reference to Exhibit 10.1 of
the Form 8-K for Amendments.
10.2 Switched Transit Agreement, dated June 5, 1995, between
Teleglobe USA, Inc. and Primus for the provision of services
to India; Incorporated by reference to Exhibit 10.2 of the
IPO Registration Statement.
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10.3 Hardpatch Transit Agreement, dated February 29, 1996,
between Teleglobe USA, Inc. and Primus for the provision of
services to Iran; Incorporated by reference to Exhibit 10.3
of the IPO Registration Statement.
10.4 Employment Agreement, dated June 1, 1994, between Primus and
K. Paul Singh; Incorporated by reference to Exhibit 10.5 of
the IPO Registration Statement. **
10.5 Primus 1995 Stock Option Plan; Incorporated by reference to
Exhibit 10.6 of the IPO Registration Statement. **
10.6 Primus 1995 Director Stock Option Plan; Incorporated by
reference to Exhibit 10.7 of the IPO Registration Statement.
**
10.7 Registration Rights Agreement, dated July 31, 1996, among
Primus, Quantum Industrial Partners LDC, S-C Phoenix
Holdings, L.L.C., Winston Partners II LDC and Winston
Partners LLC; Incorporated by reference to Exhibit 10.11 of
the IPO Registration Statement.
10.8 Service Provider Agreement between Telstra Corporation
Limited and Axicorp Pty., Ltd., dated May 3, 1995;
Incorporated by reference to Exhibit 10.12 of the IPO
Registration Statement.
10.9 Dealer Agreement between Telstra Corporation Limited and
Axicorp Pty., Ltd. dated January 8, 1996; Incorporated by
reference to Exhibit 10.13 of the IPO Registration
Statement.
10.10 Hardpatch Transit Agreement dated October 5, 1995 between
Teleglobe USA, Inc. and Primus regarding the provision of
services to India; Incorporated by reference to Exhibit
10.14 of the IPO Registration Statement.
10.11 Master Lease Agreement dated as of November 21, 1997 between
NTFC Capital Corporation and Primus Telecommunications,
Inc.; Incorporated by reference to Exhibit 10.17 of Primus's
Annual Report on Form 10-K for the year ended December 31,
1997 (the "1997 10-K"), as amended on Form 10-K/A dated
April 30, 1998.
10.12 Primus Employee Stock Purchase Plan; Incorporated by
reference to Exhibit 10.15 of the 1997 Senior Note
Registration Statement. **
10.13 Primus 401(k) Plan; Incorporated by reference to Exhibit 4.4
of the Primus Registration Statement on Form S-8 (No.
333-35005).
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10.14 Registration Rights Agreement, dated May 19, 1998, among
Primus Telecommunications Group, Incorporated, Primus
Telecommunications,Incorporated, Primus Telecommunications
Pty. Ltd. and Lehman Brothers, Inc.; Incorporated by
reference to Exhibit 10.23 of the 1998 Senior Note
Registration Statement.
10.15 Primus Telecommunications Group, Incorporated-TresCom
International Stock Option Plan Incorporated by reference to
Exhibit 4.1 of the S-8 Registration Statement. **
10.16 Warrant Agreement between the Company and Warburg, Pincus
Investors, L.P.; Incorporated by reference to Exhibit 10.6
to the TresCom For S-1.
10.17 Form of Indemnification Agreement between the Company and
its directors and executive officers Incorporated by
reference to Exhibit 10.23 to the TresCom Form S-1.
10.18 The Company's 1998 Restricted Stock Plan; Incorporated by
reference to Exhibit 10.33 to Amendment No. 1 to the
Company's Registration Statement on Form S-3, No. 333-86839,
filed with the Commission on September 17, 1999.
10.19 Agreement for the Reciprocal Purchase of Capacity On the
Systems of Each of the Company and Global Crossing Holdings
Ltd. Effective as of May 24, 1999; Incorporated by reference
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
10.20 Indefeasible Right of Use Agreement between Primus
Telecommunications, Inc. and Qwest Communications
Corporation dated December 30, 1999. ***
10.21 Common Stock Purchase Agreement between the Company and
Pilot Network Services, Inc. dated December 28, 1999;
Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
10.22 Warrant to purchase up to 200,000 shares of common stock of
Pilot Network Services, Inc. dated December 28, 1999;
Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
10.23 Loan Agreement between Primus Telecommunications, Inc. and
TFC Capital Corporation dated November 22, 1999;
Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
10.24 Resale Registration Rights Agreement among the Company,
certain of its subsidiaries, Lehman Brothers
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Inc., Merrill Lynch, Pierce, Fenner & Smith, Incorporated
and Morgan Stanley & Co. Incorporated dated February 24,
2000; Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
10.25 Multi-Currency Credit Facility Agreement between Primus
Telecommunication Limited and Ericsson I.F.S; Incorporated
by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
21.1 Subsidiaries of the Registrant; Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
27.1 Financial Data Schedule for the Company for the three months
ended June 30, 2000. *
* Filed herewith
** Compensatory benefit plan
*** Confidential treatment has been requested. The copy filed as
an exhibit omits the information subject to the confidential
treatment request.
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