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PRIMUS TELECOMMUNICATIONS GROUP INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
You should read the following discussion and analysis of our financial condition
and results of operations together with our unaudited condensed consolidated
financial statements and the notes thereto included herein, as well as our
audited consolidated financial statements and the notes thereto contained in our
Annual Report on Form 10-K for the year ended December 31, 2011. You should
review the "Risk Factors" section in our Annual Report on Form 10-K for the year
ended December 31, 2011 and in Part II, Item 1A of this report for a discussion
of important factors that could cause actual results to differ materially from
the results described in or implied by the forward-looking statements contained
in the following discussion and analysis.
Unless the context otherwise requires, in this Quarterly Report on Form 10-Q,
"PTGi" means Primus Telecommunications Group, Incorporated and "Primus," the
"Company," "we" and "our" mean PTGi together with its subsidiaries.
Introduction and Overview of Operations
We are an integrated facilities-based communications services provider offering
a portfolio of international and domestic voice, wireless, Internet, VoIP, data,
colocation and data center services to customers located primarily in Canada and
the United States. Our primary market is Canada, where we have deployed
significant network infrastructure. We currently classify our services into
three categories: Growth Services, Traditional Services and International
Carrier Services ("ICS"). Our focus is on expanding our Growth Services, which
includes our broadband, SME VoIP, data, and data center services, to fulfill the
demand for high quality, competitively priced communications services. This
demand is being driven, in part, by the globalization of the world's economies,
the global trend toward telecommunications deregulation and the migration of
communications traffic to the Internet. We manage our Traditional Services,
which includes our domestic and international long-distance voice, local
landline services, including wireless, residential VoIP services, prepaid cards,
and dial-up Internet services, for cash flow generation that we reinvest to
develop and market our Growth Services, particularly in our primary market of
Canada. We also provide our ICS voice termination services to other
telecommunications carriers and resellers requiring IP or time-division
multiplexing access. However, as discussed below under "Recent
Developments-Pursuit of Divestiture of ICS Business Unit," the Company is
currently pursuing a sale or other disposition or disposal of its ICS segment,
which has been classified as a discontinued operation as a result of being held
for sale.
Generally, we price our services competitively with the major carriers and
service providers operating in our principal service regions. We seek to
generate net revenue through sales and marketing efforts focused on customers
with significant communications needs, including small and medium enterprises
("SMEs"), multinational corporations, residential customers, and other
telecommunications carriers and resellers.
Industry trends have shown that the overall market for domestic and
international long-distance voice, prepaid cards and dial-up Internet services
has declined in favor of Internet-based, wireless and broadband communications.
Our challenge concerning net revenue in recent years has been to overcome
declines in long-distance voice minutes of use per customer as more customers
are using wireless devices and the Internet as alternatives to the use of
wireline phones. Also, product substitution (e.g., wireless/Internet for fixed
line voice) has resulted in revenue declines in our long-distance voice
services. Additionally, we believe that because deregulatory influences have
begun to affect telecommunications markets outside the United States, the
deregulatory trend is resulting in greater competition from the existing
wireline and wireless competitors and from more recent entrants, such as cable
companies and VoIP companies, which could continue to affect adversely our net
revenue per minute, as well as minutes of use. More recently, adverse global
economic conditions have resulted in a contraction of spending by business and
residential customers generally which, we believe, has had an adverse effect on
our net revenues.
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In order to manage our network transmission costs, we pursue a flexible approach
with respect to the management of our network capacity. In most instances, we
(1) optimize the cost of traffic by using the least expensive cost routing,
(2) negotiate lower variable usage-based costs with domestic and foreign service
providers, (3) negotiate additional and lower cost foreign carrier agreements
with the foreign incumbent carriers and others, and (4) continue to expand or
reduce the capacity of our network when traffic volumes justify such actions.
Our overall margin may fluctuate based on the relative volumes of international
versus domestic long-distance services; prepaid services versus traditional
post-paid voice services; Internet, VoIP and data services versus fixed line
voice services; the amount of services that are resold; and the proportion of
traffic carried on our network versus resale of other carriers' services. Our
margin is also affected by customer transfer and migration fees. We generally
pay a charge to install and transfer a new customer onto our network and to
migrate broadband and local customers. However, installing and migrating
customers to our network infrastructure enables us to increase our margin on
such services as compared to resale of services using other carriers' networks.
Selling, general and administrative expenses are comprised primarily of salaries
and benefits, commissions, occupancy costs, sales and marketing expenses,
advertising, professional fees, and other administrative costs. All selling,
general and administrative expenses are expensed when incurred. Emphasis on cost
containment and the shift of expenditures from non-revenue producing expenses to
sales and marketing expenses has been heightened since growth in net revenue has
been under pressure.
Recent Developments
Repurchase of a Majority of 10% Senior Secured Notes due 2017
On September 17, 2012, Primus Telecommunications Holding, Inc. ("PTHI"), a
subsidiary of PTGi, consummated the repurchase of $119,035,219 aggregate
principal amount of PTHI's 10% Senior Secured Notes due 2017 (the "10% Notes")
for a purchase price equal to 109% of the principal amount thereof, plus accrued
but unpaid interest to the date of repurchase, pursuant to agreements with
certain selling holders of 10% Notes, the form of which is filed as Exhibit 10.2
to this Quarterly Report on Form 10-Q. The sellers of the 10% Notes,
representing a majority in principal amount of the outstanding 10% Notes,
consented to amendments of the indenture governing the 10% Notes (the "10% Notes
Indenture") to remove substantially all of the restrictive and reporting
covenants under the 10% Notes Indenture, as well as certain events of default
and related provisions. PTHI, each of the guarantors of the 10% Notes, including
PTGi, and U.S. Bank National Association, as Trustee, entered into a
Supplemental Indenture, dated as of September 17, 2012 (the "Supplemental
Indenture"), to memorialize the 10% Notes Indenture amendments. Also on
September 17, 2012, a complaint and motion for temporary restraining order were
filed in the Court of Chancery of the State of Delaware (the "Court"), which
complaint and motion were subsequently amended on September 19, 2012. The
amended complaint alleges that the Supplemental Indenture was entered into in
breach of certain covenants in the 10% Notes Indenture and seeks among other
things to enjoin the Supplemental Indenture from becoming effective and to
enjoin PTHI from acting in reliance upon it. On September 28, 2012, PTHI entered
into a stipulation pursuant to which PTHI has agreed not to take any actions
under the Supplemental Indenture that would not have otherwise been permitted by
the 10% Notes Indenture (absent amendment by the Supplemental Indenture) until
the matter is finally resolved on the merits or otherwise by the Court. A
hearing on the relevant motions has been scheduled with the Court for Friday,
January 4, 2013. See Note 6-"Commitments and Contingencies-Litigation" and
Item 1 of Part II of this Quarterly Report on Form 10-Q-"Legal Proceedings" for
further information on such litigation.
