-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PG40WY0M00fb1HMjryc/Y36PWiOZAwS1np9Lya7dCEuhdyXucIhGT1RKX0wnfgC5 CUrZCLdJJtuXV6rF2ZFWyw== 0000928385-98-002296.txt : 19981116 0000928385-98-002296.hdr.sgml : 19981116 ACCESSION NUMBER: 0000928385-98-002296 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIMUS TELECOMMUNICATIONS GROUP INC CENTRAL INDEX KEY: 0001006837 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 541708481 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-29092 FILM NUMBER: 98749312 BUSINESS ADDRESS: STREET 1: 1700 OLD MEADOW ROAD STREET 2: STE 425 CITY: MCLEAN STATE: VA ZIP: 22102 BUSINESS PHONE: 7039022800 MAIL ADDRESS: STREET 1: 8180 GREENSBORO DR STREET 2: SUITE 1100 CITY: MCLEAN STATE: VA ZIP: 22102 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. COMMISSION FILE NO. 0-29-092 PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 54-1708481 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1700 0LD MEADOW ROAD, SUITE 300, MCLEAN, VA 22102 (Address of principal executive offices) (Zip Code)
(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 OCTOBER 31, 1998 ----- ---------------- COMMON STOCK , $.01 PAR VALUE 28,049,231
================================================================================ 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................................... 11 Part II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS..................................... 12 Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............. 12 Item 3. DEFAULTS UPON SENIOR SECURITIES....................... 12 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.... 12 Item 5. OTHER INFORMATION..................................... 12 Item 6. EXHIBITS AND REPORTS ON FORM 8-K...................... 12 SIGNATURE............................................................... 13 EXHIBIT INDEX........................................................... 14
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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ----------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- NET REVENUE $116,047 $ 73,018 $295,573 $202,099 COST OF REVENUE 96,557 65,266 249,406 184,478 ------------- ------------- ------------- ------------- GROSS MARGIN 19,490 7,752 46,167 17,621 ------------- ------------- ------------- ------------- OPERATING EXPENSES Selling, general and administrative 23,022 13,749 57,389 35,784 Depreciation and amortization 7,411 1,877 15,322 4,343 ------------- ------------- ------------- ------------- Total operating expenses 30,433 15,626 72,711 40,127 ------------- ------------- ------------- ------------- LOSS FROM OPERATIONS (10,943) (7,874) (26,544) (22,506) INTEREST EXPENSE (11,456) (4,893) (28,235) (5,570) INTEREST INCOME 3,364 2,118 8,634 3,377 OTHER INCOME (EXPENSE) - 58 - 407 ------------- ------------- ------------- ------------- LOSS BEFORE INCOME TAXES (19,035) (10,591) (46,145) (24,292) INCOME TAXES - - - 81 ------------- ------------- ------------- ------------- NET LOSS $(19,035) $(10,591) $(46,145) $(24,373) ============= ============= ============= ============= BASIC AND DILUTED NET LOSS PER COMMON SHARE $(0.68) $(0.60) $(1.99) $(1.37) ============= ============= ============= ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 27,998 17,781 23,211 17,780 ============= ============= ============= =============
See notes to consolidated financial statements. 1 PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED CONSOLIDATED BALANCE SHEET (in thousands, except share amounts)
SEPTEMBER 30, DECEMBER 31, 1998 1997 --------------- --------------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $179,070 $115,232 Restricted investments 25,388 22,774 Accounts receivable (net of allowance of $10,493 and $5,044) 98,433 58,172 Prepaid expenses and other current assets 14,184 5,152 --------------- --------------- Total current assets 317,075 201,330 RESTRICTED INVESTMENTS 24,517 50,776 PROPERTY AND EQUIPMENT - Net 127,649 59,241 INTANGIBLES - Net 203,073 33,164 DEFERRED INCOME TAXES 2,391 2,620 OTHER ASSETS 15,185 10,882 --------------- --------------- TOTAL ASSETS $689,890 $358,013 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 97,338 $ 56,358 Accrued expenses and other current liabilities 32,163 13,898 Accrued interest 9,810 11,016 Deferred income taxes 2,740 3,004 Current portion of long-term obligations 26,333 1,059 --------------- --------------- Total current liabilities 168,384 85,335 LONG TERM OBLIGATIONS 384,670 230,152 OTHER LIABILITIES 527 - --------------- --------------- Total liabilities 553,581 315,487 --------------- --------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value - authorized 2,455,000 shares; none issued and outstanding - - Common stock, $.01 par value - authorized, 80,000,000 and 40,000,000 shares; issued and outstanding, 28,041,692 and 19,662,233 shares 280 197 Additional paid-in capital 234,405 92,181 Accumulated deficit (94,150) (48,005) Accumulated other comprehensive loss (4,226) (1,847) --------------- --------------- Total stockholders' equity 136,309 42,526 --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $689,890 $358,013 =============== ===============
