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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 22102
McLean, VA (Zip Code)
(Address of principal executive
offices)
(703) 902-2800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
-------------------- ------------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Non-affiliates of Primus Telecommunications Group, Incorporated held
19,693,026 shares of Common Stock as of February 28, 1999. The fair market value
of the stock held by non-affiliates is $215,392,472 based on the sale price of
the shares on February 28, 1999.
As of February 28, 1999, 28,397,877 shares of Common Stock, par value
$.01, were outstanding.
Documents Incorporated by Reference:
Portions of the definitive Proxy Statement to be delivered to Stockholders
in connection with the Annual Meeting of Stockholders are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
General
Primus Telecommunications Group, Incorporated ("Primus" or the "Company"),
organized in 1994, is a facilities-based global telecommunications company that
offers international and domestic long distance, Internet access and data, and
other telecommunications services to business, residential and carrier customers
in North America and in selected markets within both the Asia-Pacific region and
Europe. The Company seeks to capitalize on the increasing demand for
high-quality international telecommunications services resulting from the
globalization of the world's economies and the worldwide trend toward
telecommunications deregulation and the growth of data and Internet traffic.
Primus provides service over its global telecommunications network (the
"Network") that includes (i) 12 international gateway switches in the United
States, Australia, Canada, Germany, Japan, Puerto Rico and the United Kingdom,
(ii) four domestic switches in Australia, (iii) data and Internet access
services in Australia and Canada, (iv) both owned and leased transmission
capacity on undersea and land-based fiber optic cable systems and (v) an
international satellite earth station located in London. Utilizing this Network,
along with resale arrangements and foreign carrier agreements, the Company
provides service to approximately 450,000 customers.
The Company primarily targets customers with significant international long
distance usage, including small- and medium-sized businesses, multinational
corporations, ethnic residential customers and other telecommunications carriers
and resellers. The Company provides competitively priced telecommunications
services, including international and domestic long distance services and
private networks, reorigination services, prepaid and calling cards and
toll-free services, as well as local services in Australia, Puerto Rico and the
United States Virgin Islands, cellular services in Australia, and Internet and
data services in Australia and Canada. The Company markets its services through
a variety of channels, including a direct sales force, independent agents, and
direct marketing.
North America
In the United States, Primus provides long distance services to small- and
medium-sized businesses, multinational corporations, residential customers, and
other telecommunications carriers. The Company operates international gateway
telephone switches in New York City, New Jersey, Washington, D.C., Fort
Lauderdale, Puerto Rico and Los Angeles which are connected with countries in
Europe, Latin America and the Asia-Pacific region through owned and leased
international fiber cable systems. The Company maintains a direct sales
organization to sell to business customers. To reach residential customers, the
Company advertises nationally in ethnic newspapers and other publications,
offering discounted rates for international calls to targeted countries. The
Company also utilizes independent agents to reach and enhance sales to both
business and residential customers and has established a direct sales force for
marketing international services to other telecommunications carriers. The
Company maintains a national customer service center in Florida, staffed with
multilingual representatives, and operates a 24-hour global network management
center in Virginia that monitors the Network. In addition to international long
distance services, the Company provides local service in Puerto Rico and the
United States Virgin Islands.
In Canada, Primus provides long distance services to small- and medium-sized
businesses, residential customers, and other telecommunications carriers and has
sales and customer service offices in Vancouver, Toronto and Montreal. Primus
operates international gateway switches in Toronto and Vancouver, maintains
points of presence in Ottawa, Montreal, Calgary and leases inter-exchange
circuits in Canada. In February 1999, Primus acquired GlobalServe
Communications, Inc., an Internet service provider based in Toronto and now
offers Internet services in Canada.
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Asia-Pacific
Primus is the fourth-largest long distance company in Australia, providing
domestic and international long distance services, data and Internet services,
as well as local and cellular services on a resale basis, to small- and
medium-sized business customers, multinational corporations, and ethnic
residential customers. In 1997, the Company installed and began operating a
five-city switched network using Northern Telecom switches in Sydney, Melbourne,
Perth, Adelaide, and Brisbane. This has since been expanded to include points of
presence in twenty-five additional cities. The Company purchased international
fiber cable capacity and has linked the Australian network to the United States
via the TPC-5, APCN, and Jasaurus cable systems, as well as to New Zealand.
Primus became a fully licensed facilities-based telecommunications carrier in
July 1997. In August 1997, equal access was introduced in Australia, and Primus
began the process of migrating and connecting customers directly to its own
network. Primus markets its services through a combination of direct sales to
small- and medium-sized business customers and large corporations, independent
agents which market to business and residential customers, and media advertising
aimed at ethnic residential customers who make a high volume of international
calls. The Company operates 24-hour customer service and a network management
centers in Australia.
In March 1998 the Company purchased a 60% interest in Hotkey Internet Services
Pty., Ltd., an Australia-based Internet service provider and in February 1999
purchased the remaining 40%. In March 1998, the Company purchased all of the
outstanding stock of Eclipse Data Services Pty., Ltd., an Australia-based data
communications service provider. These strategic acquisitions positioned the
Company to offer a complete range of voice and data services, as well as
Internet access, to its customers.
Primus also entered the Japanese market in late 1997 through the acquisition of
Telepassport Network KK. Primus maintains an office in Tokyo and a Northern
Telecom switch to provide international calling services to resellers and small
businesses. In March 1999, Primus Telecommunications K.K. ("Primus Japan")
received a Type I carrier license in Japan that allows Primus Japan to
construct, own and operate telecommunications facilities in Japan.
Europe
Primus is a fully licensed carrier in the United Kingdom, Germany and France and
provides national and international long distance services to residential and
business customers and other telecommunications carriers in the United Kingdom
and Germany. In the United Kingdom, Primus operates an Ericsson AXE-10
international gateway switch in London that is directly connected to the United
States and continental Europe. The Company has also completed construction of an
Intelsat earth station that will enable the Company to carry voice, data and
Internet traffic to and from countries in the Indian Ocean/Southeast Asia
region. Primus maintains both a 24-hour customer service call center and a
network management center in London. Primus markets its services using a
combination of direct sales representatives, independent agents, and direct
media advertising primarily.
In Germany, Primus has been awarded a switched voice telephone license and
operates an Ericsson AXE-10 international gateway switch in Frankfurt, Germany.
Primus has begun marketing its services in Germany through carrier and retail
direct sales forces in Munich, Frankfurt, Hamburg and Berlin and to residential
customers through affinity marketing agreements.
In France, Primus has been awarded a switched voice license and is currently
installing and interconnecting an Ericsson AXE-10 international gateway switch
in Paris.
Primus Strategy
Primus' objective is to become a leading global provider of international and
domestic long distance voice, Internet, data and other services. Key elements of
Primus' strategy to achieve this objective include:
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o Focus on Customers with Significant International Long Distance Usage. The
Company primarily targets customers with significant international long
distance usage, including small- and medium-sized businesses,
multinational corporations, ethnic residential customers and other
telecommunications carriers and resellers. The Company believes that the
international long distance market is attractive due to its size and its
higher revenue per minute, gross margin and expected growth rate as
compared to the domestic long distance market.
o Pursue Early Entry into Selected Deregulating Markets. Primus seeks to be
an early entrant into selected deregulating telecommunications markets
where it believes there is significant demand for international long
distance services as well as substantial growth and profit potential. The
Company believes that early entrance into deregulating markets provides it
with competitive advantages as it develops sales channels, establishes
customer base, hires personnel experienced in the telecommunications
industry and achieves name recognition. Primus intends to concentrate its
immediate expansion plans in those markets that are more economically
stable and are experiencing more rapid deregulation, such as continental
Europe and Canada. Subsequently, the Company expects to expand in
additional markets including Japan, other parts of the Asia-Pacific region
and Latin America.
o Expand Global Network. By constructing and expanding the Network, the
Company has been able to reduce operating costs, improve service
reliability and increase flexibility to introduce new services. Primus
expects that continued strategic development of its Network will continue
to reduce transmission costs, improve gross margins, reduce reliance on
other carriers and provide more efficient Network utilization. The Company
owns its own switching facilities, a satellite earth station, and fiber
optic cable capacity on an end-to-end basis.
o Expand Service Offerings to Become a Full-Service Carrier in Selected
Deregulating Markets. The Company typically enters markets which are in
the initial stages of deregulation by first providing international long
distance services and, as the market deregulates further, by expanding its
portfolio of service offerings within the particular market. In an effort
to attract larger business customers in multiple markets, the Company
intends to offer a broad array of services (including long distance voice,
cellular, Internet and data services) in approximately ten markets. The
Company believes that international long distance generally offers
attractive margins in markets in the early stage of deregulation and
provides a platform for expanding its service offerings to its customers.
o Provide Transmission for Internet and Data Services. The Company plans to
offer satellite-based broadband transmission capacity to post, telephone &
telegraph operators ("PTTs"), other telecommunications carriers and
Internet service providers ("ISPs") principally serving developing
countries. The Company is focusing these services on developing countries
due to their limited capacity to handle their rapidly growing Internet and
data traffic. Once operational, the Company's satellite earth station in
London will enable it to offer such Internet and data transmission service
in the Indian Ocean/Southeast Asia region.
o Deliver a Broad Selection of Quality Services at Competitive Prices.
Management believes that the Company delivers high quality services at
competitive prices and provides a high level of customer service. The
Company intends to maintain a low-cost structure in order to offer its
customers international and domestic long distance services priced below
that of major carriers in its principal markets of operation. In addition,
the Company intends to continue to maintain strong customer relationships
through the use of trained and experienced sales and service
representatives and through the provision of customized billing services.
By also offering a broad selection of services, including cellular, data,
Internet and other value-added services, the Company believes it can
bundle services for customers and reduce per customer sales and marketing
costs and customer turnover.
o Growth through Selected Acquisitions, Joint Ventures and Strategic
Investments. As part of its business strategy, the Company frequently
evaluates potential acquisitions, joint ventures and strategic
investments. The Company views acquisitions, joint ventures and strategic
investments as means to enter additional markets, add
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new services and expand its operations within existing markets. Potential
candidates include voice and data service providers and ISPs with an
established customer base, complementary operations, telecommunications
licenses, experienced management, or network facilities.
Services
Primus offers a broad array of telecommunications services through its own
Network and through interconnection with the networks of other carriers.
The Company offers the following services:
International and Domestic Long Distance. The Company provides
international long distance voice services terminating in approximately
230 countries, and provides domestic long distance voice services within
the countries in which it operates. Access methods required to originate a
call vary according to regulatory requirements and existing domestic
telecommunications infrastructure.
Internet and Data Services. In Australia, the Company is a nationwide ISP
and offers asynchronous transfer mode and frame relay data services
through its own Network. In Canada, the Company offers Internet access
services through its February 1999 acquisition of GlobalServe
Communications, Inc. Once operational, the Company's satellite earth
station in London will enable it to offer Internet and data transmission
services in the Indian Ocean/Southeast Asia region.
Private Network Services. In selected countries, the Company designs and
implements international private network services that may be used for
voice, data, Internet and video applications.
Toll-free Services. The Company offers domestic and international
toll-free services within selected countries.
Prepaid and Calling Cards. The Company offers prepaid and calling cards
that may be used by customers for domestic and international telephone
calls both within and outside of their home country.
Reorigination Services. In selected countries, the Company provides call
reorigination services which allow non-United States country to country
calling to originate from the United States, thereby taking advantage of
lower United States accounting rates.
Cellular Services. The Company offers analog and digital cellular
services in Australia through resale arrangements.
Local Switched Services. The Company currently provides local service on a
resale basis in Australia, Puerto Rico and the United States Virgin
Islands. In the future, the Company intends to expand its provision of
local service on a resale basis as part of its "multi-service" marketing
approach, subject to commercial feasibility and regulatory limitations.
