PRIMUS TELECOMMUNICATIONS GROUP INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 0-29092

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		54-1708481 (I.R.S. Employer Identification No.)
1700 Old Meadow Road, Suite 300, McLean, VA (Address of principal executive offices)		22102 (Zip Code)

(703) 902-2800
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class		Outstanding as of July 31, 2003
Common Stock $.01 par value		65,355,904

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

INDEX TO FORM 10-Q

			Page No.
Part I.	FINANCIAL INFORMATION
	Item 1.	FINANCIAL STATEMENTS (UNAUDITED)
		Consolidated Condensed Statements of Operations	1
		Consolidated Condensed Balance Sheets	2
		Consolidated Condensed Statements of Cash Flows	3
		Consolidated Condensed Statements of Comprehensive Income	4
		Notes to Consolidated Condensed Financial Statements	5
	Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
	Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	32
	Item 4.	CONTROLS AND PROCEDURES	34
Part II.	OTHER INFORMATION
	Item 1.	LEGAL PROCEEDINGS	35
	Item 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS	35
	Item 3.	DEFAULTS UPON SENIOR SECURITIES	36
	Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	36
	Item 5.	OTHER INFORMATION	36
	Item 6.	EXHIBITS AND REPORTS ON FORM 8-K	36
SIGNATURES			37
EXHIBIT INDEX			38

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

			Three Months Ended June 30,						Six Months Ended June 30,
			2003			2002			2003			2002
NET REVENUE			$	320,240		$	251,244		$	620,683		$	495,911
COST OF REVENUE				196,363			165,904			386,386			327,462

GROSS MARGIN				123,877			85,340			234,297			168,449

OPERATING EXPENSES
	Selling, general and administrative			89,241			61,535			166,866			123,514
	Depreciation and amortization			21,218			19,789			41,553			39,971
	Loss on sale of assets			804			—			804			—
	Asset impairment write-down			—			337			537			337

		Total operating expenses		111,263			81,661			209,760			163,822

INCOME FROM OPERATIONS				12,614			3,679			24,537			4,627
INTEREST EXPENSE				(14,622	)		(16,830	)		(29,999	)		(34,523	)
GAIN ON EARLY EXTINGUISHMENT OF DEBT				7,981			—			14,634			27,251
INTEREST INCOME AND OTHER INCOME (EXPENSE)				(82	)		742			200			875
FOREIGN CURRENCY TRANSACTION GAIN				14,765			835			24,818			282

INCOME (LOSS) BEFORE INCOME TAXES				20,656			(11,574	)		34,190			(1,488	)
INCOME TAX BENEFIT (EXPENSE)				(620	)		—			(2,953	)		10,668

INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE				20,036			(11,574	)		31,237			9,180
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE				—			—			—			(10,973	)

NET INCOME (LOSS)				20,036			(11,574	)		31,237			(1,793	)
ACCRETED AND DEEMED DIVIDEND ON CONVERTIBLE PREFERRED STOCK				(1,356	)		—			(1,678	)		—

INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS			$	18,680		$	(11,574	)	$	29,559		$	(1,793	)

BASIC INCOME (LOSS) PER COMMON SHARE:
	Income (loss) before cumulative effect of change in accounting principle		$	0.21		$	(0.18	)	$	0.35		$	0.14
	Cumulative effect of change in accounting principle			—			—			—			(0.17	)

	Income (loss)		$	0.21		$	(0.18	)	$	0.35		$	(0.03	)

DILUTED INCOME (LOSS) PER COMMON SHARE:
	Income (loss) before cumulative effect of change in accounting principle		$	0.21		$	(0.18	)	$	0.34		$	0.14
	Cumulative effect of change in accounting principle			—			—			—			(0.17	)

	Income (loss)		$	0.21		$	(0.18	)	$	0.34		$	(0.03	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
	Basic			87,774			64,821			85,332			64,367

	Diluted			90,744			64,821			87,572			64,367

See notes to consolidated condensed financial statements.

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)

			June 30, 2003			December 31, 2002
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	65,776		$	92,492
	Accounts receivable (net of allowance for doubtful accounts receivable of $27,042 and $23,406)			187,374			160,421
	Prepaid expenses and other current assets			31,871			33,105

		Total current assets		285,021			286,018
RESTRICTED CASH				11,958			11,712
PROPERTY AND EQUIPMENT—Net				337,894			330,102
GOODWILL—Net				52,634			48,963
OTHER INTANGIBLE ASSETS—Net				33,509			29,696
OTHER ASSETS				13,713			18,097

	TOTAL ASSETS		$	734,729		$	724,588

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
	Accounts payable		$	112,325		$	99,653
	Accrued interconnection costs			96,943			98,224
	Accrued expenses and other current liabilities			95,850			71,654
	Accrued interest			13,151			18,027
	Current portion of long-term obligations			65,555			63,231

		Total current liabilities		383,824			350,789
LONG-TERM OBLIGATIONS				476,423			537,757
OTHER LIABILITIES				1,863			3,868