See notes to consolidated financial statements. 2 PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- 1998 1997 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(46,145) $(24,373) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation, amortization and accretion 15,593 4,494 Sales allowance 6,592 4,211 Stock issuance - 401(k) plan employer match 70 - Foreign currency transaction loss - (407) Changes in assets and liabilities: (Increase) decrease in accounts receivable (24,728) (30,454) (Increase) decrease in prepaid expenses and other current assets (7,678) (1,422) (Increase) decrease in other assets 171 (766) Increase (decrease) in accounts payable 7,116 45,798 Increase (decrease) in accrued expense, other current liabilities and other liabilities (5,378) 1,134 Increase (decrease) in accrued interest payable (1,476) 3,664 --------------- --------------- Net cash provided by (used in) operating activities (55,863) 1,879 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (55,933) (34,667) (Purchase) sale of short-term investments - 25,125 (Purchase) sale of restricted investments 23,644 (72,521) Cash used in business acquisitions, net of cash acquired (1,165) (5,208) --------------- --------------- Net cash provided by (used in) investing activities (33,454) (87,271) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital leases and long-term obligations (4,673) (14,968) Sale of common stock, employee option and purchase plan 4,613 - Proceeds from long-term obligations 159,320 225,000 Deferred financing costs (5,500) (9,500) --------------- --------------- Net cash provided by (used in) financing activities 153,760 200,532 --------------- --------------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (605) (427) --------------- --------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 63,838 114,713 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 115,232 35,474 --------------- --------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $179,070 $150,187 =============== ===============
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 nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. The financial statements should be read in conjunction with the Company's audited consolidated financial statements included in the Company's most recently filed Form 10-K. (2) Acquisition ----------- On June 9, 1998 the Company completed its acquisition of TresCom International, Inc. ("TresCom"), a long distance telecommunications carrier focused on international long distance traffic originating in the United States and terminating in the Caribbean and Central and South America. As a result of the acquisition, all of the approximately 12.7 million TresCom common shares outstanding were exchanged for approximately 7.8 million shares of the Company's common stock valued at approximately $138 million. The Company has accounted for the TresCom acquisition using the purchase method. Accordingly, the results of operations of TresCom are included in the consolidated results of the Company as of June 9, 1998, the date of acquisition. Under the purchase method of accounting, the Company has preliminarily allocated the purchase price to assets and liabilities acquired based upon their estimated fair values. The purchase price allocation reflected in the financial statements is therefore tentative and is subject to changes arising from the receipt of additional valuation and other information. Pro forma operating results for the nine months ended September 30, 1998 and the year ended December 31, 1997, as if the acquisition of TresCom had occurred as of January 1, 1997, are as follows (in thousands, except per share amounts):
Nine Months Ended Year Ended September 30, 1998 December 31, 1997 ---------------------- --------------------- Net revenue $359,141 $428,454 Net loss $(55,724) $(54,204) Basic and diluted net loss per share $ (2.01) $ (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):
September 30, December 31, 1998 1997 --------------- -------------- (Unaudited) Obligations under capital leases $ 14,003 $ 8,487 Revolving Credit Agreement 23,554 - Senior Notes 11 3/4% 222,888 222,616 Senior Notes 9 7/8% 150,000 - Notes payable 558 - Settlement obligation - 108 --------- --------- Subtotal 411,003 231,211 Less: Current portion of long term obligations (26,333) (1,059) --------- --------- $ 384,670 $ 230,152 ========= =========
On May 19, 1998 the Company completed the sale of $150 million 9 7/8% senior notes ("1998 Senior Notes Offering") due 2008 with semi-annual interest payments. As a result of the merger with TresCom, the Company has a $25 million revolving credit and security agreement (the "Revolving Credit Agreement") with a commercial bank secured by certain of the Company's accounts receivable. (4) New Accounting Pronouncements ----------------------------- In January 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130). Under SFAS No. 130, the Company's foreign currency translation adjustments are considered to be components of other comprehensive income (loss), and the stockholders' equity section of the accompanying balance sheet has been reclassified accordingly. During the three and nine months ended September 30, 1998 and 1997, the Company's foreign currency translation adjustment totaled $(1.2) million and $(2.4) and $(0.3) million and $(0.6) million, respectively. For the year ending December 31, 1998, the Company will report its net income (loss) and its foreign currency translation income or loss within a separate statement of comprehensive income (loss). (5) Reclassifications ----------------- Certain prior year amounts have been reclassified to conform to the current year presentation. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Primus is a global facilities-based telecommunications company that offers international and domestic long distance and other telecommunications services to business, residential and wholesale carrier customers in North America, Asia- Pacific and Europe. The Company is exploiting the increasing demand for high- quality international telecommunications services resulting from the globalization of the world's economies and the worldwide trend toward telecommunications deregulation. The Company currently provides services in the United States, Canada, Mexico, Japan, Germany, Australia and the United Kingdom. Net revenue is earned based on the number of minutes billable by the Company and is recorded upon completion of a call, adjusted for sales allowance. The Company generally prices its services at a savings compared to the major carriers operating in its service regions. The Company's net revenue is derived from carrying a mix of business, residential and wholesale long distance voice and data traffic and, in Australia, also from provision of local and cellular services. Cost of revenue is primarily comprised of costs incurred from other domestic and foreign telecommunications carriers to originate, transport and terminate calls. The majority of the Company's cost of revenue is variable, based upon the number of minutes of use, with transmission and termination costs being the Company's most significant expense. As the Company increases the portion of traffic transmitted over its leased or owned facilities, cost of revenue increasingly will be comprised of fixed costs. Although the Company's functional currency is the U.S. dollar, a significant portion of the Company's net revenue is derived from its sales and operations outside the United States, principally in Australia, the United Kingdom and Canada. In the future, the Company expects to continue to derive a significant portion of its net revenue and incur a significant portion of its operating costs outside the United States and changes in foreign currency exchange rates may have a significant effect on the Company's results of operations. The Company historically has not engaged in hedging transactions. OTHER OPERATING DATA The following information for the three months ended September 30, 1998 and 1997 is provided for informational purposes and should be read in conjunction with the unaudited Consolidated Financial Statements and Notes provided herein and the Consolidated Financial Statements presented with the Company's most recently filed Form 10-K. 6
------------------------------------------------------------------------ Three Months Ended September 30, 1998 ------------------------------------------------------------------------ Minutes of Long Distance Use Net ------------------------------------------------------- Revenue International Domestic Total --------------- ----------------- ----------------- ----------------- North America $ 58,553 152,701 86,113 238,814 Europe 16,614 52,266 16,354 68,620 Asia-Pacific 40,880 32,896 76,456 109,352 --------------- ----------------- ----------------- ----------------- Total $116,047 237,863 178,923 416,786 =============== ================= ================= ================= ------------------------------------------------------------------------ Three Months Ended September 30, 1997 ------------------------------------------------------------------------ Minutes of Long Distance Use Net ------------------------------------------------------- Revenue International Domestic Total --------------- ----------------- ----------------- ----------------- North America $20,350 57,199 17,131 74,330 Europe 6,228 9,852 6,973 16,825 Asia-Pacific 46,440 11,844 61,544 73,388 --------------- ----------------- ----------------- ----------------- Total $73,018 78,895 85,648 164,543 =============== ================= ================= =================
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 Net revenue increased $43.0 million or 59%, from $73.0 million for the three months ended September 30, 1997 to $116.0 million for the three months ended September 30, 1998. Of the increase, $38.2 million was associated with the North American operations, which represents a growth rate of approximately 188%. The growth is a result of the addition of traffic from the acquisition of TresCom, increased traffic volumes in the Company's United States and Canadian wholesale carrier operations and in retail operations particularly from ethnic residential consumers. European net revenue increased $10.4 million from $6.2 million for the three months ended September 30, 1997 to $16.6 million for the three months ended September 30, 1998, a growth rate of 167%. The European increase is attributable to increased traffic volumes and net revenue in the United Kingdom wholesale and retail operations and the addition of wholesale operations in Germany. The Company's Asia- Pacific net revenue, in United States dollar terms, decreased $5.6 million or 12.0%, from $46.4 million for the three months ended September 30, 1997 to $40.9 million for the three months ended September 30, 1998, primarily as a result of a 24% decrease in the Australian dollar's average exchange rate. Net revenue