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Network
The Company believes that the continued strategic development of its global
telecommunications network allows it to control both the quality and cost of the
telecommunications services it provides to its customers. Increased usage of the
Company's Network has and will continue to reduce transmission and other
operating costs and reduce reliance on other carriers. The Company's Network
consists of (i) a global backbone network connecting gateway switches in its
primary service regions, (ii) a domestic long distance network presence within
certain countries, (iii) a combination of owned and leased transmission
facilities, resale arrangements and foreign carrier agreements.
The Company's Network consists of 16 carrier-grade switches, including 12
international gateway switches (two in the New York city area, and one each in
Los Angeles, Washington, D.C., Ft. Lauderdale, Toronto, Vancouver, London,
Frankfurt, Sydney, Tokyo and Puerto Rico), and four domestic switches in
Australia (Melbourne, Brisbane, Perth and Adelaide). The Company also currently
operates approximately 25 points of presence in other major metropolitan areas
in its service regions. Additionally, the Company operates data and Internet
access switches and points of presence in Canada and Australia and has completed
the construction of a satellite earth station in London. Each of the
international gateway switches is connected to the domestic and international
networks of both the Company and other carriers in each country.
During 1998 the Company entered into an agreement to purchase $20 million of
fiber capacity from Qwest Communications, Inc. which provides connections among
the United States gateway switches and future United States points of presence.
The Company expects such purchase to reduce its network cost structure and
provide improved service to customers on its high traffic routes.
The Company's international fiber network is comprised of a combination of owned
and leased international fiber optic cable capacity. When traffic volumes
increase and such commitments are cost effective, the Company either purchases
lines or leases lines on a longer-term basis at a fixed cost or acquires
economic interests in such transmission capacity.
In selected countries where competition with the traditional incumbent PTTs is
limited or is not currently permitted, the Company has entered into foreign
carrier agreements with PTTs or other service providers which permit the Company
to provide traffic into and receive return traffic from these countries. The
Company has existing foreign carrier agreements with PTTs in Cyprus, Greece,
India, Iran, Italy and New Zealand, and additional agreements with other foreign
carriers in other countries.
Customers
As of December 31, 1998, the Company had approximately 450,000 customers. Set
forth below is a description of the customer base:
Businesses. The Company's business sales and marketing efforts target small- and
medium-sized businesses with significant international long distance traffic.
More recently with the development of its global Network, the Company has also
targeted larger multinational businesses. In an effort to attract these larger
customers in multiple markets, the Company intends to offer a broad array of
services around the world. The Company believes that business users are
attracted to Primus due to its significant price savings compared to first-tier
carriers and its personalized approach to customer service and support,
including customized billing and bundled service offerings.
Residential Consumers. The Company's residential sales and marketing strategy
targets ethnic residential consumers who generate high international traffic
call volumes. The Company believes that such customers are attracted to Primus
because of significant price savings as compared to first-tier carriers,
simplified pricing structure, and multilingual customer service and support.
6
Telecommunications Carriers and Resellers. The Company competes for the business
of other telecommunications carriers and resellers primarily on the basis of
price and service quality. Sales to other carriers and resellers help the
Company maximize the utilization of the Network and thereby reduce the Company's
fixed costs per minute of use.
Sales and Marketing
The Company markets its services through a variety of sales channels, as
summarized below:
Direct Sales Force. The Company's direct sales force is comprised of full-time
employees who focus on business customers with substantial international
traffic, including multinational businesses. The Company also employs full-time
direct sales representatives focused on ethnic residential consumers and direct
sales representatives who sell services to other telecommunications carriers and
resellers. Direct sales personnel generally are compensated with a base salary
plus commissions.
The Company's direct sales efforts are organized into regional sales offices.
The Company currently has offices in New York City, South Florida, Tampa,
Washington, D.C., Puerto Rico, St. Thomas, Montreal, Toronto, Vancouver, Mexico
City, London, Frankfurt, Munich, Hamburg, Berlin, Melbourne, Sydney, Adelaide,
Brisbane, Perth and Tokyo.
Agents and Independent Sales Representatives. The Company supplements its direct
sales efforts with agents and independent sales representatives. These agents
and representatives, who typically focus on small- and medium-sized businesses,
as well as ethnic residential consumers, are generally paid commissions based on
long distance revenue generated.
Media and Direct Mail. The Company uses a variety of print, television and radio
to increase brand recognition and generate new customers. The Company reaches
ethnic residential consumers by print, media advertising campaigns in ethnic
newspapers, and on select radio and television programs.
Competition
The international telecommunications industry is highly competitive and
significantly affected by regulatory changes, marketing and pricing decisions of
the larger industry participants and the introduction of new services made
possible by technological advances. The Company believes that telecommunications
service providers compete on the basis of price, customer service, product
quality and breadth of services offered. In each country of operation, the
Company has numerous competitors. The Company believes that as the international
telecommunications markets continue to deregulate, competition in these markets
will increase, similar to the competitive environment that has developed in the
United States following the AT&T divestiture in 1984. Prices for long distance
calls in the markets in which the Company competes have declined historically
and are likely to continue to decrease. Many of the competitors are
significantly larger, have substantially greater financial, technical and
marketing resources and larger networks than the Company.
The following is a brief summary of the competitive environment in selected
countries within each of the Company regions of service:
North America. In the United States, which is the most competitive and among the
most deregulated long distance markets in the world, competition is based upon
pricing, customer service, network quality, and the ability to provide
value-added services. AT&T is the largest supplier of long distance services,
with MCI Worldcom and Sprint being the next largest providers. In the future,
under provisions of recently enacted federal legislation, the Company
anticipates that it will also compete with Regional Bell Operating Companies
("RBOCs"), Local Exchange Carriers ("LECs") and ISPs in providing domestic and
international long distance services.
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The Canadian telecommunications market is highly competitive and is dominated by
a few established carriers whose marketing and pricing decisions have a
significant impact on industry participants.
Asia-Pacific. Australia is one of the most deregulated and competitive
telecommunications markets in the Asia-Pacific region. The Company's principal
competitors in Australia are Telstra, the dominant carrier, Optus, AAPT and a
number of switchless resellers. The Company competes in Australia by offering a
comprehensive portfolio of competitively priced products and services, including
value-added services, and by providing superior customer service and support.
The Company believes that competition in Australia will increase as more
companies are awarded carrier licenses in the future. The Company's principal
competitor in Japan is KDD, the dominant international carrier, as well as Japan
Telecom, IDC and a number of second-tier carriers.
Europe. The Company's principal competitors in the United Kingdom are British
Telecom, the dominant supplier of telecommunications services in the United
Kingdom, Cable & Wireless Communications and a group of second-tier carriers.
The Company's principal competitor in Germany is Deutsche Telekom, the dominant
carrier. The Company also faces competition from other licensed public telephone
operators that are constructing their own facilities-based networks, cable
companies and switch-based resellers. The Company competes in Europe by offering
competitively priced bundled and stand-alone services and personalized customer
service.
Government Regulation
As a global telecommunications company, Primus is subject to varying degrees of
regulation in each of the jurisdictions in which it provides its services. Local
laws and regulations, and the interpretation of such laws and regulations,
differ significantly among the jurisdictions in which the Company operates.
Regulation of the telecommunications industry is changing rapidly both
domestically and globally. Although the Company believes that these changes,
which include deregulation, will create opportunities for new entrants in the
telecommunications service industry, there can be no assurance that these
changes will benefit the Company.
United States. In the United States, the Company's services are subject to the
provisions of the Communications Act of 1994 as amended by the 1996
Telecommunications Act (the "Communications Act") and the Federal Communications
Commission ("FCC") regulations thereunder, as well as the applicable laws and
regulations of the various states.
As a carrier offering services to the public, the Company must comply with the
requirements of common carriage under the Communications Act, including the
offering of service on a non-discriminatory basis at just and reasonable rates
and obtaining FCC approval prior to any assignment of authorizations or any
transfer of de jure or de facto control of the Company. The Company is
classified as a non-dominant common carrier for domestic service and is not
required to obtain specific prior FCC approval to initiate or expand domestic
interstate services.
International common carriers, including the Company, are required to obtain
authority under Section 214 of the Communications Act and file a tariff
containing the rates, terms, and conditions applicable to their services prior
to initiating their international telecommunications services. The Company has
obtained all required authorizations from the FCC to use, on a facilities and
resale basis, various transmission media for the provision of international
switched services and international private line services.
In addition to the general common carrier principles, the Company must conduct
its international business in compliance with the FCC's international
settlements policy, the rules that establish the permissible boundaries for
U.S.-based carriers and their foreign correspondents to settle the cost of
terminating each other's traffic over their respective networks. The Company
intends, where possible, to take advantage of lowered accounting rates and
flexible arrangements. The Company cannot predict how the FCC will resolve
pending international policy issues or how such resolutions will affect its
international business.
8
The Company's intrastate long distance operations are subject to various state
laws and regulations including, in most jurisdictions, certification and tariff
filing requirements. The Company has received the necessary certificate and
tariff approvals to provide intrastate long distance service in 48 states. The
Company is subject to a variety of tariffing, filing, and reporting requirements
imposed on authorized carriers by state public service commissions ("PSCs").
PSCs also regulate access charges and other pricing for telecommunications
services within each state. The RBOCs and other LECs have been seeking reduction
of state regulatory requirements, including greater pricing flexibility that, if
granted, could subject the Company to increased price competition.
Regulation of the telecommunications industry is changing rapidly both
domestically and globally. The FCC is considering a number of international
service issues in the context of several policy rulemaking proceedings and in
response to specific petitions and applications filed by other international
carriers. The Company is unable to predict how the FCC will resolve the pending
international policy issues or how such resolution will affect its international
business. In addition, the World Trade Organization during 1997 reached a
68-nation agreement on telecommunications services (the "WTO Agreement"), which
reflects efforts to dismantle government-owned telecommunications monopolies
throughout Europe and Asia. Although the Company believes that these
deregulation efforts will create opportunities for new entrants in the
telecommunications service industry, there can be no assurance that the
agreement will be implemented in a manner that would benefit the Company.
Canada. Telecommunications carriers are regulated generally by the Canadian
Radio-Television and Telecommunications Commission which has recently
established a new competitive regulatory framework governing the international
segment of the long distance market, eliminating certain barriers to
competition, consistent with Canada's commitments to the WTO Agreement. As a
result, full facilities-based resale competition has been introduced in the
provision of international services in Canada during October 1998, coincident
with the elimination of traffic routing limitations on switched hubbing through
the United States.
Australia. The provision of the Company's services is subject to federal
regulation. Two primary instruments of regulation have been the
Telecommunications Act 1991 and federal regulation of anti-competitive practices
pursuant to the Trade Practices Act 1974. The regulatory climate changed in July
1997 with the implementation of the Telecommunications Act of 1997 (the "Telecom
Act"). These latest changes to the regulatory framework have been described by
the Australian Government as the achievement of the Government's long term
objective of an internationally competitive telecommunications industry in
Australia through full and open competition.
The Company is licensed under the Telecom Act to own and operate transmission
facilities in Australia. Under the new regulatory framework, the Company does
not require a carriage license in order to supply carriage services to the
public using network facilities owned by another carrier. Instead, with respect
to carriage services, the Company must comply with legislated "service provider"
rules contained in the Telecom Act covering matters such as compliance with the
Telecom Act, operator services, regulation of access, directory assistance,
provision of information to allow maintenance of an integrated public number
database, and itemized billing.
Also, in connection with the Telecom Act, two federal regulatory authorities now
exercise control over a broad range of issues affecting the operation of the
Australian telecommunications industry. The Australian Communications Authority
("ACA") is the authority regulating matters including the licensing of carriers
and technical matters, and the Australian Competition and Consumer Commission
("ACCC") has the role of promoting competition and consumer protection. The
Company will be required to comply with the terms of its own licenses and will
be subject to the regulatory control of the ACA and the ACCC.