Pursuit of Divestiture of ICS Business Unit
On June 28, 2012, PTGi's Board of Directors committed to dispose of the
Company's ICS business unit. As a result of holding the ICS business unit out
for sale, such business unit has been classified as a discontinued
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operation. The Company continues to actively solicit a sale or other disposition
of its ICS business unit. See Note 12-"Discontinued Operations" to the notes to
our condensed consolidated financial statements included elsewhere in this
report.
Reclassification of Data Center Costs
In order to conform to industry best practices, certain amounts in selling,
general and administrative expense related to our Data Center operating segment
were reclassified to cost of revenue as part of the Company's new operating
segment structure discussed in Note 11-"Operating Segment and Related
Information" to the notes to our condensed consolidated financial statements
included elsewhere in this report.
Foreign Currency
Foreign currency can have a major impact on our financial results. During the
nine months ended September 30, 2012, approximately 86% of our net revenue was
derived from sales and operations outside the U.S. The reporting currency for
our condensed consolidated financial statements is the United States dollar. The
local currency of each country is the functional currency for each of our
respective entities operating in that country. In the future, we expect to
continue to derive the majority of our net revenue and incur a significant
portion of our operating costs from outside the U.S., and therefore changes in
exchange rates have had and may continue to have a significant, and potentially
adverse, effect on our results of operations. Our primary risk of loss regarding
foreign currency exchange rate risk is caused primarily by fluctuations in the
following exchange rates: US Dollar ("USD")/Canadian dollar ("CAD"), USD/British
pound sterling ("GBP"), and USD/Euro ("EUR"). Due to the large percentage of our
revenue derived outside of the U.S., changes in the USD relative to one or more
of the foregoing currencies could have an adverse impact on our future results
of operations. In addition, prior to the sale of the Company's Australia
operations during the quarterly period ended June 30, 2012, we also experienced
risk of loss regarding foreign currency exchange due to fluctuations in the
USD/Australian dollar ("AUD") exchange rate. We have agreements with certain
subsidiaries for repayment of a portion of the investments and advances made to
these subsidiaries. As we anticipate repayment in the foreseeable future, we
recognize the unrealized gains and losses in foreign currency transaction gain
(loss) on the condensed consolidated statements of operations. The exposure of
our income from operations to fluctuations in foreign currency exchange rates is
reduced in part because a majority of the costs that we incur in connection with
our foreign operations are also denominated in local currencies.
We are exposed to financial statement gains and losses as a result of
translating the operating results and financial position of our international
subsidiaries. We translate the local currency statements of operations of our
foreign subsidiaries into USD using the average exchange rate during the
reporting period. Changes in foreign exchange rates affect the reported profits
and losses and cash flows of our international subsidiaries and may distort
comparisons from year to year. By way of example, when the USD strengthens
compared to the CAD, there could be a negative or positive effect on the
reported results for our Canadian operating segment, depending upon whether the
business in our Canadian operating segment is operating profitably or at a loss.
It takes more profits in CAD to generate the same amount of profits in USD and a
greater loss in CAD to generate the same amount of loss in USD. The opposite is
also true. For instance, when the USD weakens against the CAD, there is a
positive effect on reported profits and a negative effect on the reported losses
for our Canadian operating segment.
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In the three and nine months ended September 30, 2012, as compared to the three
and nine months ended September 30, 2011, the USD was stronger on average as
compared to the CAD, AUD, GBP, and EUR. The following tables demonstrate the
impact of currency fluctuations on our net revenue for the three and nine months
ended September 30, 2012 and 2011:
Net Revenue by Location, including Discontinued Operations-in USD (in thousands)
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2012 2011 Variance Variance% 2012 2011 Variance Variance%
Canada 55,123 62,867 (7,744 ) -12.3 % 168,924 187,763 (18,839 ) -10.0 %
Australia - 71,684 (71,684 ) -100.0 % 114,860 217,098 (102,238 ) -47.1 %
United Kingdom 50,040 71,511 (21,471 ) -30.0 % 156,651 193,629 (36,978 ) -19.1 %
Europe (1),(2) 40 98 (58 ) -59.2 % (193 ) 87 (280 ) -321.8 %
Brazil (2) - 7,146 (7,146 ) -100.0 % - 21,215 (21,215 ) -100.0 %
Net Revenue by Location, including Discontinued Operations-in Local Currencies
(in thousands)
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2012 2011 Variance Variance% 2012 2011 Variance Variance%
Canada (in CAD) 54,883 61,457 (6,574 ) -10.7 % 169,311 183,430 (14,119 ) -7.7 %
Australia (in AUD) - 68,159 (68,159 ) -100.0 % 110,408 208,875 (98,467 ) -47.1 %
United Kingdom (in GBP)
31,681 44,382 (12,701 ) -28.6 % 99,368 119,611 (20,243 ) -16.9 %
Europe (1),(2) (in EUR)
32 71 (39 ) -54.9 % (110 ) 64 (174 ) -271.9 %
Brazil (2) (in BRL) - 11,602 (11,602 ) -100.0 % - 34,510 (34,510 ) -100.0 %
(1) Europe includes only subsidiaries whose functional currency is the EUR.
(2) Table includes revenues from discontinued operations which are subject to
currency risk.
Critical Accounting Policies
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Form 10-K for the year ended December 31, 2011 for a detailed
discussion of our critical accounting policies. These policies include revenue
recognition, determining our allowance for doubtful accounts receivable,
accounting for cost of revenue, valuation of long-lived assets, goodwill and
other intangible assets, and accounting for income taxes.
No significant changes in our critical accounting policies have occurred since
December 31, 2011.
Financial Presentation Background
In the following presentations and narratives within this Management's
Discussion and Analysis of Financial Condition and Results of Operations, we
compare, pursuant to accounting principles generally accepted in the United
States of America ("US GAAP") and Securities and Exchange Commission ("SEC")
disclosure rules, the Company's results of operations for the three and nine
months ended September 30, 2012 as compared to the three and nine months ended
September 30, 2011.