of the Australian operations, in Australian dollar terms, grew 9.0% to $68.4 million as a result of increased traffic from retail residential and business customers and from the addition of data and internet services. Cost of revenue increased $31.3 million, from $65.3 million, or 89.4% of net revenue, for the three months ended September 30, 1997 to $96.6 million, or 83.2% of net revenue, for the three months ended September 30, 1998. The increase in the cost of revenue is attributable to the increase in traffic volumes and associated net revenue growth. The decrease in the cost of revenue as a percentage of net revenue is reflective of the continuing migration of existing and newly generated customer traffic onto the Company's expanding network and new higher margin product offerings such as data and internet services. Selling, general and administrative expenses increased $9.3 million, from $13.7 million for the three months ended September 30, 1997, to $23.0 million for the three months ended September 30, 1998. The increase is primarily a result of the addition of expenses from acquired operations including TresCom, Hotkey Internet Services Pty., Ltd. ("Hotkey") and Eclipse Telecommunications Pty., Ltd. ("Eclipse"). 7 Depreciation and amortization expense increased from $1.9 million for the three months ended September 30, 1997 to $7.4 million for the three months ended September 30, 1998. The increase is primarily associated with increased amortization expense related to intangible assets arising from the Company's acquisitions of TresCom, Hotkey and Eclipse and increased depreciation expense related to acquired fixed assets and capital expenditures for fiber optic cable, switching and other network equipment being placed into service. Interest expense increased from $4.9 million for the three months ended September 30, 1997 to $11.5 million for the three months ended September 30, 1998. The increase is primarily due to the additional debt incurred pursuant to the 1998 senior notes offerings and, to a lesser extent, the addition of the Company's Revolving Credit Agreement and additional capital lease financings. Interest income increased from $2.1 million for the three months ended September 30, 1997 to $3.4 million for the three months ended September 30, 1998. The increase is a result of the investment of the net proceeds from the Company's 1997 and 1998 senior notes offerings. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997 Net revenue increased $93.5 million or 46%, from $202.1 million for the nine months ended September 30, 1997 to $295.6 million for the nine months ended September 30, 1998. Of the net revenue increase, $79.7 million was associated with the Company's North American operations, which represents a growth rate of approximately 170%. The growth is a result of increased traffic volumes in wholesale carrier operations and in business and ethnic residential retail operations. Additionally, the 1998 period includes operations of TresCom (since the June 9, 1998 acquisition), the acquired Canadian operations and the acquired operations of TelePassport L.L.C. / USFI, Inc. European operations contributed $24.9 million of the year-over-year net revenue growth, which represents a growth rate of approximately 169%. The European net revenue increased from $14.7 million for the nine months ended September 30, 1997 to $39.6 million for the nine months ended September 30, 1998 resulting primarily from increased retail business and residential traffic and the addition of wholesale services, both in the United Kingdom and Germany. The Company's Asia-Pacific net revenue, in United States dollar terms, decreased by $11.1 million, or 7.9%, from $140.4 million for the nine months ended September 30, 1997 to $129.3 million for the nine months ended September 30, 1998 primarily resulting from a 17% decrease in the Australian dollar average exchange rate. Net revenue of the Australian operations, in Australian dollar terms, grew 6% to $195.8 million as a result of increased retail business and residential traffic growth and the addition of data and internet services. Cost of revenue increased $64.9 million, from $184.5 million, or 91.3% of net revenue, for the nine months ended September 30, 1997 to $249.4 million, or 84.4% of net revenue, for the nine months ended September 30, 1998. The increase in the cost of revenue is primarily attributable to the increased traffic volumes and associated net revenue growth. The decrease in the cost of revenue as a percentage of net revenue is reflective of the continual expansion of the Company's global network, the continuing migration of existing and newly generated customer traffic onto the Company's network, and the new higher margin product offerings such as data and internet services. Selling, general and administrative expenses increased $21.6 million from $35.8 million to $57.4 million for the nine months ended September 30, 1997 as compared to the nine months ended September 30, 1998. The increase is attributable to the addition of expenses from acquired operations including TresCom, Hotkey, Eclipse and the Canadian operations, the hiring of additional sales and marketing staff and network operations personnel and increased advertising and promotional expenses associated with the Company's residential marketing campaigns. Depreciation and amortization increased from $4.3 