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Japan. The Company's services in Japan are subject to regulation by the Japanese
Telecom Ministry under the Japanese Telecom Law. During 1998, the Company
operated in Japan under a Special Type II business license which allowed and
still allows it to provide telecommunications services over international
circuits leased from another carrier and domestic service over leased circuits.
The Company received a Type I business license in March 1999 which allows the
Company to provide telecommunications services using its own facilities.
United Kingdom. The Company's services are subject to the provisions of the
United Kingdom Telecommunications Act of 1984. The Secretary of State for Trade
and Industry, acting on the advice of the United Kingdom Department of Trade and
Industry is responsible for granting United Kingdom telecommunications licenses,
while the Director General of Telecommunications and the Office of
Telecommunications ("Oftel") are responsible for enforcing the terms of such
licenses. Oftel attempts to promote effective competition both in networks and
in services to redress anti-competitive behavior. Oftel has imposed mandatory
rate reductions on British Telecom in the past, that are expected to continue
for the foreseeable future, and these have had, and may continue to have, the
effect of reducing the prices the Company can charge its customers.
Germany. The German Telecom Act liberalized all telecommunications activities as
of January 1, 1998. Under the German Telecom Act, companies that desire to
connect with Deutsche Telekom's network must enter into an interconnection
agreement with the regulated interconnection tariffs. The Company entered into
such an agreement with Deutsche Telekom in February 1998. Subsequently, Deutshce
Telekom exercised its option to terminate its current interconnection agreement
with the Company effective at the end of 1999 and has commenced renegotiations.
There can be no assurance that a revised interconnection agreement with Deutsche
Telekom or the regulatory environment in Germany will allow the Company to
continue to provide competitively priced telecommunications services.
Acquisitions
On March 31, 1999, the Company purchased the common stock of London Telecom
Network, Inc. and certain related entities that provide long distance
telecommunications services in Canada (the "LTN Companies"), for approximately
$36 million in cash (including payments made in exchange for certain
non-competition agreements). In addition, on March 31, 1999, the Company entered
into an agreement to purchase for $14 million in cash substantially all of the
operating assets of Wintel CNC Communications Inc. and Wintel CNT Communications
Inc. (the "Wintel Companies"), which are Canada-based long distance
telecommunications providers affiliated with the LTN Companies. The purchase of
the assets of the Wintel Companies is expected to close in early May 1999. If
the LTN Companies and the Wintel Companies collectively achieve certain
financial goals during the first half of 1999, the Company has agreed to pay up
to an additional $4.6 million in cash.
In February 1999 the Company acquired GlobalServe Communications, Inc.,
("GlobalServe") a privately held Internet services provider ("ISP") based in
Toronto, Canada. The purchase price of approximately $4.2 million was comprised
of $2.1 million in cash and 142,806 shares of the Company's common stock. As a
result of the acquisition, the Company now serves approximately 30,000 Internet
customers in Canada.
In June 1998 the Company acquired 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 regions. As a result of the acquisition, all of the
approximately 12.7 million TresCom shares outstanding were exchanged for
approximately 7.8 million shares of the Company's common stock valued at
approximately $138 million.
In March 1998 the Company acquired all of the outstanding stock of Eclipse
Telecommunications Pty., Ltd. ("Eclipse"), a data communications provider in
Australia. The purchase price was approximately $1.8 million in cash and 27,500
shares of the Company's Common Stock.
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In March 1998 the Company purchased a 60% controlling interest in Hotkey
Internet Services Pty., Ltd. ("Hotkey"), a Melbourne, Australia-based Internet
service provider, for approximately $1.3 million. In February 1999, the Company
purchased the remaining 40% of Hotkey for approximately $1.1
million.
Employees
The following table summarizes the number of full-time employees of the Company
as of December 31, 1998, by operating region and classification:
North Asia-
America Pacific Europe Total
------- ------- ------ -----
Management and Administrative 97 59 13 169
Sales and Marketing 181 122 24 327
Customer Service and Support 85 63 31 179
Technical 101 91 22 214
--- -- -- ---
Total 464 335 90 889
=== === == ===
The Company has never experienced a work stoppage, and none of its employees are
represented by a labor union or covered by a collective bargaining agreement.
The Company considers its employee relations to be excellent.
ITEM 2. PROPERTIES
The Company currently leases its corporate headquarters offices that are located
in McLean, Virginia. Additionally, the Company also leases administrative,
technical and sales office space, as well as space for its switches, in various
locations in the countries in which it operates, including the United States,
Australia, the United Kingdom, Canada, Japan, Mexico, Germany and France. Total
leased space approximates 240,000 square feet and the total annual lease costs
are approximately $5.3 million. The operating leases expire at various times
through 2008. Management believes that the Company's present administrative and
sales office facilities are adequate for its anticipated operations and that
similar space can readily be obtained as needed. The Company believes the
current leased facilities to house the communications equipment are adequate.
However, as the Company's network of switches grows, the Company expects to
lease additional locations to house the new equipment.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to the
ordinary course of the conduct of its business. The Company believes the outcome
of pending legal proceedings to which the Company is a party will not have a
material adverse effect on the Company's business, financial condition, results
of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock
11
The Company's Common Stock trades on the Nasdaq Stock Market under the symbol
"PRTL". The following table sets forth, for the period indicated, the high and
low sales prices of the Company's Common Stock.
Period
- ------- High Low
---- ----
1997
1st Quarter $17 $7 3/8
2nd Quarter $11 1/8 $7 1/8
3rd Quarter $10 5/8 $7 5/8
4th Quarter $16 5/8 $10
1998
1st Quarter $31 1/4 $14 3/4
2nd Quarter $30 7/8 $14 5/8
3rd Quarter $28 $5 3/8
4th Quarter $16 3/4 $5 1/4
Dividend Policy
The Company has not paid any cash dividends on its Common Stock to date. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition. Dividends are currently restricted by the
senior note indentures, and may be restricted by other credit arrangements
entered into in the future by the Company. It is the present intention of the
Board of Directors to retain all earnings, if any, for use in the Company's
business operations, and accordingly, the Board of Directors does not expect to
declare or pay any dividends in the foreseeable future.
Holders
As of February 28, 1999, the Company had approximately 182 holders of record of
its Common Stock. The Company believes that it has in excess of 400 beneficial
owners.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected consolidated financial data of the Company for
the years ended December 31, 1998, 1997, 1996, and 1995 and from inception to
December 31, 1994 as derived from the historical financial statements of the
Company:
Statement of Operations Data: For the Period Ended December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- ---------- --------- --------
(in thousands except per share data)
Net revenue $ 421,628 $ 280,197 $ 172,972 $ 1,167 $ 0
Gross margin (deficit) $ 68,612 $ 27,466 $ 14,127 $ (217) $ 0
Selling, general, administrative
expenses $ 79,532 $ 50,622 $ 20,114 $ 2,024 $ 557
Loss from operations $ (35,105) $ (29,889) $ (8,151) $(2,401) $(569)
Net loss $ (63,648) $ (36,239) $ (8,764) $(2,425) $(577)
Basic and diluted net loss per
share $ (2.61) $ (1.99) $ (0.75) $ (0.48) $(0.22)
Balance Sheet Data: As of December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- ------ ------
12
(in thousands)
Total assets $673,963 $355,393 $135,609 $5,042 $ 487
Total long term obligations $420,174 $231,211 $ 17,248 $ 528 $ 13
Total stockholders' equity
(deficit) $114,917 $ 42,526 $ 76,440 $2,562 $ (71)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OVERVIEW
Overview
Primus is a facilities-based global telecommunications company that offers
international and domestic long distance, Internet access and data, and other
telecommunications services to business, residential and carrier customers in
North America and in selected markets within both the Asia-Pacific region and
Europe. The Company seeks to capitalize on the increasing demand for
high-quality international telecommunications services resulting from the
globalization of the world's economies and the worldwide trend toward
telecommunications deregulation and the growth of data and Internet traffic.
Primus provides service over its Network which includes (i) 12 international
gateway switches in the United States, Australia, Canada, Germany, Japan, Puerto
Rico and the United Kingdom, (ii) four domestic switches in Australia, (iii)
data and Internet access switches in Australia and Canada, (iv) both owned and
leased transmission capacity on undersea and land-based fiber optic cable
systems and (v) an international satellite earth station located in London.
Utilizing this Network, along with resale arrangements and foreign carrier
agreements, the Company provides service to approximately 450,000 customers.
Net revenue is earned based on the number of minutes billable by the Company and
is recorded upon completion of a call, adjusted for sales allowance. The Company
generally prices its services at a savings compared to the major carriers
operating in each country. The Company's net revenue is derived from carrying a
mix of business, residential and carrier long distance voice traffic, data and
Internet traffic in Australia and Canada, and, in Australia, also from provision
of local and cellular services.
Cost of revenue is primarily comprised of costs incurred from other domestic and
foreign telecommunications carriers to originate, transport and terminate calls.
The majority of the Company's cost of revenue is variable, based upon the number
of minutes of use, with transmission and termination costs being the Company's
most significant expense. As the Company increases the portion of traffic
transmitted over its leased or owned facilities, fixed costs as a percentage of
cost of revenue will proportionately increase.
Although the Company's functional currency is the United States dollar, a
significant portion of the Company's net revenue is derived from its sales and
operations outside the United States. In the future, the Company expects to
continue to derive a significant portion of its net revenue and incur a
significant portion of its operating costs outside the United States; therefore,
changes in foreign currency exchange rates may have a significant effect on the
Company's results of operations. The Company historically has not engaged in
hedging transactions and does not currently contemplate engaging in hedging
transactions.
Other Operating Data
The following information for the year ended December 31, 1998 is provided for
informational purposes and should be read in conjunction with the Consolidated
Financial Statements and Notes.
13
Minutes of Long Distance Use
Net ----------------------------------------
Revenue International Domestic Total
--------- ------------- ----------- ---------
(in thousands)
North America $ 188,008 539,749 215,860 755,609
Asia-Pacific 172,757 119,727 284,654 404,381
Europe 60,863 193,866 71,712 265,578
--------- --------- --------- ---------
Total $ 421,628 853,342 572,226 1,425,568
========= ========= ========= =========
Results of operations for the year ended December 31, 1998 as compared to the
year ended December 31, 1997
Net revenue increased $141.4 million or 51% to $421.6 million for the year ended
December 31, 1998, from $280.2 million for the year ended December 31, 1997. Of
the net revenue increase, $113.7 million was associated with the Company's North
American operations, which represents a growth rate of approximately 153%. The
growth reflects increased traffic volumes in business and ethnic residential
retail operations and in carrier operations, and includes operations of TresCom
(since the June 9, 1998 acquisition), and a full year's results of the acquired
Canadian operations and the acquired operations of TelePassport L.L.C./USFI,
Inc. The European net revenue increased from $22.7 million for the year ended
December 31, 1997 to $60.9 million for the year ended December 31, 1998,
resulting from increased retail business and residential traffic and the
addition of carrier services, both in the United Kingdom and Germany. The
Company's Asia-Pacific net revenue decreased by $10.3 million or 5.7% to $172.8
million for the year ended December 31, 1998 from $183.1 million for the year
ended December 31, 1997 primarily resulting from a 13% decrease in the
Australian dollar average exchange rate. Net revenue of the Australian
operations, in Australian dollar terms, grew 7% to Australian $259.5 million as
a result of increased retail business and residential traffic growth and the
addition of data and Internet services.
Cost of revenue increased $100.3 million, from $252.7 million, or 90.2% of net
revenue, for the year ended December 31, 1997 to $353.0 million, or 83.7% of net
revenue, for the year ended December 31, 1998. The increase in the cost of
revenue is primarily attributable to the increased traffic volumes and
associated net revenue growth. The cost of revenue as a percentage of net
revenue decreased by 650 percentage points as a result of expansion of the
Company's global Network, the continuing migration of existing and newly
generated customer traffic onto the Company's Network, and new higher margin
product offerings such as data and Internet services.
