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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 0-29-092
PRIMUS TELECOMMUNICATIONS GROUP,
INCORPORATED
(Exact name of registrant as specified in its charter)
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, 1998
----- -----------------
COMMON STOCK , $.01 PAR VALUE 28,018,255
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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
INDEX TO FORM 10-Q
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statement of Operations.................. 1
Consolidated Balance Sheet............................ 2
Consolidated Statement of Cash Flows.................. 3
Notes to Consolidated Financial Statements............ 4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 6
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK................................... 10
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS..................................... 11
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............. 11
Item 3. DEFAULTS UPON SENIOR SECURITIES....................... 11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.... 11
Item 5. OTHER INFORMATION..................................... 11
Item 6. EXHIBITS AND REPORTS ON FORM 8-K...................... 11
SIGNATURE............................................................... 13
EXHIBIT INDEX........................................................... 14
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
1998 1997 1998 1997
------------ ---------- ------------ ------------
NET REVENUE $99,475 $70,045 $179,526 $129,081
COST OF REVENUE 84,126 64,178 152,848 119,212
------------ ---------- ------------ ------------
GROSS MARGIN 15,349 5,867 26,678 9,869
------------ ---------- ------------ ------------
OPERATING EXPENSES
Selling, general and administrative 18,990 13,206 34,367 22,035
Depreciation and amortization 4,433 1,669 7,911 2,466
------------ ---------- ------------ ------------
Total operating expenses 23,423 14,875 42,278 24,501
------------ ---------- ------------ ------------
LOSS FROM OPERATIONS (8,074) (9,008) (15,600) (14,632)
INTEREST EXPENSE (9,605) (526) (16,780) (677)
INTEREST INCOME 2,886 474 5,270 1,259
OTHER INCOME (EXPENSE) - 230 - 349
------------ ---------- ------------ ------------
LOSS BEFORE INCOME TAXES (14,793) (8,830) (27,110) (13,701)
INCOME TAXES - 45 - 81
------------ ---------- ------------ ------------
NET LOSS $(14,793) $(8,875) $(27,110) $(13,782)
=========== ========= =========== ===========
BASIC AND DILUTED NET
LOSS PER COMMON SHARE $(0.68) $(0.50) $(1.30) $(0.78)
=========== ========= =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 21,829 17,779 20,779 17,779
=========== ========= =========== ===========
See notes to consolidated financial statements.
1
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
June 30, December 31,
1998 1997
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $202,693 $115,232
Restricted investments 24,120 22,774
Accounts receivable (net of allowance of $11,008
and $5,044) 97,491 58,172
Prepaid expenses and other current assets 14,563 5,152
------------ ------------
Total current assets 338,867 201,330
RESTRICTED INVESTMENTS 38,234 50,776
PROPERTY AND EQUIPMENT - Net 112,428 59,241
INTANGIBLES - Net 205,228 33,164
DEFERRED INCOME TAXES 2,496 2,620
OTHER ASSETS 17,372 10,882
------------ ------------
TOTAL ASSETS $714,625 $358,013
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Accounts payable $100,991 $ 56,358
Accrued expenses and other current liabilities 38,382 13,898
Accrued interest 12,887 11,016
Deferred income taxes 2,861 3,004
Current portion of long-term obligations 19,998 1,059
------------ ------------
Total current liabilities 175,119 85,335
LONG TERM OBLIGATIONS 385,204 230,152
OTHER LIABILITIES 528 -
------------ ------------
Total liabilities 560,851 315,487
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS EQUITY:
Preferred stock, $.01 par value - authorized 2,455,000 shares;
none issued and outstanding - -
Common stock, $.01 par value - authorized, 80,000,000 and
40,000,000 shares; issued and outstanding,
27,870,860 and 19,662,233 shares 279 197
Additional paid-in capital 231,666 92,181
Accumulated deficit (75,115) (48,005)
Accumulated other comprehensive loss (3,056) (1,847)
------------ ------------
Total stockholders equity 153,774 42,526
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $714,625 $358,013
============ ============
See notes to consolidated financial statements.