We also present detailed changes in results, excluding currency impacts, since a
large portion of our revenues is derived outside of the U.S., and currency
changes can influence or mask underlying changes in foreign operating unit
performance. For purposes of calculating constant currency rates between periods
in connection with presentations that describe changes in values "excluding
currency effects" herein, we have taken results from foreign operations for a
given year (that were computed in accordance with US GAAP using local currency)
and converted such amounts utilizing the same USD to applicable local currency
exchange rates that were used for purposes of calculating corresponding
preceding period US GAAP presentations.
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Discontinued Operations
During 2011, the Company sold its Brazilian segment. In the second quarter of
2012, the Company sold its Australian segment and committed to dispose of and is
actively soliciting a sale or other disposition of its ICS business unit.
The Company has applied retrospective adjustments for the three and nine months
ended September 30, 2011 to reflect the effects of the discontinued operations
that occurred during 2012. Accordingly, revenue, costs, and expenses of the
discontinued operations have been excluded from the respective captions in the
condensed consolidated statements of operations. Additionally the assets and
liabilities of ICS have been classified as held for sale assets and liabilities
and removed from the specific line items on the condensed consolidated balance
sheet as of September 30, 2012. See Note 12-"Discontinued Operations," for
further information regarding these transactions.
Summarized operating results of the discontinued operations are as follows (in
thousands):
Three Months Ended Three Months Ended
September 30, 2012 September 30, 2011
Net revenue $ 71,049 $ 180,303
Operating expenses 73,698 176,885
Income (loss) from operations (2,649 ) 3,418
Interest expense (2 ) (2,370 )
Interest income and other income (expense) (7 ) (1,982 )
Foreign currency transaction gain (loss) 199 (6,994 )
Income (loss) before income tax (2,459 ) (7,928 )
Income tax (expense) benefit - 3,046
Income (loss) from discontinued operations $ (2,459 ) $ (4,882 )
Nine Months Ended Nine Months Ended
September 30, 2012 September 30, 2011
Net revenue $ 355,019 $ 539,325
Operating expenses 363,917 547,412
Income (loss) from operations (8,898 ) (8,087 )
Interest expense (511 ) (2,496 )
Interest income and other income (expense) 288 (1,095 )
Foreign currency transaction gain (loss) (2,546 ) (3,078 )
Income (loss) before income tax (11,667 ) (14,756 )
Income tax (expense) benefit (6,342 ) 1,907
Income (loss) from discontinued operations $ (18,009 ) $ (12,849 )
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Results of Operations
Results of operations for the three months ended September 30, 2012 as compared
to the three months ended September 30, 2011
Net revenue: Net revenue, exclusive of the currency effect, decreased $9.4
million, or 12.6%, to $64.9 million for the three months ended September 30,
2012 from $74.3 million for the three months ended September 30, 2011. Inclusive
of the currency effect which accounted for a decrease of $1.0 million, net
revenue decreased $10.4 million to $63.9 million for the three months ended
September 30, 2012 from $74.3 million for the three months ended September 30,
2011.
Currency Inclusive of
Exclusive of Currency Effect Effect Currency Effect
Quarter Ended Quarter-over-Quarter Quarter Ended
September 30, 2012 September 30, 2011 September 30, 2012
Net % of Net % of Net % of
(in thousands) Revenue Total Revenue Total Variance Variance % Revenue Total
Data Center 8,620 13.3 % 7,697 10.4 % 923 12.0 % (137 ) 8,483 13.3 %
North America Telecom 56,303 86.7 % 66,417 89.4 % (10,114 ) -15.2 % (875 ) 55,428 86.7 %
Other - 0.0 % 194 0.2 % (194 ) -100.0 % - - 0.0 %
Total Net Revenue 64,923 100.0 % 74,308 100.0 % (9,385 ) -12.6 % (1,012 ) 63,911 100.0 %
Data Center: Data Center net revenue, exclusive of the currency effect,
increased $0.9 million, or 12.0%, to $8.6 million for the three months ended
September 30, 2012 from $7.7 million for the three months ended September 30,
2011. Inclusive of the currency effect which accounted for a $0.1 million
decrease, net revenue increased $0.8 million to $8.5 million for the three
months ended September 30, 2012 from $7.7 million for the three months ended
September 30, 2011.
North America Telecom: North America Telecom net revenue, exclusive of the
currency effect, decreased $10.1 million, or 15.2%, to $56.3 million for the
three months ended September 30, 2012 from $66.4 million for the three months
ended September 30, 2011. The net revenue decrease is primarily attributable to
a decrease of $4.4 million in retail voice services, a decrease of $1.9 million
in local services, a decrease of $1.5 million in prepaid voice services, a
decrease of $0.3 million in wireless services, a decrease of $0.3 million in
VoIP services, a decrease of $0.1 million in data and hosting services, and a
decrease of $2.2 million in other services offset, in part, by an increase of
$0.6 million in Internet services. Inclusive of the currency effect which
accounted for a $0.9 million decrease, net revenue decreased $11.0 million to
$55.4 million for the three months ended September 30, 2012 from $66.4 million
for the three months ended September 30, 2011.
Cost of revenue: Cost of revenue, exclusive of the currency effect, decreased
$4.8 million to $32.0 million, or 49.3% of net revenue, for the three months
ended September 30, 2012 from $36.8 million, or 49.5% of net revenue, for the
three months ended September 30, 2011. Inclusive of the currency effect, which
accounted for a $0.5 million decrease, cost of revenue decreased $5.3 million to
$31.5 million for the three months ended September 30, 2012 from $36.8 million
for the three months ended September 30, 2011.
Currency Inclusive of
Exclusive of Currency Effect Effect Currency Effect
Quarter Ended Quarter-over-Quarter Quarter Ended
September 30, 2012 September 30, 2011 September 30, 2012
Cost of % of Net Cost of % of Net Cost of % of Net
(in thousands) Revenue Revenue Revenue Revenue Variance Variance % Revenue Revenue
Data Center 3,794 44.0 % 3,243 42.1 % 551 17.0 % (59 ) 3,735 44.0 %
North America Telecom 28,225 50.1 % 33,565 50.5 % (5,340 ) -15.9 % (449 ) 27,776 50.1 %
Other - 0.0 % - 0.0 % - 0.0 % - - 0.0 %
Total Cost of Revenue 32,019 49.3 % 36,808 49.5 % (4,789 ) -13.0 % (508 ) 31,511 49.3 %
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Data Center: Data Center cost of revenue, exclusive of the currency effect,
increased $0.6 million to $3.8 million, or 44.0% of net revenue, for the three
months ended September 30, 2012 from $3.2 million, or 42.1% of net revenue, for
the three months ended September 30, 2011. The increase is primarily
attributable to an increase in net revenue of $0.9 million. Inclusive of the
currency effect, which accounted for a $0.1 million decrease, cost of revenue
increased $0.5 million to $3.7 million for the three months ended September 30,
2012 from $3.2 million for the three months ended September 30, 2011.