Selling, general and administrative expenses increased $28.9 million to $79.5
million for the year ended December 31, 1998 from $50.6 million for the year
ended December 31, 1997. 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 $6.7 million for the year ended
December 31, 1997 to $24.2 million for the year ended December 31, 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 to $40.0 million for the year ended December 31, 1998
from $12.9 million for the year ended December 31, 1997. The increase is
primarily attributable to the interest expense associated with the Company's
July 1997 $225 million 11 3/4% senior notes offering, due 2004, ("1997 Senior
Notes") and the Company's May 1998 $150 million 9 7/8% senior notes offering,
due 2008, ("1998 Senior Notes") and, to a lesser extent, the Company's Bank
Revolving Credit Facility and additional capital lease financing.
14
Interest income increased from $6.2 million for the year ended December 31, 1997
to $11.5 million for the year ended December 31, 1998. The increase is a result
of the investment of the net proceeds of the Company's 1998 and 1997 Senior Note
offerings.
Results of operations for the year ended December 31, 1997 as compared to the
year ended December 31, 1996
Net revenue increased $107.2 million or 62%, from $173.0 million for the year
ended December 31, 1996 to $280.2 million for the year ended December 31, 1997.
Of the increase, $57.8 million was associated with the Company's North American
operations and reflects a growth rate in excess of 300%. The growth is a result
of increased traffic volumes in carrier operations and, to a lesser extent, in
ethnic residential and business customer traffic. Additionally, the purchases of
the Company's Canadian operations in April 1997 and those of Telepassport/USFI
in October 1997 contributed to the year-over-year net revenue growth. The
Asia-Pacific operations contributed $31.9 million to the year-over-year net
revenue growth, resulting in part from the residential customer marketing
campaigns commenced in early 1997. The 1997 results also reflect a full year of
the Australian operations as compared to ten months in 1996 as a result of the
March 1, 1996 acquisition of these operations. The Asia-Pacific net revenue
growth was negatively impacted by weakness in the Australian dollar during 1997
as compared to 1996. The European net revenue growth of $17.6 million, a
year-over-year growth rate in excess of 300%, came from the expansion into the
United Kingdom carrier marketplace during the third quarter of 1997 and
continued growth in the ethnic residential and business marketplaces.
Cost of revenue increased $93.9 million, from $158.8 million, or 91.8% of net
revenue, for the year ended December 31, 1996 to $252.7 million, or 90.2% of net
revenue, for the year ended December 31, 1997. The increase in the cost of
revenue is a direct reflection of the increase in traffic volumes. The decrease
in the cost of revenue as a percentage of net revenue reflects the investments
made by the Company in its global Network and the associated migration of
customer traffic onto the Network, particularly in Australia with the advent of
equal access in the second half of 1997.
Selling, general and administrative expenses increased $30.5 million, from $20.1
million to $50.6 million for the year ended December 31, 1997, as compared to
the year ended December 31, 1996. The increase is attributable to the hiring of
additional sales and marketing staff, and operations and engineering personnel
to operate the Company's global Network; the addition of the Canadian and
Telepassport/USFI operations; a full year of the Company's Australian operations
versus ten months in the prior year; and increased advertising and promotional
expenses associated with the Company's residential marketing campaigns.
Depreciation and amortization increased from $2.2 million for the year ended
December 31, 1996 to $6.7 million for the year ended December 31, 1997. The
majority of the increase is associated with capital expenditures for
international fiber, telephone switches and related transmission equipment being
placed into service. Additionally, amortization expense increased as a result of
the intangible assets associated with the Company's acquisitions during 1997.
Interest expense increased from $0.9 million for the year ended December 31,
1996 to $12.9 million for the year ended December 31, 1997. The increase is
attributable to the interest expense associated with the Company's 1997 Senior
Notes.
Interest income increased from $0.8 million for the year ended December 31, 1996
to $6.2 million for the year ended December 31, 1997. The increase is due to
investment of the net proceeds from the Company's 1997 Senior Notes and the
$54 million net proceeds from its November 1996 initial public equity offering.
Other income (expense) for the years ended December 31, 1997 and 1996 is the
result of foreign currency transaction gains/losses on Australian
dollar-denominated debt incurred by the Company for its acquisition of its
15
Australian operations, due to the fluctuations of the Australian dollar against
the United States dollar during each year. This debt was paid in full during
1997.
Income taxes were attributable to the operations of the Company's United Kingdom
and Australian subsidiaries.
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
capacity, interest and principal payments on outstanding indebtedness, and
acquisitions of businesses. The Company has financed its growth to date through
public offerings and private placements of debt and equity securities, bank debt
and capital lease financing.
Net cash used in operating activities was $71.3 million for the year ended
December 31, 1998 as compared to net cash used in operating activities of $14.8
million for the year ended December 31, 1997. The increase in operating cash
used is primarily comprised of an increase in the net loss of $27.4 million and
a decrease in accounts payable of $8.2 million (as compared to an increase in
accounts payable of $30.2 million in 1997), partially offset by increased
non-cash operating expenses of $21.5 million.
Net cash used in investing activities was $54.2 million for the year ended
December 31, 1998 compared to net cash used in investing activities of $104.2
million for the year ended December 31, 1997. Net cash used in investing
activities during the year ended December 31, 1998 includes $76.0 million of
capital expenditures primarily for the expansion of the Company's global
Network, partially offset by $22.9 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 $146.8 million for the year ended
December 31, 1998 as compared to net cash provided by financing activities of
$200.1 million during the year ended December 31, 1997. Cash provided by
financing activities for the year ended December 31, 1998 resulted primarily
from $144.5 million of net proceeds of the 1998 Senior Notes offering.
The Company anticipates aggregate capital expenditures of approximately $125
million during 1999. Such capital expenditures will be primarily for
international and domestic switches and points of presence, international and
domestic fiber optic cable capacity for new and existing routes, satellite earth
station facilities, other transmission equipment, and back office support
systems.
On March 31, 1999, the Company purchased the common stock of London Telecom
Network, Inc. and certain related entities that provide long distance
telecommunications services in Canada (the "LTN Companies"), for approximately
$36 million in cash (including payments made in exchange for certain
non-competition agreements). In addition, on March 31, 1999, the Company entered
into an agreement to purchase for $14 million in cash substantially all of the
operating assets of Wintel CNC Communications Inc. and Wintel CNT Communications
Inc. (the "Wintel Companies"), which are Canada-based long distance
telecommunications providers affiliated with the LTN Companies. The purchase of
the assets of the Wintel Companies is expected to close in early May 1999. If
the LTN Companies and the Wintel Companies collectively achieve certain
financial goals during the first half of 1999, the Company has agreed to pay up
to an additional $4.6 million in cash.
On January 29, 1999 the Company completed an offering of $200 million 11 1/4 %
Senior Notes (the "1999 Senior Notes") due in 2009. The $192.5 million of net
proceeds of the offering are to be used for continued expansion of the Network
and other general corporate purposes.
On January 20, 1999, the Company entered into a supplemental indenture
applicable to the Company's 11 3/4% Senior Notes in order to provide additional
flexibility to incur indebtedness to fund the Company's expansion, to make
permitted investments in marketing channels and complementary telecommunications
services and to secure additional bank debt. The supplemental indenture
substantially conformed certain covenants applicable to the 1997 Senior Notes
to the corresponding provisions of the Company's other senior notes. The Company
incurred fees and expenses of approximately $4.8 million in connection with
securing consents to enter into the supplemental indenture.
In January 1999, the Company voluntarily repaid in full with a part of its
available cash, and delivered notice of its termination of, the Revolving Bank
Credit Facility (the "Facility"). The Facility, which provided for up to $25
million of revolving credit borrowings and which was due to mature on July 30,
2002, was acquired upon completion of the TresCom Merger.
16
The Company believes that the net proceeds from the 1999 Senior Notes, together
with its existing cash and available capital lease financing (subject to the
limitations in the Indentures related to the Company's senior notes) will be
sufficient to fund the Company's operating losses, debt service requirements,
capital expenditures, acquisition activities, including the recently announced
acquisitions of the LTN Companies and the Wintel Companies, and other cash needs
for its operations through the end of 2000. The semi-annual interest payments
due under the 1997 Senior Notes through August 1, 2000 have been pre-funded and
will be paid from restricted investments. The Company is continually evaluating
the expansion of its service offerings and plans to make further investments in
and enhancements to its Network and distribution channels in order to expand its
service offerings. In order to fund these additional cash requirements, the
Company anticipates that it will be required to raise additional financing from
public or private equity or debt sources. Additionally, if the Company's plans
or assumptions change (including those with respect to the development of the
Network, the level of its operations and its operating cash flow), if its
assumptions prove inaccurate, if it consummates additional investments or
acquisitions, if it experiences unexpected costs or competitive pressures, or if
existing cash and any other borrowings prove insufficient, the Company may be
required to seek additional capital sooner than expected. In the event that the
Company is unable to obtain such additional capital or is unable to obtain such
additional capital on acceptable terms, it may be required to reduce the scope
of its expansion, which could adversely affect its business prospects and its
ability to compete. There can be no assurance that the Company will be able to
raise equity capital, obtain capital lease or bank financing or incur other
borrowings on commercially reasonable terms, if at all, to fund any such
expansion or otherwise.
Year 2000
General. Primus is reviewing its network elements, computer systems, software
applications and other business systems in order to determine if any of these
systems will not properly reflect or recognize the year 2000. Because many
computer and computer applications define dates by the last two digits of the
year, "00" could be interpreted to mean the year 1900, rather than the year
2000. This error could result in miscalculations or system failures. Year 2000
issues may also affect the systems and applications of Primus' customers,
vendors or resellers.
Compliance Program. Beginning in 1998, Primus began a comprehensive inventory
and Year 2000 assessment of its principal computer systems, network elements,
software applications and other business systems. Primus expects to complete its
inventory and assessment and begin repairing or replacing the most critical
network elements and significant management systems that are determined not to
be Year 2000 compliant during the first quarter of 1999. Primus expects to
complete the repair, replacement, testing and certification of substantially all
non-compliant network elements by September 30, 1999. Primus is using both
internal and external resources to identify, correct or reprogram, and test its
systems for Year 2000 compliance.
Suppliers. Primus is also contacting third party suppliers of major equipment,
software, systems and services used by the Company to identify and, to the
extent possible, to resolve issues involving Year 2000 compliance. However, the
Company has limited or no control over the actions of these third party
suppliers. Consequently, while Primus expects that it will be able to resolve
any significant Year 2000 issues with regard to its systems and services,
there can be no assurance that its suppliers will resolve any or all Year 2000
issues before the occurrence of a material disruption to the business of the
Company or any of its customers.
17
Costs. Primus expects to incur approximately $3 to $5 million in expenditures in
1999 to complete its Year 2000 compliance program. The costs of modifying the
Company's network elements, software and systems for Year 2000 compliance are
being funded from existing cash resources and are being charged to expense as
incurred.
Risks. Primus believes that it will complete the implementation of its Year 2000
program prior to December 31, 1999. Consequently, the Company does not believe
that Year 2000 issues will have a material adverse effect on the Company's
business, cash flows, or results of operations. However, if the Company does not
achieve compliance prior to December 31, 1999, if it fails to identify and
remedy all critical Year 2000 problems or if major suppliers or customers
experience material Year 2000 problems, the Company's results of operations or
financial condition could be materially and adversely affected. Primus has
determined that non-compliant network elements may result in improperly routed
traffic and that non-compliant, non-network systems may result in errors in
customer billing and accounting records.
Contingency Plans. Primus has begun to develop appropriate contingency plans to
mitigate, to the extent possible, any significant Year 2000 noncompliance. The
Company expects to complete its contingency plans by September 30, 1999. If
Primus is required to implement its contingency plans, the cost of Year 2000
compliance may be greater than the amount referenced above and there can be no
assurance that these plans will be adequate.