2
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
------------------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(27,110) $(13,782)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, amortization and accretion 8,092 2,466
Sales allowance 4,212 2,809
Stock issuance - 401(k) plan employer match 39 -
Foreign currency transaction gain - (349)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (20,287) (23,629)
(Increase) decrease in prepaid expenses and
other current assets (7,671) (1,431)
(Increase) decrease in other assets (2,014) (515)
Increase (decrease) in accounts payable 9,963 28,006
Increase (decrease) in accrued expense,
other current liabilities and other liabilities 1,458 3,092
Increase (decrease) in accrued interest payable 1,601 -
------------ ------------
Net cash provided by (used in) operating activities (31,717) (3,333)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (36,029) (18,248)
(Purchase) sale of short-term investments - 25,125
(Purchase) sale of restricted investments 11,196 -
Cash used in business acquisitions, net of cash acquired (1,165) (5,208)
------------ ------------
Net cash provided by (used in) investing activities (25,998) 1,669
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease (2,015) (434)
Principal payments on long-term obligations (114) (4,737)
Proceeds from long-term obligations 145,549 -
Sale of common stock, employee option and purchase plan 1,903 -
------------ ------------
Net cash provided by (used in) financing activities 145,323 (5,171)
------------ ------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (147) (336)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 87,461 (7,171)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 115,232 35,474
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 202,693 $ 28,303
=========== ===========
See notes to consolidated financial statements.
3
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial reporting and Securities and Exchange Commission ("SEC")
regulations. Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. In the opinion of management, the financial statements
reflect all adjustments (of normal and recurring nature) which are
necessary to present fairly the financial position, results of operations
and cash flows for the interim periods. The results for the three months or
six months ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
The financial statements should be read in conjunction with the Company's
audited consolidated financial statements included in the Company's most
recently filed Form 10-K.
(2) Acquisition
-----------
On June 9, 1998 the Company completed its acquisition of TresCom
International, Inc. ("TresCom"), a long distance telecommunications carrier
focused on international long distance traffic originating in the United
States and terminating in the Caribbean and Central and South America. As a
result of the acquisition, all of the approximately 12.7 million TresCom
common shares outstanding were exchanged for approximately 7.8 million
shares of the Company's common stock valued at approximately $138 million.
The Company has accounted for the TresCom acquisition using the purchase
method. Accordingly, the results of operations of TresCom are included in
the consolidated results of the Company as of June 9, 1998, the date of
acquisition. Under the purchase method of accounting, the Company has
preliminarily allocated the purchase price to assets and liabilities
acquired based upon their estimated fair values. The purchase price
allocation reflected in the financial statements is therefore tentative and
is subject to changes arising from the receipt of additional valuation and
other information.
Pro forma operating results for the six months ended June 30, 1998 and the
year ended December 31, 1997, as if the acquisition of TresCom had occurred
as of January 1, 1997 are as follows (in thousands, except per share
amounts):
Six Months
Ended Year Ended
June 30, 1998 December 31, 1997
-------------------- ------------------------
Net revenue $ 243,094 $ 428,454
Net loss $ (39,148) $ (54,204)
Basic and diluted net loss per share $ (1.42) $ (2.08)
4
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of future operations.
(3) Long Term Obligations
---------------------
Long-term obligations consist of the following (in thousands):
June 30,
1998 December 31,
(Unaudited) 1997
---------------- --------------------
Obligations under capital leases $ 15,023 $ 8,487
Bank Revolver 17,207 -
Senior Notes 11 3/4% 222,797 222,616
Senior Notes 9 7/8% 150,000 -
Notes payable 175 -
Settlement obligation - 108
---------------- --------------------
Subtotal 405,202 231,211
Less: Current portion of long term obligations ( 19,998) (1,059)
---------------- --------------------
$ 385,204 $ 230,152
================ ====================
On May 19, 1998 the Company completed the sale of $150 million 9 7/8%
senior notes ("1998 Senior Notes Offering") due 2008 with semi-annual
interest payments. The net proceeds of the 1998 Senior Notes Offering will
be used to fund capital expenditures to expand and develop the Company's
global intelligent telecommunications network.
As a result of the merger with TresCom, the Company has a $25 million
revolving credit and security agreement (the "Revolving Credit Agreement")
with a commercial bank secured by certain of the Company's accounts
receivable.
(4) New Accounting Pronouncements
-----------------------------
In January 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
(SFAS No. 130). Under SFAS No. 130, the Company's foreign currency
translation adjustments are considered to be components of other
comprehensive income (loss), and the stockholders' equity section of the
accompanying balance sheet has been reclassified accordingly. During the
three and six months ended June 30, 1998 and 1997, the Company's foreign
currency translation adjustment totaled $ (2.3) million and $ (1.2) and
$(0.1) million and $ (0.3) million, respectively. For the year ending
December 31, 1998, the Company will report its net income (loss) and its
foreign currency translation income or loss within a separate statement of
comprehensive income (loss).