North America Telecom: North America Telecom cost of revenue, exclusive of the
currency effect, decreased $5.4 million to $28.2 million, or 50.1% of net
revenue, for the three months ended September 30, 2012 from $33.6 million, or
50.5% of net revenue, for the three months ended September 30, 2011. The
decrease is primarily attributable to a decrease in net revenue of $10.1
million. Inclusive of the currency effect, which accounted for a $0.4 million
decrease, cost of revenue decreased $5.8 million to $27.8 million for the three
months ended September 30, 2012 from $33.6 million for the three months ended
September 30, 2011.
Selling, general and administrative expenses: Selling, general and
administrative expenses ("SG&A"), exclusive of the currency effect, decreased
$3.6 million to $23.6 million, or 36.3% of net revenue, for the three months
ended September 30, 2012 from $27.2 million, or 36.7% of net revenue, for the
three months ended September 30, 2011. Inclusive of the currency effect, which
accounted for a $0.3 million decrease, selling, general and administrative
expenses decreased $3.9 million to $23.3 million for the three months ended
September 30, 2012 from $27.2 million for the three months ended September 30,
2011.
Currency Inclusive of
Exclusive of Currency Effect Effect Currency Effect
Quarter Ended Quarter-over-Quarter Quarter Ended
September 30, 2012 September 30, 2011 September 30, 2012
% of Net % of Net % of Net
(in thousands) SG&A Revenue SG&A Revenue Variance Variance % SG&A Revenue
Data Center 1,513 17.6 % 1,341 17.4 % 172 12.8 % (28 ) 1,485 17.5 %
North America Telecom 18,001 32.0 % 21,919 33.0 % (3,918 ) -17.9 % (281 ) 17,720 32.0 %
Other - 0.0 % 316 162.9 % (316 ) -100.0 % - - 0.0 %
Corporate 4,055 0.0 % 3,666 0.0 % 389 10.6 % - 4,055 0.0 %
Total SG&A 23,569 36.3 % 27,242 36.7 % (3,673 ) -13.5 % (309 ) 23,260 36.4 %
Data Center: Data Center selling, general and administrative expense, exclusive
of the currency effect, increased $0.2 million to $1.5 million, or 17.6% of net
revenue, for the three months ended September 30, 2012 from $1.3 million, or
17.4% of net revenue, for the three months ended September 30, 2011. The
increase is primarily attributable to an increase of $0.1 million in salaries
and benefits and $0.1 million in advertising expenses. Inclusive of the currency
effect, which accounted for an insignificant decrease, SG&A increased $0.2
million to $1.5 million for the three months ended September 30, 2012 from $1.3
million for the three months ended September 30, 2011.
North America Telecom: North America Telecom selling, general and administrative
expense, exclusive of the currency effect, decreased $3.9 million to $18.0
million, or 32.0% of net revenue, for the three months ended September 30, 2012
from $21.9 million, or 33.0% of net revenue, for the three months ended
September 30, 2011. The decrease is attributable to a decrease of $1.9 million
in advertising expenses, a decrease of $0.9 million in general and
administrative expenses, a decrease of $0.6 million in sales and marketing
expenses, a decrease of $0.3 million in occupancy expenses, and a decrease of
$0.2 million in salaries and benefits. Inclusive of the currency effect, which
accounted for a $0.3 million decrease, selling, general and administrative
expenses decreased $4.2 million to $17.7 million for the three months ended
September 30, 2012 from $21.9 million for the three months ended September 30,
2011.
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Corporate: Corporate selling, general and administrative expense increased $0.4
million to $4.1 million for the three months ended September 30, 2012 from $3.7
million for the three months ended September 30, 2011. The increase is
attributable to an increase of $0.5 million in general and administrative
expenses, an increase of $0.2 million in occupancy expenses, and an increase of
$0.2 million in professional fees offset, in part, by a decrease of $0.4 million
in salaries and benefits and a decrease of $0.1 million in travel and
entertainment expenses.
Depreciation and amortization expense: Depreciation and amortization expense
decreased $1.1 million to $7.5 million for the three months ended September 30,
2012 from $8.6 million for the three months ended September 30, 2011. The
decrease is attributable to a decrease in the amortization of our Canadian
customer list intangible asset. This intangible asset is amortized over a useful
life that corresponds to the diminishing projected cash flows in the fresh start
valuation model so future amortization expense will continue to decline.
Interest expense and accretion (amortization) on debt premium/discount, net:
Interest expense and accretion (amortization) on debt premium/discount, net
decreased $1.2 million to $6.4 million for the three months ended September 30,
2012 from $7.6 million for the three months ended September 30, 2011. The
decrease was due to exchanging our prior higher rate debt for the 10% Notes in
July 2011, as well as the repurchase of a portion of the outstanding 10% Notes
in September 2012. See Note 5-"Long-Term Obligations" to the notes to our
condensed consolidated financial statements included elsewhere in this report.
Gain (loss) from contingent value rights valuation: The gain from the change in
fair value of the contingent value rights decreased $11.2 million to $0.2
million for the three months ended September 30, 2012 from $11.4 million for the
three months ended September 30, 2011. The Company determined these contingent
value rights to be derivative instruments to be accounted for as liabilities and
marked to fair value at each balance sheet date. Upon issuance of the contingent
value rights, the Company recorded a liability of $2.6 million in other
liabilities as part of fresh-start accounting, and we will adjust this liability
quarterly to its then estimated fair value. The change in fair value of the
liability is reflected in our condensed consolidated statements of operations as
other income (expense). Estimates of fair value represent the Company's best
estimates based on a Black-Scholes pricing model.
Interest and other income (expense): Interest and other income decreased $2.2
million to $26 thousand of expense for the three months ended September 30, 2012
from $2.2 million of income for the three months ended September 30, 2011.
Foreign currency transaction gain (loss): Foreign currency transaction loss
decreased $8.2 million to a gain of $2.8 million for the three months ended
September 30, 2012 from a loss of $5.4 million for the three months ended
September 30, 2011. The gains and losses are attributable to the impact of
foreign currency exchange rate changes on intercompany debt balances and on
receivables and payables denominated in a currency other than the subsidiaries'
functional currency. We incurred a foreign currency transaction gain on the
intercompany payable balances that our Canadian subsidiaries have with our US
subsidiaries due to an increase in the exchange rate from July to September
2012, compared to the prior year when we incurred a loss due to a decrease in
the exchange rate from July 2011 to September 2011.