Special Note Regarding Forward Looking Statements
Statements in this Annual Report on Form 10-K, 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 and acquired
its most significant operating subsidiaries, Primus Australia (formerly Axicorp)
and TresCom, in March 1996 and June 1998, respectively. The Company intends to
enter markets where it has limited or no operating experience. The Company's
prospects should be considered in light of risks, expenses, problems and delays
inherent in establishing a new business in a rapidly changing industry.
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 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.
18
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 in 1996,
1997, and 1998 and has an accumulated deficit of approximately $112 million as
of December 31, 1998. 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. 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.
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 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. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000 and are vulnerable to the Year 2000
problem which could result in a major system failure or miscalculations. There
can be no assurance that the Company will be able to successfully implement
upgrades to its systems to correct any Year 2000 problem. A failure of the
Company's computer systems, or the failure of the Company's vendors or customers
to effectively
19
upgrade their software and systems for transition to the Year 2000, could have a
material adverse effect on the Company's business and financial condition or
results of operations.
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.
ITEM 7A. 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 - As noted above, although the Company's functional currency is
the United States dollar, a significant portion of the Company's net revenue is
derived from its sales and operations outside the United States. In the future,
the Company expects to continue to derive a significant portion of its net
revenue and incur a significant portion of its operating costs outside the
United States, and changes in foreign currency exchange rates may have a
significant effect on the Company's results of operations. The operations of
affiliates and subsidiaries in foreign countries have been funded with
investments and other advances. Due to the long-term nature of such investments
and advances, the Company accounts for any adjustments resulting from
translation as a charge or credit to "accumulated other comprehensive loss"
within the stockholders' equity section of the consolidated balance sheet. The
Company historically has not engaged in hedging transactions.
Interest rates - The Company's financial instruments that are sensitive to
changes in interest rates are its 1997 Senior Notes, and its 1998 Senior Notes.
The aggregate fair value of the 1997 and 1998 Senior Notes approximates their
face value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditors' Report F-2
20
Consolidated Financial Statements
Consolidated Statement of Operations for the years ended
December 31, 1998, 1997 and 1996 F-3
Consolidated Balance Sheet - December 31, 1998 and 1997 F-4
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Consolidated Statement of Comprehensive Loss for the
years ended December 31, 1998, 1997 and 1996 F-7
Notes to the Consolidated Financial Statements F-8
PART III
The information required by Part III will be provided in the Company's
definitive proxy statement for the Company's 1999 annual meeting of stockholders
(involving the election of directors), which definitive proxy statement will be
filed pursuant to Regulation 14A not later than April 30, 1999 ("1999 Proxy
Statement"), and is incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors of the Company is set forth under the caption
entitled "Election of Directors" in the Company's 1999 Proxy Statement and is
incorporated herein by reference. Information relating to the executive officers
of the Company is set forth in the Company's 1999 Proxy Statement under the
caption "Executive Officers, Directors and Key Employees" and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding compensation of officers and directors of the Company
is set forth under the caption entitled "Executive Compensation" in the
Company's 1999 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of certain of the Company's securities is set
forth under the captions entitled "Security Ownership of Certain Beneficial
Owners" and "Security Ownership of Management" in the Company's 1999 Proxy
Statement and is incorporated herein by reference.
21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with the
Company is set forth under the caption entitled "Certain Relationships and
Related Transactions" in the Company's 1999 Proxy Statement and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
a) Financial Statements and Schedules
The financial statements as set forth under Item 8 of this report on Form
10-K are incorporated herein by reference.
Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included.
b) Reports on 8-K
Form 8-K dated December 16, 1998 was filed to announce the distribution of
one right to purchase one one-thousandth of a share (a "Unit") of Series B
Junior Participating Preferred Stock for $90.00 per Unit for each share of
Common Stock held by stockholders at the close of business on December 31,
1998, and for each share of Common Stock issued thereafter but prior to
the date of distribution.
c) Exhibit listing
Exhibit
Number Description
2.1 Agreement and Plan of Merger by and among Primus, TresCom and TAC,
dated as of February 3, 1998, and as amended by Amendments No. 1 and
2 to Agreement and Plan of Merger dated as of April 8, 1998 and as
of April 16, 1998, respectively; Incorporated by reference to
Appendix A to the Joint Proxy Statement/Prospectus on Form S-4, No.
333-51797 dated May 4, 1998.
2.2 Amendment No. 1 to Agreement and Plan of Merger among Primus,
TresCom and TAC, dated as of April 8, 1998; Incorporated by
reference to Exhibit 2.1 of the Primus Current Report on Form 8-K
dated April 10, 1998.
2.3 Amendment No. 2 to Agreement and Plan of Merger among Primus,
TresCom and TAC, dated as of April 16, 1998; Incorporated by
reference to Exhibit 2.1 of the Primus Current Report on Form 8-K
dated April 23, 1998 (the "Form 8-K for Amendments"), as amended by
the Primus Current Report on Form 8-K/A dated April 23, 1998.
2.4 Asset Purchase Agreement by and among USFI, Inc., Primus
Telecommunications, Inc., Primus and US Cable Corporation dated as
of October 20, 1997; Incorporated by reference to Exhibit 2.1 of
Primus's Current Report on Form 8-K dated November 3,
22
1997. (The exhibits and schedules listed in the table of contents to
the Asset Purchase Agreement have been omitted in accordance with
Item 601(b)(2) of Regulation S-K. A copy of such exhibits and
schedules shall be furnished supplementally to the Commission upon
request.)
2.5 Equity Purchase Agreement by and among Messrs. James D. Pearson,
Stephen E. Myers, Michael C. Anderson, Primus Telecommunications,
Inc., and Primus, dated as of October 20, 1997; Incorporated by
reference to Exhibit 2.2 of Primus' Current Report on Form 8-K dated
November 3, 1997. (The exhibits and schedules listed in the table of
contents to the Equity Purchase Agreement have been omitted in
accordance with Item 601(b)(2) of Regulation S-K. A copy of such
exhibits and schedules shall be furnished supplementally to the
Commission upon request.)
3.1 Amended and Restated Certificate of Incorporation of Primus;
Incorporated by reference to Exhibit 3.1 of the Registration
Statement on Form S-8, No. 333-56557 (the "S-8 Registration
Statement").
3.2 Amended and Restated Bylaws of Primus; Incorporated by reference to
Exhibit 3.2 of the Registration Statement on Form S-1, No. 333-10875
(the "IPO Registration Statement").
4.1 Specimen Certificate of Primus Common Stock; Incorporated by
reference to Exhibit 4.1 of the IPO Registration Statement.
4.2 Form of Indenture; 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. *
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. *
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.
23
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.
10.1 Stockholder Agreement among Warburg, Pincus, K. Paul Singh and
Primus, dated as of February 3, 1998; Incorporated by reference to
Exhibit 10.1 of the Primus Current Report on Form 8-K dated February
6, 1998 (the "Form 8-K").
10.2 Voting Agreement between Primus and Wesley T. O'Brien, dated as of
February 3, 1998; Incorporated by reference to Exhibit 10.4 of the
Form 8-K.
10.3 Voting Agreement between Primus and Rudy McGlashan, dated as of
February 3, 1998; Incorporated by reference to Exhibit 10.5 of the
Form 8-K.
10.4 Voting Agreement between TresCom and K. Paul Singh, dated as of
February 3, 1998; Incorporated by reference to Exhibit 10.2 of the
Form 8-K.
10.5 Voting Agreement between TresCom and John F. DePodesta, dated as of
February 3, 1998; Incorporated by reference to Exhibit 10.3 of the
Form 8-K.
10.6 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.
10.7 Amendment No. 1 to Voting Agreement between Wesley T. O'Brien and
Primus, dated as of April 16, 1998; Incorporated by reference to
Exhibit 10.2 of the Form 8-K for Amendments.
10.8 Amendment No. 1 to Voting Agreement between Rudolph McGlashan and
Primus, dated as of April 16, 1998; Incorporated by reference to
Exhibit 10.3 of the Form 8-K for Amendments.
10.9 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.
10.10 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.
10.11 Agreement for Billing and Related Services, dated February 23, 1995,
between Primus and Electronic Data System Inc.; Incorporated by
reference to Exhibit 10.4 of the IPO Registration Statement.
10.12 Employment Agreement, dated June 1, 1994, between Primus and K. Paul
Singh; Incorporated by reference to Exhibit 10.5 of the IPO
Registration Statement.**
10.13 Primus 1995 Stock Option Plan; Incorporated by reference to Exhibit
10.6 of the IPO Registration Statement. **
24
10.14 Primus 1995 Director Stock Option Plan; Incorporated by reference to
Exhibit 10.7 of the IPO Registration Statement. **
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 Primus Employee Stock Purchase Plan; Incorporated by reference to
Exhibit 10.15 of the 1997 Senior Note Registration Statement. **
10.21 Primus 401(k) Plan; Incorporated by reference to Exhibit 4.4 of the
Primus Registration Statement on Form S-8 (No. 333-35005).
10.22 Purchase Agreement, dated May 14, 1998, among Primus
Telecommunications Group, Incorporated, Primus Telecommunications,
Incorporated, Primus Telecommunications Pty. Ltd. and Lehman
Brothers, Inc.; Incorporated by reference to Exhibit 10.22 of the
1998 Senior Note Registration Statement.
10.23 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.
10.24 Primus Telecommunications Group, Incorporated-TresCom International
Stock Option Plan Incorporated by reference to Exhibit 4.1 of the
S-8 Registration Statement. **
10.25 Amended and Restated Employment Agreement between the Company and
Wesley T. O'Brien; Incorporated by reference to Exhibit 10.3 to the
TresCom 1996 Form 10-K. **
25
10.26 First Amendment to Amended and Restated Employment Agreement between
the Company and Wesley T. O'Brien; Incorporated by reference to
Exhibit 10.2 to the TresCom 1997 Form 10-K. **
10.27 Employment Agreement between the Company and Rudolph McGlashan;
Incorporated by reference to Exhibit 10.4 to the TresCom
Registration Statement on Form S-1, No. 33-99738, filed on November
22, 1995 (the "TresCom Form S-1"). **
10.28 Amendment to Employment Agreement between the Company and Rudolph
McGlashan; Incorporated by reference to Exhibit 10.5 to the TresCom
Form S-1. **
10.29 Warrant Agreement between the Company and Warburg, Pincus Investors,
L.P.; Incorporated by reference to Exhibit 10.6 to the TresCom Form
S-1.
10.30 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.
10.31 Revolving Credit and Security Agreement, among TresCom
International, Inc., TresCom U.S.A., Inc., Intex Telecommunications,
Inc., The St. Thomas and San Juan Telephone Company, Inc., STSJ
Overseas Telephone Company, Inc., PNC Bank, National Association (as
lender and as agent) and the other lenders a party thereto (the
"Loan Agreement"); Incorporated by reference to Exhibit 10.22 to the
TresCom Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1997.
10.32 Revolving Credit Note, dated July 31, 1997, payable to PNC Bank,
National Association and the other lenders a party to the Loan
Agreement; Incorporated by reference to Exhibit 10.23 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1997.
21.1 Subsidiaries of the Registrant. *
23.1 Independent Auditors' Consent. *
27.1 Financial Data Schedule for the Company for the year ended December
31, 1998. *
- ----------
* Filed herewith
** Compensatory benefit plan
26
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized.