(5) Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current
year presentation.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Primus is a global facilities-based telecommunications company that offers
international and domestic long distance and other telecommunications services
to business, residential and wholesale carrier customers in North America, Asia-
Pacific and Europe. Primus has expanded its geographic coverage in the
Caribbean, Central America and South America (collectively "Latin America")
through its June 1998 merger with TresCom International, Inc., which provides
international long distance service primarily for calls originating in the
United States. The Company is capitalizing on the increasing demand for high-
quality international telecommunications services resulting from the
globalization of the world's economies and the worldwide trend toward
telecommunications deregulation. The Company currently provides services in the
United States, Canada, Mexico, Japan, Germany, Australia and the United Kingdom.
Net revenue is earned based on the number of minutes billable by the Company and
is recorded upon completion of a call, adjusted for sales allowance. The Company
generally prices its services at a savings compared to the major carriers
operating in its service regions. The Company's net revenue is derived from
carrying a mix of business, residential and wholesale carrier long distance
traffic and, in Australia, also from provision of local, data and cellular
services.
Cost of revenue is primarily comprised of costs incurred from other domestic and
foreign telecommunications carriers to originate, transport and terminate calls.
The majority of the Company's cost of revenue is variable, based upon the number
of minutes of use, with transmission and termination costs being the Company's
most significant expense. As the Company increases the portion of traffic
transmitted over its leased or owned facilities, cost of revenue increasingly
will be comprised of fixed costs.
Although the Company's functional currency is the U.S. dollar, a significant
portion of the Company's net revenue is derived from its sales and operations
outside the United States. In the future, the Company expects to continue to
derive a significant portion of its net revenue and incur a significant portion
of its operating costs outside the United States and changes in foreign currency
exchange rates may have a significant effect on the Company's results of
operations. The Company historically has not engaged in hedging transactions.
OTHER OPERATING DATA
The following information for the three months ended June 30, 1998 and 1997 is
provided for informational purposes and should be read in conjunction with the
unaudited Consolidated Financial Statements and Notes provided herein and the
Consolidated Financial Statements presented with the Company's most recently
filed Form 10-K.
6
Three Months Ended June 30, 1998
---------------------------------------------------------------------------------------
Net Minutes of Long Distance Use
------------------------------------------------------------------
Revenue International Domestic Total
----------------- ------------------- ------------------- -------------------
North America $41,782 111,029 36,590 147,619
Europe 13,906 49,028 18,263 67,291
Asia-Pacific 43,787 29,865 64,936 94,801
----------------- ------------------- ------------------- -------------------
Total $99,475 189,922 119,789 309,711
================= =================== =================== ===================
Three Months Ended June 30, 1997
---------------------------------------------------------------------------------------
Net Minutes of Long Distance Use
------------------------------------------------------------------
Revenue International Domestic Total
----------------- ------------------- ------------------- -------------------
North America $18,345 45,784 18,498 64,282
Europe 4,590 5,131 5,775 10,906
Asia-Pacific 47,110 6,222 61,304 67,526
----------------- ------------------- ------------------- -------------------
Total $70,045 57,137 85,577 142,714
================= =================== =================== ===================
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 1997
Net revenue increased $29.4 million or 42.0%, from $70.0 million for the three
months ended June 30, 1997 to $99.5 million for the three months ended June 30,
1998. Of the increase, $23.4 million was associated with the North American
operations, which represents a growth rate of approximately 128%. The increase
is a result of increased traffic volumes and net revenue in its United States
and Canadian wholesale carrier operations and in its retail business and
residential customer operations. The June 9, 1998 purchase of TresCom accounted
for $7.6 million of the North American net revenue growth. The European net
revenue increased from $4.6 million for the three months ended June 30, 1997 to
$13.9 million for the three months ended June 30, 1998, a growth rate of 203%.
The Company's Asia- Pacific net revenue, in United States dollar terms,
decreased $3.3 million or 7.1%, from $47.1 million for the three months ended
June 30, 1997 to $43.8 million for the three months ended June 30, 1998,
primarily as a result of a decrease in the Australian dollar's average exchange
rate. Net revenue of the Australian operations, in Australian dollar terms, grew
7.0% to $65.6 million as a result of increased traffic from retail residential
and business customers and from the addition of data and internet services.
Additionally, the Asia-Pacific net revenue reflects the Company's October 1997
acquisition of its Japanese operations.