Income tax benefit (expense): Income tax benefit (expense) was immaterial for
the three months ended September 30, 2012 and 2011.
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Results of operations for the nine months ended September 30, 2012 as compared
to the nine months ended September 30, 2011
Net revenue: Net revenue, exclusive of the currency effect, decreased $19.8
million, or 9.0%, to $201.7 million for the nine months ended September 30, 2012
from $221.5 million for the nine months ended September 30, 2011. Inclusive of
the currency effect which accounted for a decrease of $4.4 million, net revenue
decreased $24.2 million to $197.3 million for the nine months ended
September 30, 2012 from $221.5 million for the nine months ended September 30,
2011.
Currency Inclusive of
Exclusive of Currency Effect Effect Currency Effect
Nine Months Ended Year-over-Year Nine Months Ended
September 30, 2012 September 30, 2011 September 30, 2012
Net % of Net % of Net % of
(in thousands) Revenue Total Revenue Total Variance Variance % Revenue Total
Data Center 25,262 12.5 % 22,728 10.3 % 2,534 11.1 % (612 ) 24,650 12.5 %
North America Telecom 176,390 87.5 % 198,201 89.5 % (21,811 ) -11.0 % (3,739 ) 172,651 87.5 %
Other - 0.0 % 571 0.2 % (571 ) -100.0 % - - 0.0 %
Total Net Revenue 201,652 100.0 % 221,500 100.0 % (19,848 ) -9.0 % (4,351 ) 197,301 100.0 %
Data Center: Data Center net revenue, exclusive of the currency effect,
increased $2.5 million, or 11.1%, to $25.2 million for the nine months ended
September 30, 2012 from $22.7 million for the nine months ended September 30,
2011. Inclusive of the currency effect which accounted for a $0.6 million
decrease, net revenue increased $1.9 million to $24.6 million for the nine
months ended September 30, 2012 from $22.7 million for the nine months ended
September 30, 2011.
North America Telecom: North America Telecom net revenue, exclusive of the
currency effect, decreased $21.8 million, or 11.0%, to $176.4 million for the
nine months ended September 30, 2012 from $198.2 million for the nine months
ended September 30, 2011. The net revenue decrease is primarily attributable to
a decrease of $10.2 million in retail voice services, a decrease of $5.1 million
in local services, a decrease of $4.0 million in prepaid services, a decrease of
$2.9 million in other services, a decrease of $0.7 million in wireless services,
and a decrease of $0.4 million in data and hosting services offset, in part, by
an increase of $1.5 million in Internet services. Inclusive of the currency
effect which accounted for a $3.7 million decrease, net revenue decreased $25.5
million to $172.7 million for the nine months ended September 30, 2012 from
$198.2 million for the nine months ended September 30, 2011.
Cost of revenue: Cost of revenue, exclusive of the currency effect, decreased
$10.2 million to $99.5 million, or 49.3% of net revenue, for the nine months
ended September 30, 2012 from $109.7 million, or 49.5% of net revenue, for the
nine months ended September 30, 2011. Inclusive of the currency effect, which
accounted for a $2.2 million decrease, cost of revenue decreased $12.4 million
to $97.3 million for the nine months ended September 30, 2012 from $109.7
million for the nine months ended September 30, 2011.
Currency Inclusive of
Exclusive of Currency Effect Effect Currency Effect
Nine Months Ended Year-over-Year Nine Months Ended
September 30, 2012 September 30, 2011 September 30, 2012
Cost of % of Net Cost of % of Net Cost of % of Net
(in thousands) Revenue Revenue Revenue Revenue Variance Variance % Revenue Revenue
Data Center 10,869 43.0 % 9,313 41.0 % 1,556 16.7 % (265 ) 10,604 43.0 %
North America Telecom 88,598 50.2 % 100,358 50.6 % (11,760 ) -11.7 % (1,896 ) 86,702 50.2 %
Other - 0.0 % - 0.0 % - 0.0 % - - 0.0 %
Total Cost of Revenue 99,467 49.3 % 109,671 49.5 % (10,204 ) -9.3 % (2,161 ) 97,306 49.3 %
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Data Center: Data Center cost of revenue, exclusive of the currency effect,
increased $1.6 million to $10.9 million, or 43.0% of net revenue, for the nine
months ended September 30, 2012 from $9.3 million, or 41.0% of net revenue, for
the nine months ended September 30, 2011. The increase is primarily attributable
to an increase in net revenue of $2.5 million. Inclusive of the currency effect,
which accounted for a $0.3 million decrease, cost of revenue increased $1.3
million to $10.6 million for the nine months ended September 30, 2012 from $9.3
million for the nine months ended September 30, 2011.
North America Telecom: North America Telecom cost of revenue, exclusive of the
currency effect, decreased $11.8 million to $88.6 million, or 50.2% of net
revenue, for the nine months ended September 30, 2012 from $100.4 million, or
50.6% of net revenue, for the nine months ended September 30, 2011. The decrease
is primarily attributable to a decrease in net revenue of $21.8 million.
Inclusive of the currency effect, which accounted for a $1.9 million decrease,
cost of revenue decreased $13.7 million to $86.7 million for the nine months
ended September 30, 2012 from $100.4 million for the nine months ended
September 30, 2011.
Selling, general and administrative expenses: Selling, general and
administrative expenses ("SG&A"), exclusive of the currency effect, decreased
$4.1 million to $80.0 million, or 39.7% of net revenue, for the nine months
ended September 30, 2012 from $84.1 million, or 38.0% of net revenue, for the
nine months ended September 30, 2011. Inclusive of the currency effect, which
accounted for a $1.6 million decrease, selling, general and administrative
expenses decreased $5.7 million to $78.4 million for the nine months ended
September 30, 2012 from $84.1 million for the nine months ended September 30,
2011.