		Total liabilities		862,110			892,414

COMMITMENTS AND CONTINGENCIES				—			—
SERIES C CONVERTIBLE PREFERRED STOCK, $0.01 par value—559,950 shares authorized; 438,853 shares issued and outstanding				—			32,297
STOCKHOLDERS' DEFICIT:
	Preferred stock, Series A and B, $0.01 par value—1,895,050 shares authorized; none issued and outstanding			—			—
	Convertible preferred stock, Series C, $0.01 par value—559,950 shares authorized; 559,950 shares issued and outstanding; liquidation preference of $43,575			41,514			—
	Common stock, $0.01 par value—150,000,000 shares authorized; 65,210,002 and 64,927,406 shares issued and outstanding			652			649
	Additional paid-in capital			608,266			607,856
	Accumulated deficit			(708,595	)		(739,832	)
	Accumulated other comprehensive loss			(69,218	)		(68,796	)

		Total stockholders' deficit		(127,381	)		(200,123	)

	TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	734,729		$	724,588

See notes to consolidated condensed financial statements.

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

					Six Months Ended June 30,
					2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income (loss)				$	31,237		$	(1,793	)
	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
		Depreciation, amortization and accretion				41,586			40,041
		Non-cash compensation expense				245			—
		Asset impairment write-down				537			337
		Loss on sale of fixed assets				804			—
		Cumulative effect of change in accounting principle				—			10,973
		Provision for doubtful accounts receivable				12,210			11,931
		Stock issuance—401(k) Plan and Restricted Stock Plan				258			—
		Equity investment loss				649			—
		Minority interest share of loss				(210	)		(370	)
		Unrealized foreign currency transaction gain on intercompany and foreign debt				(26,488	)		—
		Deferred income taxes				—			(5,668	)
		Gain on early extinguishment of debt				(14,634	)		(27,251	)
		Changes in assets and liabilities, net of acquisitions:
			Increase in accounts receivable			(18,280	)		(8,160	)
			(Increase) decrease in prepaid expenses and other current assets			7,429			(1,181	)
			Decrease in restricted cash			891			—
			Decrease in other assets			534			2,489
			Increase (decrease) in accounts payable			2,094			(22,525	)
			Increase in accrued expenses, other current liabilities and other liabilities			2,688			8,299
			Decrease in accrued interest			(2,396	)		(1,011	)
	Sale of trading marketable securities					—			532

				Net cash provided by operating activities		39,154			6,643

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment					(9,677	)		(13,350	)
	Cash used for business acquisitions, net of cash acquired					(1,129	)		(348	)

				Net cash used in investing activities		(10,806	)		(13,698	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of long-term obligations					9,125			9,509
	Purchase of the Company's debt securities					(42,549	)		(4,383	)
	Principal payments on capital leases, vendor financing and other long-term obligations					(31,503	)		(21,224	)
	Proceeds from sale of convertible preferred stock, net					8,895			—
	Proceeds from sale of common stock					231			86

				Net cash used in financing activities		(55,801	)		(16,012	)

EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS						737			1,310

NET CHANGE IN CASH AND CASH EQUIVALENTS						(26,716	)		(21,757	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD						92,492			83,953

CASH AND CASH EQUIVALENTS, END OF PERIOD					$	65,776		$	62,196

SUPPLEMENTAL CASH FLOW INFORMATION
	Cash paid for interest				$	31,367		$	34,373
	Non-cash investing and financing activities:
		Capital lease additions			$	—		$	139
		Leased fiber capacity additions			$	2,938		$	1,263
		Common stock issued for payment on capital lease liability			$	—		$	744
		Acquisition of customer list, financed by long-term obligations			$	8,102		$	—

See notes to consolidated condensed financial statements.

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

		Three Months Ended June 30,					Six Months Ended June 30,
		2003		2002			2003			2002
NET INCOME (LOSS)		$	20,036	$	(11,574	)	$	31,237		$	(1,793	)
OTHER COMPREHENSIVE INCOME (LOSS)—
	Foreign currency translation adjustment		691		14,205			(422	)		16,105

COMPREHENSIVE INCOME		$	20,727	$	2,631		$	30,815		$	14,312

See notes to consolidated condensed financial statements.

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(1): Basis of Presentation

The accompanying unaudited consolidated condensed financial statements of Primus Telecommunications Group, Incorporated and subsidiaries ("the Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and Securities and Exchange Commission ("SEC") regulations. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (all of which are of a normal and recurring nature), which are necessary to present fairly the financial position, results of operations, cash flows and comprehensive income for the interim periods. The results for the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

The financial statements should be read in conjunction with the Company's audited consolidated financial statements included in the Company's most recently filed Form 10-K.

On January 1, 2002, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." By June 30, 2002, the Company had completed the first step of the goodwill impairment test and had identified that an impairment condition existed. The Company completed the second step of the goodwill impairment test during the three months ended December 31, 2002. A cumulative effect of change in accounting principle of $11.0 million is reflected in the consolidated condensed statement of operations for the six months ended June 30, 2002.