Cost of revenue increased $19.9 million, from $64.2 million, or 91.6% of net
revenue, for the three months ended June 30, 1997 to $84.1 million, or 84.6% of
net revenue, for the three months ended June 30, 1998. The increase in the cost
of revenue is attributable to the increase in traffic volumes and associated net
revenue growth. The decrease in the cost of revenue as a percentage of net
revenue is reflective of the continual expansion of the Company's network, the
continuing migration of existing and newly generated customer traffic onto the
Company's network, especially in Australia, higher margin product offerings such
as data and internet services in Australia, and a shift in the Australian
traffic mix away from lower-margin local traffic.
Selling, general and administrative expenses increased $5.8 million, from $13.2
million for the three months ended June 30, 1997, to $19.0 million for the three
months ended June 30, 1998. The increase is primarily associated with increased
advertising and promotional expenses associated with the Company's residential
and business marketing campaigns in Australia and the United States, and the
addition of expenses from acquired operations including Hotkey Internet Services
Pty., Ltd., Eclipse Telecommunications Pty., Ltd., and TresCom.
7
Depreciation and amortization expense increased from $1.7 million for the three
months ended June 30, 1997 to $4.4 million for the three months ended June 30,
1998. 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.
Interest expense increased from $0.5 million for the three months ended June 30,
1997 to $9.6 million for the three months ended June 30, 1998. The increase is
primarily due to interest expense associated with the Company's 1997 and 1998
senior notes offerings and, to a lesser extent, additional capital lease
financings.
Interest income increased from $0.5 million for the three months ended June 30,
1997 to $2.9 million for the three months ended June 30, 1998. The increase is a
result of the investment of the net proceeds from the Company's 1997 and 1998
senior notes offerings.
Other income (expense) for the three months ended June 30, 1997 is related to
foreign currency transaction gains (losses) on the Australian dollar-denominated
debt incurred by the Company payable to the sellers for its acquisition of
Primus Australia (formerly "Axicorp Pty., Ltd.") as a result of a fluctuating
exchange rate of the Australian dollar against the United States dollar during
the period. The debt was paid in full in 1997.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED TO
THE SIX MONTHS ENDED JUNE 30, 1997
Net revenue increased $50.4 million, from $129.1 million for the six months
ended June 30, 1997 to $179.5 million for the six months ended June 30, 1998. Of
the net revenue increase, $41.5 million was associated with the Company's North
American operations, which represents a growth rate of approximately 156%. The
growth is a result of increased traffic volumes in wholesale carrier operations,
and to a lesser extent, in its business and residential customer base.
Additionally, the 1998 period includes a full six months of the April 1997
acquired Canadian operations, the October 1997 acquired operations of
TelePassport L.L.C. / USFI, Inc. ("TelePassport/USFI") and 22 days of the June
9, 1998 acquired operations of TresCom. The European operations contributed
$14.5 million of the year-over-year net revenue growth, which represents a
growth rate of approximately 171%. The European net revenue increased from $8.5
million for the six months ended June 30, 1997 to $23.0 million for the six
months ended June 30, 1998 resulting primarily from wholesale traffic being
carried in 1998. The Company's Asia-Pacific net revenue, in United States dollar
terms, decreased by $5.6 million, or 5.9%, from $94.0 million for the six months
ended June 30, 1997 to $88.4 million for the six months ended June 30, 1998
primarily as a result of a decrease in the Australian dollar average exchange
rate. The effect of the Australian dollar's average exchange rate decrease on
the Asia-Pacific net revenue was partially offset by Australian net revenue
growth as a result of increased retail business and residential traffic growth,
the addition of data and internet services in Australia and the October 1997
acquisition of the Company's Japanese operations.
Cost of revenue increased $33.6 million, from $119.2 million, or 92.4% of net
revenue, for the six months ended June 30, 1997 to $152.8 million, or 85.1% of
net revenue, for the six months ended June 30, 1998. The increase in the cost of
revenue is primarily attributable to the increased traffic volumes and
associated net revenue growth. The decrease in the cost of revenue as a
percentage of net revenue is reflective of the continual expansion of the
Company's global network, the continuing migration of existing and newly
generated customer traffic onto the Company's network, especially in Australia
with the advent of equal access, the acquisition of higher margin product
offerings such as data and internet services in Australia, and a shift in the
Australian traffic mix away from lower-margin local traffic.
Selling, general and administrative expenses increased $12.3 million from $22.0
million to $34.4 million for the six months ended June 30, 1997 as compared to
the six months ended June 30, 1998.