Currency Inclusive of
Exclusive of Currency Effect Effect Currency Effect
Nine Months Ended Year-over-Year Nine Months Ended
September 30, 2012 September 30, 2011 September 30, 2012
% of Net % of Net % of Net
(in thousands) SG&A Revenue SG&A Revenue Variance Variance % SG&A Revenue
Data Center 4,280 16.9 % 4,140 18.2 % 140 3.4 % (109 ) 4,171 16.9 %
North America Telecom 56,605 32.1 % 64,766 32.7 % (8,161 ) -12.6 % (1,440 ) 55,165 32.0 %
Other - 0.0 % 889 155.7 % (889 ) -100.0 % - - 0.0 %
Corporate 19,079 0.0 % 14,299 0.0 % 4,780 33.4 % - 19,079 0.0 %
Total SG&A 79,964 39.7 % 84,094 38.0 % (4,130 ) -4.9 % (1,549 ) 78,415 39.7 %
Data Center: Data Center selling, general and administrative expense, exclusive
of the currency effect, increased $0.2 million to $4.3 million, or 16.9% of net
revenue, for the nine months ended September 30, 2012 from $4.1 million, or
18.2% of net revenue, for the nine months ended September 30, 2011. The increase
is primarily attributable to an increase of $0.1 million in salaries and
benefits and $0.1 million in general and administrative expenses. Inclusive of
the currency effect, which accounted for a $0.1 million decrease, selling,
general and administrative expenses increased $0.1 million to $4.2 million for
the nine months ended September 30, 2012 from $4.1 million for the nine months
ended September 30, 2011.
North America Telecom: North America Telecom selling, general and administrative
expense, exclusive of the currency effect, decreased $8.2 million to $56.6
million, or 32.1% of net revenue, for the nine months ended September 30, 2012
from $64.8 million, or 32.7% of net revenue, for the nine months ended
September 30, 2011. The decrease is attributable to a decrease of $3.8 million
in advertising expenses, a decrease of $1.7 million in general and
administrative expenses, a decrease of $1.4 million in sales and marketing
expenses, a decrease of $0.7 million in salaries and benefits, and a decrease of
$0.6 million in occupancy expenses. Inclusive of the currency effect, which
accounted for a $1.4 million decrease, selling, general and administrative
expenses decreased $9.6 million to $55.2 million for the nine months ended
September 30, 2012 from $64.8 million for the nine months ended September 30,
2011.
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Corporate: Corporate selling, general and administrative expense increased $4.8
million to $19.1 million for the nine months ended September 30, 2012 from $14.3
million for the nine months ended September 30, 2011. The increase is
attributable to an increase of $2.5 million in salaries and benefits, an
increase of $1.5 million in general and administrative expenses and an increase
of $1.0 million in professional fees offset, in part, by a decrease of $0.1
million in travel and entertainment expenses and a decrease of $0.1 million in
occupancy expenses.
Depreciation and amortization expense: Depreciation and amortization expense
decreased $4.0 million to $22.9 million for the nine months ended September 30,
2012 from $26.9 million for the nine months ended September 30, 2011. The
decrease is attributable to a decrease in the amortization of our Canadian
customer list intangible asset. This intangible asset is amortized over a useful
life that corresponds to the diminishing projected cash flows in the fresh start
valuation model so future amortization expense will continue to decline.
Interest expense and accretion (amortization) on debt premium/discount, net:
Interest expense and accretion (amortization) on debt premium/discount, net
decreased $3.9 million to $20.3 million for the nine months ended September 30,
2012 from $24.2 million for the nine months ended September 30, 2011. The
decrease was due to exchanging our prior higher rate debt for the 10% Notes in
July 2011, as well as the repurchase of a portion of the outstanding 10% Notes
in September 2012. See Note 5-"Long-Term Obligations" to the notes to our
condensed consolidated financial statements included elsewhere in this report.
Gain (loss) from contingent value rights valuation: The gain from the change in
fair value of the contingent value rights decreased $12.0 million to a loss of
$4.9 million for the nine months ended September 30, 2012 from a gain of $7.1
million for the nine months ended September 30, 2011. The Company determined
these contingent value rights to be derivative instruments to be accounted for
as liabilities and marked to fair value at each balance sheet date. Upon
issuance of the contingent value rights, the Company recorded a liability of
$2.6 million in other liabilities as part of fresh-start accounting, and we will
adjust this liability quarterly to its then estimated fair value. The change in
fair value of the liability is reflected in our condensed consolidated
statements of operations as other income (expense). Estimates of fair value
represent the Company's best estimates based on a Black-Scholes pricing model.
Interest and other income (expense): Interest and other income decreased $1.7
million to $0.1 million for the nine months ended September 30, 2012 from $1.8
million for the nine months ended September 30, 2011.
Foreign currency transaction gain (loss): Foreign currency transaction loss
decreased $6.0 million to a gain of $3.2 million for the nine months ended
September 30, 2012 from a loss of $2.8 million for the nine months ended
September 30, 2011. The gains and losses are attributable to the impact of
foreign currency exchange rate changes on intercompany debt balances and on
receivables and payables denominated in a currency other than the subsidiaries'
functional currency. We incurred a foreign currency transaction gain on the
intercompany payable balances that our Canadian subsidiaries have with our US
subsidiaries due to an increase in the exchange rate in the third quarter of
2012, compared to the prior year when we incurred a loss due to a decrease in
the exchange rate in the second quarter of 2011.
Income tax benefit (expense): Income tax benefit increased $0.1 million to $0.7
million for the nine months ended September 30, 2012 compared to $0.6 million
for the nine months ended September 30, 2011. The benefit includes a benefit
from the release of certain "ASC 740" liabilities as a result of the expiration
of the statute of limitations, partially offset by expenses consisting of a
provision for foreign income taxes and foreign withholding tax on intercompany
interest.
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Liquidity and Capital Resources
Important Long-Term Liquidity and Capital Structure Developments:
Repurchase of a Majority of 10% Senior Secured Notes due 2017
On September 17, 2012, PTHI consummated the repurchase of $119,035,219 aggregate
principal amount of PTHI's 10% Notes for a purchase price equal to 109% of the
principal amount thereof, plus accrued but unpaid interest to the date of
repurchase, in each case pursuant to agreements with certain selling holders of
10% Notes. The sellers of the 10% Notes, representing a majority in principal
amount of the outstanding 10% Notes, consented to amendments of the 10% Notes
Indenture to remove substantially all of the restrictive and reporting covenants
under the 10% Notes Indenture, as well as certain events of default and related
provisions. PTHI, each of the guarantors of the 10% Notes, including PTGi, and
U.S. Bank National Association, as Trustee, entered into the Supplemental
Indenture to memorialize the 10% Notes Indenture amendments. The repurchase of
the 10% Notes and the Supplemental Indenture are the subject of ongoing
litigation commenced by certain holders of 10% Notes. In connection with such
litigation, on September 28, 2012, PTHI entered into a stipulation pursuant to
which PTHI has agreed not to take any actions under the Supplemental Indenture
that would not have otherwise been permitted by the 10% Notes Indenture (absent
amendment by the Supplemental Indenture) until the matter is finally resolved on
the merits or otherwise by the Court. See Note 6-"Commitments and
Contingencies-Litigation" and Item 1 of Part II of this Quarterly Report on Form
10-Q-"Legal Proceedings" for further information on such litigation.