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
By: /s/ K. Paul Singh Chairman of the Board, President and
--------------------- Chief Executive Officer
K. Paul Singh
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints K. Paul Singh and Neil L. Hazard, and each of them, his
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities to sign any and all amendments to this Form 10-K of the Securities
and Exchange Commission for the fiscal year of Primus Telecommunications Group,
Incorporated ended December 31, 1998, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ K. Paul Singh Chairman, President and Chief March 31, 1999
- ---------------------------------- Executive Officer (Principal Executive
K. Paul Sing Officer) and Director
/s/ Neil L. Hazard Executive Vice President and Chief March 31, 1999
- ---------------------------------- Financial Officer (Principal Financial
Neil L. Hazard Officer)
/s/ John F. DePodesta Executive Vice President and Director March 31, 1999
- ----------------------------------
John F. DePodesta
/s/ Thomas R. Kloster Vice President and Corporate Controller March 31, 1999
- ---------------------------------- (Principal Accounting Officer)
Thomas R. Kloster
/s/ Herman Fialkov Director March 31, 1999
- ----------------------------------
Herman Fialkov
/s/ David E. Hershberg Director March 31, 1999
- ----------------------------------
David E. Hershberg
/s/ Douglas M. Karp Director March 31, 1999
- ----------------------------------
Douglas M. Karp
27
/s/ John Puente Director March 31, 1999
- -----------------------------------
John Puente
28
INDEX TO FINANCIAL STATEMENTS AND
EXHIBITS
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Statement of Operations for the years ended
December 31, 1998, 1997, and 1996 F-3
Consolidated Balance Sheet-December 31, 1998 and 1997 F-4
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1998, 1997, and 1996 F-5
Consolidated Statement of Cash Flows for the
years ended December 31, 1998, 1997, and 1996 F-6
Consolidated Statement of Comprehensive Loss for the
years ended December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
Exhibits:
Exhibit 27.1 - Financial Data Schedule E-1
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Primus Telecommunications Group, Incorporated
We have audited the accompanying consolidated balance sheets of Primus
Telecommunications Group, Incorporated and subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, comprehensive loss and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Primus Telecommunications Group,
Incorporated and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Washington, D.C.
February 10, 1999, except for paragraph one
of Note 16 as to which the date is March 31, 1999
F-2
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
For the Year Ended
December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
NET REVENUE $ 421,628 $ 280,197 $ 172,972
COST OF REVENUE 353,016 252,731 158,845
--------- --------- ---------
GROSS MARGIN 68,612 27,466 14,127
--------- --------- ---------
OPERATING EXPENSES
Selling, general and administrative 79,532 50,622 20,114
Depreciation and amortization 24,185 6,733 2,164
--------- --------- ---------
Total operating expenses 103,717 57,355 22,278
--------- --------- ---------
LOSS FROM OPERATIONS (35,105) (29,889) (8,151)
INTEREST EXPENSE (40,047) (12,914) (857)
INTEREST INCOME 11,504 6,238 785
OTHER INCOME (EXPENSE) -- 407 (345)
--------- --------- ---------
LOSS BEFORE INCOME TAXES (63,648) (36,158) (8,568)
INCOME TAXES -- (81) (196)
--------- --------- ---------
NET LOSS $ (63,648) $ (36,239) $ (8,764)
========= ========= =========
BASIC AND DILUTED NET
LOSS PER COMMON SHARE $ (2.61) $ (1.99) $ (0.75)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 24,432 18,250 11,660
========= ========= =========
See notes to consolidated financial statements.
F-3
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
December 31, December 31,
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 136,196 $ 115,232
Restricted investments 25,729 22,774
Accounts receivable (net of allowance for
doubtful accounts of $14,976 and $5,044) 92,531 58,172
Prepaid expenses and other current assets 13,505 5,152
--------- ---------
Total current assets 267,961 201,330
RESTRICTED INVESTMENTS 24,894 50,776
PROPERTY AND EQUIPMENT - Net 158,873 59,241
INTANGIBLES - Net 205,039 33,164
OTHER ASSETS 17,196 10,882
--------- ---------
TOTAL ASSETS $ 673,963 $ 355,393
========= =========
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Accounts payable $ 82,520 $ 56,358
Accrued expenses and other current liabilities 42,597 12,468
Accrued interest 12,867 11,016
Deferred income taxes 361 1,814
Current portion of long-term obligations 22,423 1,059
--------- ---------
Total current liabilities 160,768 82,715
LONG TERM OBLIGATIONS 397,751 230,152
OTHER LIABILITIES 527 --
--------- ---------
Total liabilities 559,046 312,867
--------- ---------
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,
28,059,063 and 19,662,233 shares 281 197
Additional paid-in capital 234,549 92,181
Accumulated deficit (111,653) (48,005)
Accumulated other comprehensive loss (8,260) (1,847)
--------- ---------
Total stockholders' equity 114,917 42,526
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 673,963 $ 355,393
========= =========
See notes to consolidated financial statements.
F-4
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Accumulated
Preferred Stock Common Stock Other
--------------- ------------ Paid-In Accumulated Comprehensive Stockholders
Shares Amount Shares Amount Capital Deficit Loss Equity
------ ------ ------ ------ ------- ------- ---- ------
BALANCE, DECEMBER 31, 1995 -- $ -- 7,064 $ 71 $ 5,496 $ (3,002) $ (3) $ 2,562
Common shares sold through
private placement, net of
transaction costs -- -- 3,148 31 21,837 -- -- 21,868
Common shares issued for
services performed -- -- 279 3 987 -- -- 990
Preferred shares issued for
acquisition 455 5 -- -- 5,455 -- -- 5,460
Common shares sold, net
of transaction costs -- -- 5,750 58 54,341 -- -- 54,399
Conversion of preferred
shares to common shares (455) (5) 1,538 15 (10) -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- (75) (75)
Net loss -- -- -- -- -- (8,764) -- (8,764)
---- ----- ------ ------ --------- ---------- -------- ---------
BALANCE, DECEMBER 31, 1996 -- -- 17,779 178 88,106 (11,766) (78) 76,440
Common shares issued upon
exercise of warrants -- -- 1,843 19 1,453 -- -- 1,472
Common shares issued for
employer 401(k) match -- -- 5 -- 45 -- -- 45
Common shares issued upon
exercise of employee stock options -- 35 -- 42 -- -- 42 --
Senior note offering - warrants -- -- -- -- 2,535 -- -- 2,535
Foreign currency translation
adjustment -- -- -- -- -- -- (1,769) (1,769)
Net loss -- -- -- -- -- (36,239) -- (36,239)
---- ----- ------ ------ --------- ---------- -------- ---------
BALANCE, DECEMBER 31, 1997 -- -- 19,662 197 92,181 (48,005) (1,847) 42,526
Common shares issued for
business acquisitions -- -- 7,864 79 137,547 -- -- 137,626
Common shares issued for
employer 401(k) match -- -- 9 -- 119 -- -- 119
Common shares issued upon
exercise of employee stock options -- 489 5 4,334 -- -- 4,339 --
Common shares issued for
employee stock purchase plan -- -- 24 -- 263 -- -- 263
Common shares issued upon
exercise of warrants -- -- 11 -- 105 -- -- 105
Foreign currency translation
adjustment -- -- -- -- -- -- (6,413) (6,413)
Net loss -- -- -- -- -- (63,648) -- (63,648)
---- ----- ------ ------ --------- ---------- -------- ---------
BALANCE, DECEMBER 31, 1998 -- $ -- 28,059 $ 281 $ 234,549 $(111,653) $(8,260) $ 114,917
==== ===== ====== ====== ========= ========= ======= =========
F-5
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
( in thousands )
For the Year Ended
-------------------------------------
December 31,
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (63,648) $ (36,239) $ (8,764)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and accretion 24,547 6,733 2,164
Sales allowance 9,431 6,185 1,960
Foreign currency transaction (gain) loss -- (407) 345
Stock issuance - 401(k) plan employer match 119 45 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (20,765) (34,240) (19,405)
(Increase) decrease in prepaid expenses and
other current assets (7,027) (4,080) (227)
(Increase) decrease in other assets 735 1,147 (1,621)
Increase (decrease) in accounts payable (8,196) 30,247 11,729
Increase (decrease) in accrued expenses,
other current liabilities and other liabilities (8,073) 5,000 6,032
Increase (decrease) in accrued interest payable 1,581 10,852 847
--------- --------- ---------
Net cash provided by (used in) operating activities (71,296) (14,757) (6,940)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (75,983) (39,465) (12,745)
(Purchase) sale of short-term investments -- 25,125 (25,125)
(Purchase) sale of restricted investments 22,927 (73,550) --
Cash used for business acquisitions, net of cash acquired (1,165) (16,349) (1,701)
--------- --------- ---------
Net cash provided by (used in) investing activities (54,221) (104,239) (39,571)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases and long-term obligations (2,373) (16,881) (508)
Proceeds from sale of common stock and exercise of employee
stock options 4,707 1,514 77,576
Proceeds from issuance of long-term obligations 150,000 225,000 2,407
Deferred financing costs (5,500) (9,500) --
--------- --------- ---------
Net cash provided by (used in) financing activities 146,834 200,133 79,475
--------- --------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (353) (1,379) 214
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 20,964 79,758 33,178
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 115,232 35,474 2,296
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 136,196 $ 115,232 $ 35,474
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 38,466 $ 2,745 $ 149
Non-cash investing and financing activities:
Common stock issued for services $ -- $ -- $ 990
Capital leases for acquisition of equipment $ 16,958 $ 8,228 $ 388
Notes payable for acquisition of equipment $ -- $ -- $ 2,826
See notes to consolidated financial statements.
F-6
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(in thousands)
For the Year Ended
December 31,
----------------------------------
1998 1997 1996
---- ---- ----
NET LOSS $(63,648) $(36,239) $ (8,764)
OTHER COMPREHENSIVE LOSS -
Foreign currency translation adjustment (6,413) (1,769) (75)
-------- -------- --------
COMPREHENSIVE LOSS $(70,061) $(38,008) $ (8,839)
======== ======== ========
See notes to consolidated financial statements.
F-7
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Primus Telecommunications Group, Incorporated ("Primus" or the "Company")
is a facilities-based global telecommunications company that offers
international and domestic long distance, Internet and data, and other
telecommunications services to business, residential and other
telecommunications carrier customers primarily in North America, the
Asia-Pacific and Europe. The Company, incorporated in the state of Delaware,
operates as a holding company and has wholly-owned operating subsidiaries in the
United States, Canada, Mexico, Australia, Japan, the United Kingdom and Germany.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly-owned and majority-owned
subsidiaries. All intercompany accounts and transactions have been eliminated.
Revenue Recognition--Revenues from long distance telecommunications
services are recognized when the services are provided and are presented net of
estimated uncollectible amounts.
Cost of Revenue--Cost of revenue includes network costs that consist of
access, transport, and termination costs. Such costs are recognized when
incurred in connection with the provision of telecommunications services.
Foreign Currency Translation--The assets and liabilities of the Company's
foreign subsidiaries are translated at the exchange rates in effect on the
reporting date, and income and expenses are translated at the average exchange
rate during the period. The net effect of such translation gains and losses are
reflected within accumulated other comprehensive loss in the stockholders'
equity section of the balance sheet.
Cash and Cash Equivalents--The Company considers cash on hand, deposits in
banks, certificates of deposit, and overnight repurchase agreements with
original maturities of three months or less to be cash and cash equivalents.
Restricted Investments -- Restricted investments consist of United States
Federal Government-backed obligations which are recorded at amortized cost.
These securities are classified as held-to-maturity and are restricted to
satisfy certain interest obligations on the Company's 1997 Senior Notes.
Property and Equipment--Property and equipment, which consists of fiber
optic cable and telecommunications equipment, furniture and computer equipment,
leasehold improvements and software is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization expense are
computed using the straight-line method over the estimated useful lives of the
assets which range from three to twenty-five years, or for leasehold
improvements and leased equipment, over the terms of the leases or estimated
lives, whichever is shorter. Expenditures for maintenance and repairs that do
not materially extend the useful lives of the assets are charged to expense.