8
The increase is attributable to the hiring of additional sales and marketing
staff and engineering personnel, the addition of expenses from acquired
operations including the June 9, 1998 acquisition of TresCom, and increased
advertising and promotional expenses associated with the Company's residential
marketing campaigns in Australia and the United States.
Depreciation and amortization increased from $2.5 million for the six months
ended June 30, 1997 to $7.9 million for the six months ended June 30, 1998. 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, switching and other network
equipment being placed into service.
Interest expense increased from $0.7 million for six months ended June 30, 1997
to $16.8 million for the six months ended June 30, 1998. The increase is
primarily attributable to the interest expense associated with the Company's
1997 and 1998 senior notes offerings and to a lessor extent increased capital
lease financings.
Interest income increased from $1.3 million for the six months ended June 30,
1997 to $5.3 million for the six months ended June 30, 1998. The increase is a
result of the investment of the net proceeds of the 1997 and 1998 senior note
offerings.
Other income (expense) for the six months ended June 30, 1997 is related to
foreign currency transaction gains (losses) on the Australian dollar-denominated
debt incurred by the Company payable to the sellers for its acquisition of
Primus Australia (former "Axicorp Pty., Ltd.") as a result of a fluctuating
exchange rate of the Australian dollar against the United States dollar during
the period. The debt was paid in full in 1997.
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 cable capacity, interest and principal
payments on outstanding indebtedness, including capital leases, and acquisitions
of and strategic investments in businesses. The Company has financed its growth
through private placements of its common stock, the initial public offering of
its common stock, the 1997 Senior Notes and Warrants Offering, the 1998 Senior
Notes Offering and capital lease financing. The semi-annual interest payments
due under the 1997 Senior Notes through August 1, 2000 have been pre-funded and
will be paid from restricted investments.
Net cash used in operating activities was $(31.7) million for the six months
ended June 30, 1998 as compared to net cash used in operating activities of
$(3.3) million for the six months ended June 30, 1997. The increase in operating
cash used is primarily comprised of an increase in the net loss of $13.3 million
and a increase in accounts receivable of $20.3 million, partially offset by
increased non-cash operating expenses of $7.4 million and a increase in accounts
payable of $10.0 million.
Net cash used in investing activities was $(26.0) million for the six months
ended June 30, 1998 compared to net cash provided by investing activities of
$1.7 million for the six months ended June 30, 1997. Net cash used in investing
activities during the six months ended June 30, 1998 includes $36.0 million of
capital expenditures primarily for the expansion of the Company's global
network, partially offset by $11.2 million of cash provided by the sale of
restricted investments used to fund interest payments on the 1997 Senior Notes.
Net cash provided by financing activities was $145.3 million for the six months
ended June 30, 1998 as compared to net cash used in financing activities of
$(5.2) million during the six months ended June 30, 1997. Cash provided by
financing activities in the six months ended June 30, 1998 resulted primarily
from $145.5 million of net proceeds of the 1998 senior notes offering.
9
The Company continues to anticipate aggregate capital expenditures of
approximately $225 million during 1998 and 1999 (of which approximately $36.0
million was expended in the first six months of 1998). Such capital expenditures
will be primarily for international and domestic switches and points of
presence, international and domestic fiber optic cable capacity for new and
existing routes, satellite earth station facilities, other transmission
equipment, and back office support systems.
The Company believes that its cash, cash equivalents, and restricted investments
along with available capital lease financing (subject to limitations in its
senior note indentures) will be sufficient to fund the Company's operating
losses, debt service requirements, capital expenditures and other cash needs for
its operations through at least the end of 1999. The Company is continually
evaluating the expansion of its network and has accelerated its investment in
international and domestic fiber optic cable capacity and other transmission
facilities. In addition, the Company expects to make additional investments in
the TresCom network in order to expand services in Latin America. In order to
fund these additional cash requirements, including the expansion of the combined
network, Primus anticipates that it will be required to raise a significant
amount of cash in excess of its existing cash, cash equivalents and restricted
investments. Consequently, the Company expects to raise additional capital from
public or private equity or debt sources to meet its new financing needs,
including for the continued buildout of the network. Additionally, if the
Company's plans or assumptions change (including those with respect to the
development of the network, the level of its operations and its operating cash
flow), if its assumptions prove inaccurate, if it consummates additional
investments or acquisitions or if it experiences unexpected costs or competitive
pressures, or if existing cash and any other borrowings prove insufficient, the
Company may require to seek additional capital sooner than expected.