Divestiture of Primus Australia and Subsequent Asset Sale Tender Offer
On May 31, 2012, the Company completed the sale of 100% of the outstanding
equity of Primus Telecom Holdings Pty Ltd. ("Primus Australia"), an indirect
wholly owned subsidiary of PTGi, to M2 Telecommunications Group Ltd., an
Australian telecommunications company, pursuant to the Equity Purchase
Agreement, dated April 15, 2012 (the "Purchase Agreement"). The purchase price
before adjustment was approximately $AUD 192.4 million (or approximately $USD
195.7 million giving effect to a currency hedge that the Company put in place in
connection with the transaction). In connection with the closing of the
transaction, $USD 9.8 million was retained from the purchase price and placed in
escrow for a period of twelve months following the closing date of the
transaction for purposes of satisfying potential indemnification claims pursuant
to the Purchase Agreement.
This transaction was approved by PTGi's Board of Directors and the Special
Committee of the Board of Directors previously established to explore and
evaluate strategic alternatives to enhance shareholder value. Following the
consummation of the transaction, the Special Committee continues to explore and
evaluate strategic alternatives, which may include (but may not be limited to) a
sale, merger or other business combination involving the Company, a
recapitalization of the Company, a joint venture arrangement, the sale or
spinoff of other Company assets or one or more of its other business units, or
the continued execution of the Company's business plans. The Company has not set
a timetable for completion of the Special Committee's evaluation process or,
except as described above with respect to Primus Australia and below with
respect to ICS, made a decision to pursue any particular course of action or
transaction, and there can be no assurance that any transaction will be pursued
or completed.
On June 20, 2012, PTHI commenced an offer to purchase (the "Offer to Purchase")
up to $183,300,000 aggregate principal amount of the 10% Notes at a purchase
price in cash equal to 100% of the principal amount of 10% Notes validly
tendered (and not validly withdrawn) and accepted in the Offer to Purchase, plus
accrued and unpaid interest thereon to the settlement date for the Offer to
Purchase. The Offer to Purchase expired on July 19, 2012. No Notes were tendered
pursuant to the Offer to Purchase.
The Offer to Purchase was required by the 10% Notes Indenture as a result of the
sale of the Company's Australia segment and the receipt of proceeds therefrom.
The 10% Notes Indenture required PTHI to make the
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Offer to Purchase using the Excess Proceeds (as defined in the 10% Notes
Indenture) from this transaction, which constituted an "Asset Sale" under the
10% Notes Indenture. The Company determined that the Excess Proceeds from this
transaction equaled $183.3 million (the "Offer Amount").
Pursuant to the 10% Notes Indenture, because no 10% Notes were tendered in the
Offer to Purchase (and thus no Excess Proceeds were used to purchase 10% Notes),
(i) the Company could thereafter use all Excess Proceeds that were the subject
of the Offer to Purchase (i.e., the Offer Amount) for general corporate purposes
not otherwise prohibited by the 10% Notes Indenture and (ii) the amount of
Excess Proceeds for purposes of the 10% Notes Indenture was reset at zero.
Pursuit of Divestiture of ICS Business Unit
In connection with the Special Committee's continued evaluation of strategic
alternatives discussed above, on June 28, 2012, the Company's Board of Directors
committed to dispose of the Company's ICS business unit and continues to
actively solicit a sale or other disposition of such business unit. As a result
of holding the ICS business unit out for sale, such business unit has been
classified as a discontinued operation and its held for sale assets and
liabilities have been removed from the specific line items on the condensed
consolidated balance sheet as of September 30, 2012. See Note 12-"Discontinued
Operations" to the notes to our condensed consolidated financial statements
included elsewhere in this report.
Exchange Offers and Consent Solicitation; Issuance of the 10% Notes
On July 7, 2011, in connection with the consummation of the private (i) exchange
offers (the "Exchange Offers") for any and all outstanding Units representing
the 13% Senior Secured Notes due 2016 (the "13% Notes") issued by PTHI and
Primus Telecommunications Canada Inc. ("Primus Canada"), and the 14 1/4% Senior
Subordinated Secured Notes due 2013 (the "14 1/4% Notes") issued by Primus
Telecommunications IHC, Inc. ("IHC"), (ii) consent solicitation (the "Consent
Solicitation") to amend the indenture governing the 13% Notes and release the
collateral securing the 13% Notes, and (iii) related transactions, PTHI issued
$240.2 million aggregate principal amount of the 10% Notes. An aggregate of
$228.6 million principal amount of 10% Notes was issued pursuant to the Exchange
Offers, and PTHI issued an additional $11.6 million aggregate principal amount
of 10% Notes for cash, the proceeds of which were used to redeem all 14 1/4%
Notes that were not exchanged pursuant to the Exchange Offers and thereby
discharge all of our obligations with respect to the 14 1/4% Notes. In
connection with the Exchange Offers, the Company also incurred $6.9 million of
third party costs which are included in gain (loss) on early extinguishment or
restructuring of debt on the condensed consolidated statement of operations in
the third quarter of 2011.
The 10% Notes and related guarantees are secured by a pledge of and first lien
security interest in (subject to certain exceptions) substantially all of the
assets of PTHI and the guarantors of the 10% Notes, including PTGi (the
"Guarantors"), including a first-priority pledge of all of the capital stock
held by PTHI, the Guarantors and each subsidiary of PTGi that is a foreign
subsidiary holding company (which pledge, in the case of the capital stock of
each non-U.S. subsidiary and each subsidiary of PTGi that is a foreign
subsidiary holding company is limited to 65% of the capital stock of such
subsidiary).
The 10% Notes rank senior in right of payment to existing and future
subordinated indebtedness of PTHI and the Guarantors. The 10% Notes rank equal
in right of payment with all existing and future senior indebtedness of PTHI and
the Guarantors. The 10% Notes rank junior to any priority lien obligations
entered into by PTHI or the Guarantors in accordance with the 10% Notes
Indenture.