Intangible Assets--At December 31, 1998 and 1997 intangible assets, net of
accumulated amortization, consist of goodwill of $179.9 million and $27.8
million respectively, and customer lists of $25.1 million and $5.3 million
respectively. Goodwill is being amortized over 30 years on a straight-line basis
and customer lists over the estimated run-off of the customer bases not to
exceed five years. Accumulated amortization at December 31, 1998 and 1997, was
$4.7 million and $1.2 million related to
F-8
goodwill and $5.9 million and $1.9 million related to customer lists,
respectively. The Company periodically evaluates the realizability of intangible
and other long-lived assets. In making such evaluations, the Company compares
certain financial indicators such as expected undiscounted future revenues and
cash flows to the carrying amount of the assets. The Company believes that no
impairments exist as of December 31, 1998.
Deferred Financing Costs--Deferred financing costs incurred in connection
with the 1998 Senior Notes and the 1997 Senior Notes are reflected within other
assets and are being amortized over the life of the respective Senior Notes
using the straight-line method which does not differ materially from the
effective interest method.
Stock-Based Compensation--The Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation. Under the provisions of SFAS 123, the Company continues to measure
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and has provided in Note 10 pro forma
disclosures of the effect on net loss and loss per share as if the fair
value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of net revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk--Financial instruments that potentially
subject the Company to concentration of credit risk principally consist of trade
accounts receivable. The Company performs ongoing credit evaluations of its
customers but generally does not require collateral to support customer
receivables.
Income Taxes--The Company recognizes income tax expense for financial
reporting purposes following the asset and liability approach for computing
deferred income taxes. Under this method, the deferred tax assets and
liabilities are determined based on the difference between financial reporting
and tax bases of assets and liabilities based on enacted tax rates. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
Net Loss Per Share--The Company has computed basic and diluted net loss
per share based on the weighted average number of shares of common stock and
potential common stock outstanding during the period. Potential common stock,
for purposes of determining diluted net loss per share, would include, where
applicable, the effects of dilutive stock options, warrants, and convertible
securities, and the effect of such potential common stock would be computed
using the treasury stock method or the if-converted method. None of the
Company's outstanding options and warrants are considered to be dilutive.
Comprehensive Income (Loss)--In 1998, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income. As such, a consolidated statement of comprehensive loss
reflecting the aggregation of net loss and foreign currency translation
adjustments, the Company's principal components of other comprehensive income or
loss, has been presented for each of the three years in the period ended
December 31, 1998.
Operating Segments--In 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures
about Segments of an Enterprise and Related Information (Note 13). SFAS 131
superceded SFAS 14 and its adoption resulted in revised and additional
disclosures but had no effect on the financial position, results of operations
or liquidity of the Company.
F-9
New Accounting Pronouncements--In June 1998, Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments
and Hedging Activities was issued. SFAS 133 established standards for the
accounting and reporting of derivative instruments and hedging activities and
requires that all derivative financial instruments be measured at fair value and
recognized as assets or liabilities in the financial statements. The Statement
will be adopted by the Company during fiscal 2000, and the Company is currently
evaluating the impact of such adoption.
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position ("SoP") 98-5, Reporting on the Costs of
Start-Up Activities. SoP 98-5 provides guidance on the financial reporting of
start-up and organizational costs. The effect of adopting SoP 98-5 is not
expected to have a material effect on the financial position, results of
operation or liquidity of the Company.
Reclassifications--Certain previous year amounts have been reclassified to
conform with current year presentation.
3. ACQUISITIONS
On June 9, 1998 the Company acquired 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 regions. 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. An additional $11.7 million cash purchase
obligation associated with a subsidiary of TresCom is expected to paid during
1999 and has been included in accrued expenses and other current liabilities.
In March 1998 the Company purchased a 60% controlling interest in
Hotkey Internet Services Pty., Ltd. ("Hotkey"), an Australian Internet service
provider, for approximately $1.3 million.
Effective March 1, 1998 the Company acquired all of the outstanding stock
of Eclipse Telecommunications Pty., Ltd. ("Eclipse"), a data communications
provider in Australia. The Company paid approximately $1.8 million in cash and
27,500 shares of the Company's Common Stock for Eclipse.
On October 20, 1997, the Company acquired the equity and ownership
interests in Telepassport L.L.C. ("Telepassport") for a purchase price of $6.0
million. Additionally, on October 20, 1997, the Company purchased substantially
all of the assets of USFI, Inc. ("USFI") for $5.5 million. Telepassport and USFI
were under common control and engaged in the business of providing international
and domestic telecommunication services, including long distance and
reorigination services in Europe, Asia, and South Africa.
On April 8, 1997, the Company acquired the assets of Cam-Net
Communications Network, Inc. and its subsidiaries, a Canadian based provider of
domestic and international long distance service. The purchase price was
approximately $5.0 million in cash.
On March 1, 1996, the Company acquired the outstanding capital stock of
Axicorp Pty., Ltd. (subsequently renamed Primus Australia), the fourth largest
telecommunications carrier in Australia. The purchase price consisted of cash,
Company stock, and seller financing. The Company paid $5.7 million cash,
including transaction costs, and issued 455,000 shares of its Series A
Convertible Preferred Stock, which were subsequently converted to 1,538,355
common shares. The Company also issued two notes aggregating $8.1 million to the
sellers, both of which were repaid in full during 1997.
The Company has accounted for all of these acquisitions using the purchase
method. Accordingly, the results of operations of the acquired companies are
included in the consolidated results of operations of the Company, as of the
date of their respective acquisition.
F-10
Unaudited pro forma operating results for the years ended December 31,
1998 and 1997, as if the acquisitions of TresCom, Telepassport and USFI had
occurred asof January 1, 1997, are as follows (in thousands, except per share
amounts):
1998 1997
---- ----
Net revenue $ 485,196 $ 448,929
Net loss $ (75,956) $ (63,426)
Basic and diluted net loss per share $ (2.73) $ (2.43)
The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the acquisitions been consummated as of the above dates,
nor are they necessarily indicative of future operations.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
December 31,
-----------------------
1998 1997
--------- --------
Network equipment $ 148,413 $ 48,246
Furniture and equipment 11,987 9,334
Leasehold improvements 2,907 1,845
Construction in progress 16,157 5,147
--------- --------
179,464 64,572
Less: Accumulated depreciation and amortization (20,591) (5,331)
--------- --------
$ 158,873 $ 59,241
========= ========
Equipment under capital leases totaled $34.5 million and $9.2 million with
accumulated depreciation of $4.3 million and $0.8 million at December 31, 1998
and 1997, respectively.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
December 31,
------------------------
1998 1997
--------- ---------
Obligations under capital leases $ 28,268 $ 8,487
Revolving Credit Agreement 17,819 --
Senior Notes 372,978 222,616
Other long-term obligations 1,109 108
--------- ---------
Subtotal 420,174 231,211
Less: Current portion of long-term obligations (22,423) (1,059)
--------- ---------
$ 397,751 $ 230,152
========= =========
As a result of the acquisition of 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. In
January 1999, the Company voluntarily repaid in full and terminated the
Revolving Credit Agreement.
On May 19, 1998 the Company completed the sale of $150 million 9 7/8%
Senior Notes ("1998 Senior Notes"). The 1998 Senior Notes are due May 15, 2008
with early redemption at the option of the
F-11
Company at any time after May 15, 2003. In addition, prior to May 15, 2001, the
Company may redeem up to 25% of the originally issued principal amount of the
1998 Senior Notes at 109.875% of the principal amount thereof, plus accrued and
unpaid interest through the redemption date. Interest is payable each May 15th
and November 15th.
On August 4, 1997 the Company completed the sale of $225 million 11 3/4%
Senior Notes ("1997 Senior Notes") and Warrants ("the Offering") to purchase
392,654 shares of the Company's common stock. The 1997 Senior Notes are due
August 1, 2004 with early redemption at the option of the Company at any time
after August 1, 2001, at a premium to par value. Dividends are currently
prohibited by the senior notes indenture. Interest payments are due
semi-annually on February 1st and August 1st. A portion of the proceeds from the
offering of the 1997 Senior Notes have been pledged to secure the first six
semi-annual interest payments on the 1997 Senior Notes and are reflected on the
balance sheet as restricted investments. A portion of the proceeds of the
Offering, $2.535 million, was allocated to the warrants, and the resulting debt
discount is being amortized over the life of the debt on the straight-line
method which does not differ materially from the effective interest method.
6. INCOME TAXES
The differences between the tax provision calculated at the statutory
federal income tax rate and the actual tax provision for each period is shown in
the table below (in thousands):
For the Year Ended
December 31,
----------------------------------
1998 1997 1996
-------- -------- -------
Tax benefit at federal statutory rate $(22,277) $(12,294) $(2,913)
State income tax, net of federal benefit (1,387) (2,100) (491)
Foreign taxes -- 81 196
Unrecognized benefit of net operating
losses 21,506 14,394 3,387
Other 2,158 -- 17
-------- -------- -------
Income taxes $ -- $ 81 $ 196
======== ======== =======
The significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
December 31,
----------------------
1998 1997
-------- --------
Deferred tax assets (non-current):
Cash to accrual basis adjustments (U.S.) $ 269 $ 590
Accrued expenses 5,393 936
Net operating loss carryforwards 32,606 17,856
Valuation allowance (38,268) (16,762)
-------- --------
$ -- $ --
======== ========
Deferred tax liabilities (current):
Accrued income $ -- $ 903
Other -- 385
F-12
Depreciation 361 526
-------- --------
$ 361 $ 1,814
======== ========
During the year ended December 31, 1998, the valuation allowance increased
by approximately $21.5 million primarily due to the acquisition of TresCom and
its related net operating losses.
At December 31, 1998, the Company had operating loss carryforwards
available to reduce future federal taxable income which expire as follows (in
millions):
Year Primus TresCom
---------------- ----------- ------------
2009 $6.1 $5.8
2010 7.1 5.4
2011 6.9 1.9
2012 33.2 10.6
2018 35.6 --
=========== ============
$88.9 $23.7
=========== ============
Approximately $23.7 million of operating loss carryforwards relate to the
acquisition of TresCom. Utilization of these operating losses is limited to the
offset of future TresCom operating income. The Company's net operating loss
carryforwards for state purposes are not significant and, therefore, have not
been recorded as deferred tax assets.
At December 31, 1998, the Company had Australian and United Kingdom net
operating loss carryforwards of $18.6 million and $2.1 million (in United States
dollars), respectively, that have no expiration periods.
No provision was made in 1998 for U.S. income taxes on the undistributed
earnings of the foreign subsidiaries as it is the Company's intention to utilize
those earnings in the foreign operations for an indefinite period of time or to
repatriate such earnings only when tax effective to do so. It is not practicable
to determine the amount of income or withholding tax that would be payable upon
the remittance of those earnings.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash
and cash equivalents, restricted investments, accounts receivable and accounts
payable approximate fair value. The estimated fair value of the Company's 1998
and 1997 Senior Notes (carrying value of $373 million), based on quoted market
prices, at December 31, 1998 was $375 million. The estimated fair value of the
Company's 1997 Senior Notes (carrying value of $223 million), based on quoted
market prices, at December 31, 1997 was $242 million.
8. COMMITMENTS AND CONTINGENCIES
Future minimum lease payments under capital lease obligations and
non-cancelable operating leases as of December 31, 1998 are as follows (in
thousands):
Capital Operating
Year Ending December 31, Leases Leases
---------- -----------
1999 $7,219 $5,295
2000 7,604 3,502
2001 8,088 3,187
F-13
2002 8,045 2,740
2003 4,934 1,754
Thereafter 198 3,058
----------- -----------
Total minimum lease payments 36,088 $19,536
===========
Less: Amount representing interest (7,820)
----------
$28,268
==========
Rent expense under operating leases was $4.8 million, $2.6 million and
$1.1 million for the years ended December 31, 1998, 1997 and 1996, respectively.