YEAR 2000 COMPLIANCE
The Company has begun a review and assessment of the anticipated costs, problems
and uncertainties associated with Year 2000 issues. The Company is implementing
a Year 2000 compliance plan whereby each operating unit is responsible for
identifying systems requiring modification or conversion (both internal systems
and those provided by or otherwise available from outside vendors). The Company
believes that Year 2000 issues will not materially affect its products,
services, or competitive conditions and that its costs of addressing Year 2000
compliance will not materially impact future operating results or financial
condition.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Form 10-Q which are based on current expectations and are not
strictly historical statements may differ materially from actual results. Not
strictly historical statements include, without limitation, those regarding
management's plans, objectives and strategy for future operations, product plans
and performance, management's assessment of market factors, and future financial
performance. Among factors that could cause actual results to differ materially
are changes in business conditions, changes in the telecommunications industry
and the general economy; competition; changes in service offering; and risks
associated with Primus's limited operating history, entry into developing
markets, managing rapid growth, integration of TresCom, risks associated with
international operations, dependence on effective information systems, and
development of the network. These factors are discussed more fully in the
company's Form 10-K filed with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 4, 1998,
the stockholders of the Company approved the issuance of shares of
Common Stock in connection with the acquisition of TresCom
International, Inc., renewed the term of one director of the Company
and approved an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock from
40,000,000 to 80,000,000. Mr. John Puente's term as director of the
Company was renewed at the meeting. The voting results were as follows:
15,350,179 shares were in favor of Mr. Puente, no shares against and
17,781 shares withheld. The vote approving the issuance of shares in
connection with the TresCom acquisition was 13,296,493 shares for,
89,911 shares against and 13,250 shares withheld. The vote approving
the amendment to the Company's Certificate of Incorporation was
13,076,858 shares for, 305,284 shares against and 18,262 shares
withheld.
ITEM 5. OTHER INFORMATION
Discretionary Proxy Voting Authority/Stockholder Proposals
On May 21, 1998 the Securities and Exchange Commission adopted an
amendment to Rule 14a-4, as promulgated under the Securities Exchange
Act of 1934. The amendment to Rule 14a-4(c)(1) governs the Company's
use of its discretionary proxy voting authority with respect to a
stockholder proposal which the stockholder has not sought to include in
the Company's proxy statement. The new amendment provides that if a
proponent of a proposal fails to notify the Company at least 45 days
prior to the month and day of mailing of the prior year's proxy
statement, then the management proxies will be allowed to use their
discretionary voting authority when the proposal is raised at the
meeting, without any discussion of the matter in the proxy statement.
With respect to the Company's 1999 Annual Meeting of Stockholders, if
the Company is not provided notice of a stockholder proposal, which the
stockholder has not previously sought to include in the Company's proxy
statement, by March 21, 1999, the management proxies will be allowed to
use their discretionary authority as outlined above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (see index on page 14)
(b) Reports on Form 8-K
Current Report on Form 8-K filed on April 10, 1998 with regards to
Amendment No.1 to the Merger Agreement with TresCom International,
Inc.
Current Report on Form 8-K filed on April 23, 1998 (as amended on
Form 8-K/A filed on April 23, 1998) with regards to Amendment No.2
to the Merger Agreement with TresCom International, Inc.
Current Report on Form 8-K filed on June 23, 1998 with regards to
the consummation of the Merger Agreement with TresCom
International, Inc. whereby a wholly-owned subsidiary of the
Company merged with and into TresCom International, Inc.
11
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, 1998 By: /s/ Neil L. Hazard
---------------- ------------------------------
Neil L. Hazard
(Executive Vice President and Chief Financial Officer)
Date August 14, 1998 By: /s/ Thomas R. Kloster
---------------- ---------------------
Thomas R. Kloster
(Vice President, Corporate Controller and Chief
Accounting Officer)
12
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Certificate of Incorporation of the Company -
incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-8 (No. 333-56557)
27.1 Financial Data Schedule for the six months ended June 30, 1998
13
5
1,000
6-MOS
DEC-31-1998
JAN-01-1998
JUN-30-1998
265,047
0
108,499
11,008
0
338,867
123,629
11,201
714,625
175,119
385,204
0
0
279
153,495
714,625
0
179,526
0
152,848
53,788
4,212
16,780
(27,110)
0
(27,110)
0
0
0
(27,110)
(1.30)
(1.30)