(2): Summary of Significant Accounting Policies

Principles of Consolidation—The consolidated condensed financial statements include the Company's accounts, its wholly-owned subsidiaries and all other subsidiaries over which the Company exerts control. The Company owns 51% of the common stock of Matrix Internet, S.A. ("Matrix") and 51% of CS Communications Systems GmbH and CS Network GmbH ("Citrus"), in all of which the Company has a controlling interest. Additionally, the Company has a controlling interest in Direct Internet Limited ("DIL"), pursuant to a convertible loan which can be converted at any time into equity of DIL in an amount as agreed upon between the Company and DIL and permitted under local law. Subsequent to March 31, 2002, the Company began using the equity method of accounting for two of its subsidiaries, InterNeXt S.A. ("InterNeXt") and Cards & Parts Telecom GmbH ("Cards & Parts"), and its investment in Bekkoame Internet, Inc ("Bekko"). All intercompany profits, transactions and balances have been eliminated in consolidation. All other investments in affiliates are carried at cost, as the Company does not have significant influence.

Stock-Based Compensation—At June 30, 2003, the Company had three stock-based employee compensation plans. The Company uses the intrinsic value method to account for those plans under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Stock-based employee compensation cost of $0.2 million for the three months ended June 30, 2003 under the intrinsic value method is reflected in net income. The following table illustrates the effect on income attributable to common stockholders and income per share if the Company had applied the fair value recognition

provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation (in thousands, except per share amounts, and unaudited).

		For the three months ended June 30,						For the six months ended June 30,
		2003			2002			2003			2002
Income (loss) attributable to common stockholders, as reported		$	18,680		$	(11,574	)	$	29,559		$	(1,793	)
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of income taxes			(753	)		(449	)		(1,471	)		(923	)

Pro forma income (loss) attributable to common stockholders		$	17,927		$	(12,023	)	$	28,088		$	(2,716	)

Basic income (loss) per share:
	As reported	$	0.21		$	(0.18	)	$	0.35		$	(0.03	)
	Pro forma	$	0.20		$	(0.19	)	$	0.33		$	(0.04	)
Diluted income (loss) per share:
	As reported	$	0.21		$	(0.18	)	$	0.34		$	(0.03	)
	Pro forma	$	0.20		$	(0.19	)	$	0.32		$	(0.04	)
Weighted average common shares outstanding:
	Basic		87,774			64,821			85,332			64,367
	Diluted		90,744			64,821			87,572			64,367

Recent Accounting Pronouncements—In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 requires that an issuer classify financial instruments that are within scope of SFAS No. 150 as a liability. Under prior guidance, these same instruments would be classified as equity. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003. Otherwise, it is effective on July 1, 2003. The Company does not expect the adoption of SFAS No. 150 to have a material effect on its consolidated financial position or results of operations.

In January 2003, FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 clarifies the application of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003, or in which the Company obtains an interest after that date. FIN No. 46 is effective July 1, 2003 to variable interest entities in which are held a variable interest acquired before February 1, 2003. The adoption of FIN No. 46 did not have a material effect on its consolidated financial position and results of operations.

In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 addresses disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN No. 45 also clarifies requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the fair value of the obligations the guarantor has undertaken in issuing that guarantee. The initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for guarantees existing as of

December 31, 2002. The Company does not have any guarantees and the adoption of FIN No. 45 did not have a material effect on its consolidated financial position and results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 requires the classification of gains and losses from extinguishments of debt as extraordinary items only if they meet certain criteria for such classification in APB No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions." Any gain or loss on extinguishment of debt classified as an extraordinary item in prior periods that does not meet the criteria in APB No. 30 must be reclassified. These provisions are effective for fiscal years beginning after May 15, 2002. Additionally, SFAS No. 145 requires sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. These lease provisions are effective for transactions occurring after May 15, 2002. The Company adopted the provisions of SFAS No. 145 during the three months ended March 31, 2003. It was determined that all of the Company's gains from early extinguishment of debt for the years ended December 31, 2000, 2001, 2002 and 2003 did not meet the criteria established in APB No. 30 to be classified as extraordinary items. For the three and six months ended June 30, 2003, $8.0 million and $14.6 million of gains from early extinguishment of debt, respectively, were reported as income from continuing operations. For the six months ended June 30, 2002, gains on the early extinguishment of debt of $27.3 million were reclassified to income from continuing operations to maintain comparability for the reported periods.

Reclassification—Certain prior year amounts have been reclassified to conform to current year presentations.

(3): Acquisitions

In March 2003, the Company acquired the assets of Weslink Datalink Corporation ("Interlynx"), a Canadian Internet service provider (ISP), for $0.6 million in cash.

In April 2003, the Company acquired 100% of Onsite Access & Terago Networks, Inc. ("Onsite"), a Canadian local service provider to business customers, for $0.5 million in cash.

In May 2003, the Company acquired 100% of Echo OnLine Internet Inc. and subsidiaries ("Echo"), a Canadian ISP, for $1.9 million in cash.

In June 2003, the Company acquired 100% of Telesonic Communications Inc. ("TCI"), a Canadian prepaid card company, for $3.8 million in cash, $1.5 million of whic