million for the nine months ended September 30, 1997 to $15.3 million for the nine months ended September 30, 1998. The increase is associated with increased amortization expense related to intangible assets arising from the Company's 8 acquisitions and with increased depreciation expense related to acquired fixed assets and capital expenditures for fiber, switching and other network equipment being placed into service. Interest expense increased from $5.6 million for the nine months ended September 30, 1997 to $28.2 million for the nine months ended September 30, 1998. The increase is primarily attributable to the interest expense associated with the Company's 1997 and 1998 senior notes offerings and, to a lesser extent, the Company's Revolving Credit Agreement and capital lease financings. Interest income increased from $3.4 million for the nine months ended September 30, 1997 to $8.6 million for the nine months ended September 30, 1998. The increase is a result of the investment of the net proceeds of the 1997 and 1998 senior note offerings. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity requirements arise from cash used in operating activities, purchases of network equipment including switches, related transmission equipment, and fiber optic cable transmission capacity, interest and principal payments on outstanding indebtedness, and acquisitions of and strategic investments in businesses. The Company has financed its growth through private placements of its common stock, the initial public offering of its common stock, the 1997 Senior Notes and Warrants Offering, the 1998 Senior Notes Offering, a $25 million bank Revolving Credit Agreement and capital lease financing. The semi-annual interest payments due under the 1997 Senior Notes through August 1, 2000 have been pre-funded and will be paid from restricted investments. Net cash used in operating activities was $55.9 million for the nine months ended September 30, 1998 as compared to net cash used in operating activities of $1.9 million for the nine months ended September 30, 1997. The increase in operating cash used is primarily comprised of an increase in the net loss of $21.8 million and an increase in accounts receivable of $24.7 million, partially offset by increased non-cash operating expenses of $14.0 million and an increase in accounts payable of $7.1 million. Net cash used in investing activities was $33.5 million for the nine months ended September 30, 1998 compared to net cash used in investing activities of $87.3 million for the nine months ended September 30, 1997. Net cash used in investing activities during the nine months ended September 30, 1998 includes $55.9 million of capital expenditures primarily for the expansion of the Company's global network, partially offset by $23.6 million of cash provided by the sale of restricted investments used to fund interest payments on the 1997 Senior Notes. Net cash provided by financing activities was $153.8 million for the nine months ended September 30, 1998 as compared to net cash provided by financing activities of $200.5 million during the nine months ended September 30, 1997. Cash provided by financing activities in the nine months ended September 30, 1998 resulted primarily from $145.5 million of net proceeds of the 1998 senior notes offering. The Company anticipates aggregate capital expenditures of approximately $100 to $125 million during the remainder of 1998 and 1999. Such capital expenditures will be primarily for international and domestic switches and points of presence, international and domestic fiber optic cable capacity for new and existing routes, satellite earth station facilities, other transmission equipment, and back office support systems. The Company believes that its cash, cash equivalents, and restricted investments along with available capital lease financing will be sufficient to fund the Company's operating losses, debt service requirements, capital expenditures and other cash needs for its operations through at least the end of 1999. In order to fund the Company's longer term cash requirements, including the continual expansion of its network, Primus anticipates that it will be required to raise a significant amount of cash in excess of its existing cash, cash equivalents and restricted investments. Consequently, the 9 Company expects to raise additional capital from public or private equity or debt sources to meet its new financing needs, including for the continued buildout of the network. Additionally, if the Company's plans or assumptions change (including those with respect to the development of the network, the level of its operations and its operating cash flow), if its assumptions prove inaccurate, if it consummates additional investments or acquisitions or if it experiences unexpected costs or competitive pressures, or if existing cash and any other borrowings prove insufficient, the Company may require to seek additional capital sooner than expected. YEAR 2000 General. Primus is reviewing its network elements, computer systems, software applications and other business systems in order to determine if any of these systems will not properly reflect or recognize the year 2000. Because many computer and computer applications define dates by the last two digits of the year, "00" could be interpreted to mean the year 1900, rather than the year 2000. This error could