9. STOCKHOLDERS' EQUITY
In December 1998, the Company adopted a Stockholders' Rights Plan (the
"Rights Plan") under which preferred stock purchase rights have been granted to
the Company's common stockholders of record at the close of business on December
31, 1998. The rights will become exercisable if a person or group becomes the
beneficial owner of more than 20% of the outstanding common stock of the Company
or announces an offer to become the beneficial owner of more than 20% of the
outstanding common stock of the Company.
In June 1998, the Company issued 7,836,324 shares of its common stock,
valued at $137.6 million, in exchange for all of the outstanding common shares
of TresCom. Additionally, the Board amended the Company's Amended and Restated
Certificate of Incorporation (the "Certificate") to increase the authorized
Common Stock to 80,000,000 shares.
In October 1997, the Company issued 1,842,941 shares of its common stock
pursuant to the exercise of certain warrants, which had been issued in
connection with the Company's $ 16 million July 1996 private equity sale. In
connection with such exercise, the Company received approximately $1.5 million.
In August 1997 the Company completed a Senior Notes and Warrants Offering.
Warrants valued at $2,535,000 to purchase 392,654 shares of the Company's common
stock at a price of $ 9.075 per share were issued.
In November 1996, the Company completed an initial public offering of
5,750,000 shares of its Common Stock. The net proceeds to the Company (after
deducting underwriter discounts and offering expenses) were $54.4 million.
In connection with the Company's initial public offering, the Board
approved a split of all shares of Common Stock at a ratio of 3.381 to one as of
November 7, 1996 and amended the Company's Certificate to increase the
authorized Common Stock to 40,000,000 shares. All share amounts presented have
been restated to give effect to the November 7, 1996 stock split.
In February 1996, the Company's Certificate was amended to authorize
2,455,000 shares of Preferred Stock (nonvoting) with a par value of $0.01 per
share. On March 1, 1996, 455,000 shares of Series A Convertible Preferred Stock
were issued in connection with the purchase of Primus Australia. The outstanding
Preferred Stock was converted to Common Stock prior to the date of the Company's
initial public offering.
10. STOCK-BASED COMPENSATION
In December 1998, the Company established the 1998 Restricted Stock Plan
(the "Restricted Plan") to facilitate the grant of restricted stock to selected
individuals who contribute to the development and success of the Company. The
total number of shares of common stock that may be granted under the
F-14
Restricted Plan is 750,000. As of December 31, 1998, there had not been any
grants under the Restricted Plan.
The Company sponsors an Employee Stock Option Plan (the "Employee Plan").
The total number of shares of common stock authorized for issuance under the
Employee Plan is 3,690,500. Under the Employee Plan, awards may be granted to
key employees of the Company and its subsidiaries in the form of Incentive Stock
Options or Nonqualified Stock Options. The Employee Plan allows the granting of
options at an exercise price of not less than 100% of the stock's fair value at
the date of grant. The options vest over a period of up to three years, and no
option will be exercisable more than ten years from the date it is granted.
The Company sponsors a Director Stock Option Plan (the "Director Plan")
for non-employee directors. Under the Director Plan, an option is granted to
each qualifying non-employee director to purchase 15,000 shares of common stock,
which vests over a two-year period. The option price per share is the fair
market value of a share of common stock on the date the option is granted. No
option will be exercisable more than ten years from the date of grant. An
aggregate of 338,100 shares of common stock were reserved for issuance under the
Director Plan.
A summary of stock option activity during the three years ended December
31, 1998 is as follows:
1998 1997 1996
------------------------ ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- --------- -------- ---------- --------
Options outstanding-
Beginning of year 2,555,360 $ 6.95 1,587,894 $ 3.02 722,015 $ 2.64
Granted 1,298,937 16.07 1,063,750 12.59 913,552 3.35
Exercised (488,835) 7.42 (35,724) 1.19 -- --
Forfeitures (236,896) 17.52 (60,560) 6.27 (47,673) 3.55
--------- ------ --------- ------ --------- ------
Outstanding - end of year 3,128,566 $ 9.87 2,555,360 $ 6.95 1,587,894 $ 3.02
--------- ------ --------- ------ --------- ------
Eligible for
exercise-End of year 1,427,041 $ 6.93 899,170 $ 3.00 511,149 $ 2.81
========= ====== ======= ====== ========= ======
The following table summarizes information about stock options outstanding at
December 31, 1998:
----------------------------------- -----------------------------
Options Outstanding Options Exercisable
----------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Total Life Exercise Total Exercise
Range of Option Prices Outstanding in years Price Exercisable Price
- ------------------------------------------------------------ -----------------------------
$ 0.01 to $ 3.55 1,176,527 2.06 $3.07 913,195 $2.99
$ 3.56 to $ 14.00 1,474,017 4.73 $12.24 409,307 $12.59
$ 14.01 to $ 23.87 478,022 5.39 $19.28 104,539 $19.13
--------- ---------
3,128,566 1,427,041
========= =========
F-15
The weighted average fair value at date of grant for options granted
during 1998, 1997 and 1996 was $7.37, $5.45 and $1.38 per option, respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
1998 1997 1996
---- ---- ----
Expected dividend yield 0% 0% 0%
Expected stock price volatility 97% 80% 49%
Risk-free interest rate 4.5% 5.7% 6.0%
Expected option term 4 years 4 years 4 years
If compensation cost for the Company's grants for stock-based compensation
had been recorded consistent with the fair value-based method of accounting per
SFAS 123, the Company's pro forma net loss, and pro forma basic and diluted net
loss per share for the years ending December 31, would be as follows:
1998 1997 1996
---------- ---------- ----------
Net loss (amounts in thousands)
As reported $ (63,648) $ (36,239) $ (8,764)
Pro forma $ (67,621) $ (37,111) $ (9,242)
Basic and diluted net loss per share
As reported $ (2.61) $ (1.99) $ (0.75)
Pro forma $ (2.77) $ (2.03) $ (0.79)
11. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) employee benefit plan (the "401(k) Plan")
that covers substantially all United States based employees. Employees may
contribute amounts to the 401(k) Plan not to exceed statutory limitations. The
401(k) plan provides an employer matching contribution of 50% of the first 6% of
employee annual salary contributions. The employer match is made in common stock
of the Company and is subject to 3-year cliff vesting. The Company contributed
Primus common stock valued at approximately $119,000 and $45,000 during 1998 and
1997.
Effective January 1, 1998, the Company adopted an Employee Stock Purchase
Plan ("ESPP"). The ESPP allows employees to contribute up to 15% of their
compensation to be used toward purchasing the Company's common stock at 85% of
the fair market value. An aggregate of 2,000,000 shares of common stock were
reserved for issuance under the ESPP.
12. RELATED PARTIES
In June 1998, a subsidiary of the Company entered into a $2.1 agreement
for the design, manufacture, installation and the provision of training with
respect to a satellite earth station in London. A Director of the Company is the
Chairman and a stockholder of the company providing such services. During 1998,
$1.2 million was paid for the above services.
13. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance accounts for the years ended December
31, 1998, 1997 and 1996 was as follows (in thousands):
Doubtful Accounts
- ----------------------------------------------------------------------------------------
Charged to
Balance at Costs and Balance at
Period Beginning of Period Expenses Deductions Other (1) End of Period
- ------ ------------------- -------- ---------- --------- -------------
1996 $ 132 $1,960 $ (377) $ 870 $ 2,585
1997 $2,585 $6,185 $ (4,309) $ 583 $ 5,044
1998 $5,044 $9,431 $(12,772) $13,273 $ 14,976
F-16
Deferred Tax Asset Valuation
- -----------------------------------------------------------------------------------
Charged to
Balance at Costs and Balance at
Period Beginning of Period Expenses Deductions Other End of Period
- ------ ------------------- -------- ---------- ----- -------------
1996 $ 1,087 $ 1,641 $- $- $ 2,728
1997 $ 2,728 $14,034 $- $- $16,762
1998 $16,762 $21,506 $- $- $38,268
(1) Other additions represent the allowances for doubtful accounts, which were
recorded in connection with business acquisitions.
14. 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 EBITDA. The Company
defines EBITDA as net income (loss) before interest expense and interest income,
income taxes, depreciation and amortization and other income (expense).
Operations and assets of the North American 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):
Year Ended December 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Net Revenue
North America $ 188,008 $ 74,359 $ 16,573
Asia-Pacific 172,757 183,126 151,253
Europe 60,863 22,712 5,146
========= ========= =========
Total $ 421,628 $ 280,197 $ 172,972
========= ========= =========
EBITDA
North America $ (14,420) $ (14,709) $ (5,965)
Asia-Pacific 1,482 (5,856) 2,207
Europe 2,018 (2,591) (2,229)
========= ========= =========
Total $ (10,920) $ (23,156) $ (5,987)
========= ========= =========
Capital Expenditures
North America $ 33,431 $ 12,441 $ 7,453
Asia-Pacific 24,589 16,506 4,263
Europe 17,763 10,518 1,029
========= ========= =========
Total $ 75,983 $ 39,465 $ 12,745
========= ========= =========
December 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Assets
North America $ 507,356 $ 249,109 $ 67,575
Asia-Pacific 109,290 83,476 62,823
Europe 57,317 22,808 5,211
========= ========= =========
Total $ 673,963 $ 355,393 $ 135,609
========= ========= =========
F-17
The above expenditures for long-lived assets exclude assets acquired in business
combinations and under terms of capital leases.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of operations
for the two years ended December 31, 1998 and 1997:
For the quarter ended
------------------------------------------------------------------------
March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
------------------------------------------------------------------------
(in thousands)
Net Revenue $ 80,051 $ 99,475 $116,047 $126,055
Gross Margin $ 11,329 $ 15,349 $ 19,490 $ 22,444
Net Loss $(12,317) $(14,793) $(19,035) $(17,503)
For the quarter ended
--------------------------------------------------------------------
March 31, 1997 June 30, 1997 September 30, 1997 December 31, 1997
--------------------------------------------------------------------
(in thousands)
Net Revenue $59,036 $70,045 $ 73,018 $ 78,098
Gross Margin $ 4,002 $ 5,867 $ 7,752 $ 9,845
Net Loss $(4,907) $(8,875) $(10,591) $(11,866)
16. SUBSEQUENT EVENTS
On March 31, 1999, the Company purchased the common stock of London
Telecom Network, Inc. and certain related entities that provide long distance
telecommunications services in Canada (the "LTN Companies"), for approximately
$36 million in cash (including payments made in exchange for certain
non-competition agreements). In addition, on March 31, 1999, the Company
entered into an agreement to purchase for $14 million in cash substantially all
of the operating assets of Wintel CNC Communications Inc. and Wintel CNT
Communications Inc. (the "Wintel Companies"), which are Canada-based long
distance telecommunications providers affiliated with the LTN Companies. The
purchase of the assets of the Wintel Companies is expected to close in early May
1999. If the LTN companies and the Wintel Companies collectively achieve
certain financial goals during the first half of 1999, the Company has agreed to
pay up to an additional $4.6 million in cash.
In February 1999 the Company purchased the remaining 40% of Hotkey
Internet Services Pty., Ltd. ("Hotkey"), a Melbourne, Australia-based Internet
service provider. The remaining 40% was purchased for approximately $1.1 million
comprised of $0.3 million in cash and 57,025 shares of the Company's common
stock.
On February 5, 1999 the Company acquired all of the outstanding shares in
the capital of GlobalServe Communications, Inc., a privately held Internet
services provider ("ISP") based in Toronto, Canada. The purchase price of
approximately $4.2 million was comprised of $2.1 million in cash and 142,806
shares of the Company's common stock.
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On January 29, 1999 the Company completed the sale of $200 million 11 1/4%
Senior Notes ("1999 Senior Notes") due 2009 with semi-annual interest payments.
The $192.5 million in net proceeds of the 1999 Senior Notes will be used to fund
capital expenditures to expand and develop the Company's global Network and
other corporate purposes.
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