result in miscalculations or system failures. Year 2000 issues may also affect the systems and applications of Primus's customers, vendors or resellers. Compliance Program. Earlier in the year, Primus began a comprehensive inventory and Year 2000 assessment of its principal computer systems, network elements, software applications and other business systems throughout the world. Primus expects to complete its inventory and assessment by the end of 1998 and begin repairing or replacing the most critical items that are determined not to be Year 2000 compliant. Primus expects to complete the repair, replacement, testing and certification of substantially all non-compliant network elements by September 30, 1999. Primus will be using both internal and external resources to identify, correct or reprogram, and test its systems for Year 2000 compliance. Suppliers. Primus is also contacting third party suppliers of major equipment, software, systems and services used by the Company to identify and, to the extent possible, to resolve issues involving Year 2000 compliance. However, the Company has limited or no control over the actions of these third party suppliers. Consequently, while Primus expects that it will be able to resolve any significant Year 2000 issues with regard to these systems and services, there can be no assurance that these suppliers will resolve any or all Year 2000 issues before the occurrence of a material disruption to the business of the Company or any of its customers. Costs. Primus expects to incur approximately $10 to $15 million in expenditures in 1998 and 1999 to complete its Year 2000 compliance program. These estimates do not include the costs of systems, software and equipment that are being replaced or upgraded in the normal course of business. The costs of modifying the Company's network elements, software and systems for Year 2000 compliance are being funded from existing cash resources. Risks. Primus believes that it will substantially complete the implementation of its Year 2000 program prior to December 31, 1999. Consequently, the Company does not believe that Year 2000 issues will have a material adverse effect on the Company's business or results of operations. However, if the Company does not achieve compliance prior to December 31, 1999, if it fails to identify and remedy all critical Year 2000 problems or if major suppliers or customers experience material Year 2000 problems, the Company's results of operations or financial condition could be materially affected. Contingency Plans. Primus has begun to develop appropriate contingency plans to mitigate, to the extent possible, any significant Year 2000 noncompliance. The Company expects to complete its contingency plans by September 30, 1999. If Primus is required to implement its contingency plans, the cost of Year 2000 compliance may be greater than the amount referenced above and there can be no assurance that these plans will be adequate. 10 SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS Statements in this Form 10-Q which are based on current expectations and are not strictly historical statements may differ materially from actual results. Not strictly historical statements include, without limitation, those regarding management's plans, objectives and strategy for future operations, product plans and performance, management's assessment of market factors, and future financial performance. In addition, discussion of the Company's efforts, and management's expectations, regarding Year 2000 compliance issues are also forward-looking statements that may differ materially from actual results. Among factors that could cause actual results to differ materially are changes in business conditions; changes in the telecommunications industry and the general economy; competition; changes in service offering; and risks associated with Primus's limited operating history, entry into developing markets, managing rapid growth, integration of TresCom, risks associated with international operations, dependence on effective information systems, and development of the network. These factors are discussed more fully in the company's Form 10-K and Prospectus dated July 16, 1998 filed with the Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (see index on page 14) (b) Reports on Form 8-K Current report on Form 8-K filed on August 14, 1998 with regards to the Company's second quarter 1997 financial results. 12 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED Date November 13, 1998 By:/s/ Neil L. Hazard ----------------- ------------------ NEIL L. HAZARD (Executive Vice President and Chief Financial Officer) Date November 13, 1998 By:/s/ Thomas R. Kloster ----------------- --------------------- THOMAS R. KLOSTER (Vice President, Corporate Controller and Chief Accounting Officer) 13 EXHIBIT INDEX
Exhibit Number Description - ------ ----------- 27.1 Financial Data Schedule for the nine months ended September 30, 1998
14 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BALANCE SHEET OF PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AT SEPTEMBER 30, 1998 AND THE INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 228,975 0 108,926 10,493 0 317,075 142,674 15,025 689,890 168,384 384,670 0 0 280 136,029 689,890 0 295,573 0 249,406 92,312 6,592 28,235 (46,145) 0 (46,145) 0 0 0 (46,145) (1.99) (1.99)
-----END PRIVACY-ENHANCED MESSAGE-----