Prior to March 15, 2013, PTHI may redeem up to 35% of the aggregate principal
amount of the 10% Notes at the redemption premium of 110% of the principal
amount of the 10% Notes redeemed, plus accrued and unpaid interest, with the net
cash proceeds of certain equity offerings. Prior to March 15, 2013, PTHI may
redeem some or all of the 10% Notes at a make-whole premium as set forth in the
10% Notes Indenture. On or after March 15, 2013, PTHI may redeem some or all of
the 10% Notes at a premium that will decrease over time as set forth in the 10%
Notes Indenture, plus accrued and unpaid interest.
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Changes in Cash Flows
Our principal liquidity requirements arise from cash used in operating
activities, purchases of network equipment, including switches, related
transmission equipment and capacity, development of back-office systems,
expansion of data center facilities, interest and principal payments on
outstanding debt and other obligations and income taxes. We have financed our
growth and operations to date through public offerings and private placements of
debt and equity securities, vendor financing, capital lease financing and other
financing arrangements.
Net cash provided by operating activities was $23.9 million for the nine months
ended September 30, 2012 as compared to $26.0 million for the nine months ended
September 30, 2011. For the nine months ended September 30, 2012, net income,
net of non-cash operating activity, provided $17.3 million of cash. Other major
drivers included a decrease in accounts receivable of $15.2 million, partially
offset by a decrease in accounts payable of $8.1 million.
Net cash provided by investing activities was $150.8 million for the nine months
ended September 30, 2012 as compared to net cash used in investing activities of
$9.2 million for the nine months ended September 30, 2011. Net cash provided by
investing activities during the nine months ended September 30, 2012 included
$177.7 million of net proceeds from the sale of Primus Australia, partially
offset by $25.1 million of capital expenditures, $1.7 million used in the
acquisition of businesses and $0.1 million from the increase in restricted cash.
Net cash used in financing activities was $148.9 million for the nine months
ended September 30, 2012 as compared to $29.5 million for the nine months ended
September 30, 2011. Net cash used in financing activities during the nine months
ended September 30, 2012 included $119.0 million used to repurchase a portion of
the 10% Notes, $13.8 million used to pay a special cash dividend to our
shareholders, $12.9 million used to pay fees related to the repurchase of a
portion of the 10% Notes and the Exchange Offers and Consent Solicitation, $1.7
million used to reduce the principal amounts outstanding on capital leases and
$1.6 million used to satisfy the tax obligations for shares issued under
share-based compensation arrangements, partially offset by $0.1 million in
proceeds from the sale of common stock.
Short- and Long-Term Liquidity Considerations and Risks
As of September 30, 2012, we had $66.0 million of cash and cash equivalents. We
believe that our existing cash and cash equivalents will be sufficient to fund
our debt service requirements, other fixed obligations (such as capital leases,
vendor financing and other long-term obligations), and other cash needs for our
operations for at least the next twelve months.
As of September 30, 2012, we have $9.4 million in future minimum purchase
obligations, $57.5 million in future operating lease payments and $118.7 million
of indebtedness.
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Contractual Obligations
The obligations reflected in the table below reflect the contractual payments of
principal and interest that existed as of September 30, 2012:
13% Senior 10% Senior
Capital Leases Secured Notes Secured Notes Purchase Operating
Year Ending December 31,
and Other due 2016 due 2017 Obligations Leases Total
2012 (as of September 30, 2012) $ 36 $ 156 $ 5,810 $ 1,406 $ 3,457 $ 10,865
2013 74 312 11,620 4,301 12,266 28,573
2014 31 312 11,620 3,639 9,145 24,747
2015 6 312 11,620 41 7,287 19,266
2016 - 2,716 11,620 - 5,949 20,285
Thereafter - - 119,585 - 19,429 139,014
Total minimum principal & interest payments 147 3,808 171,875 9,387 57,533 242,750
Less: Amount representing interest (12 ) (1,405 ) (55,679 ) - - (57,096 )
Total long-term obligations $ 135 $ 2,403 $ 116,196 $ 9,387 $ 57,533 $ 185,654
We have contractual obligations to utilize network facilities from certain
carriers with terms greater than one year. We generally do not purchase or
commit to purchase quantities in excess of normal usage or amounts that cannot
be used within the contract term.
New Accounting Pronouncements
For a discussion of our "New Accounting Pronouncements," refer to Note
2-"Summary of Significant Accounting Policies" to our unaudited condensed
consolidated financial statements included elsewhere in this report.
Related Party Transactions
For a discussion of our "Related Party Transactions," refer to Note 14-"Related
Party Transactions" to our unaudited condensed consolidated financial statements
included elsewhere in this report.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains or incorporates a number of
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such statements are based on current expectations, and are not
strictly historical statements. In some cases, you can identify forward-looking
statements by terminology such as "if," "may," "should," "believe,"
"anticipate," "future," "forward," "potential," "estimate," "opportunity,"
"goal," "objective," "growth," "outcome," "could," "expect," "intend," "plan,"
"strategy," "provide," "commitment," "result," "seek," "pursue," "ongoing,"
"include" or in the negative of such terms or comparable terminology. These
forward-looking statements inherently involve certain risks and uncertainties
and are not guarantees of performance, results, or the creation of shareholder
value, although they are based on our current plans or assessments which we
believe to be reasonable as of the date hereof.
Factors or risks that could cause our actual results to differ materially from
the results we anticipate include, but are not limited to:
• continuing uncertain global economic conditions;
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• significant changes in the competitive environment, including as a result
of industry consolidation, and the effect of competition in our markets,
including our pricing policies;
• uncertainties from our announcement of our exploration and evaluation of
strategic alternatives that may enhance shareholder value or our ability
to complete any transactions arising out of that evaluation, including the
pursuit of a divestiture of our ICS business unit;
• our possible inability to generate sufficient liquidity, margins, earnings
per share, cash flow and working capital;
• our ability to attract and retain customers;
• our expectations regarding increased competition, pricing pressures, and
declining usage patterns in our traditional products;
• the effectiveness and profitability of our growth products and bundled service offerings, the pace and cost of customer migration onto our
networks, and the successful network platform migration to reduce costs
and increase efficiencies;
• volatility in the volume and mix of trading activity on the Arbinet
Exchange;
• strengthening of the U.S. dollar against foreign currencies, which may reduce the amount of U.S. dollars generated from foreign operating
subsidiaries and adversely affect our ability to service our significant
debt obligations and pay corporate expenses;
• our compliance with complex laws and regulations in the U.S. and
internationally;
• further changes in the telecommunications or Internet industry, including
rapid technological, regulatory and pricing changes in our principal
markets;
• our liquidity and possible inability to service our substantial
indebtedness;
• an occurrence of a default or event of default under our indentures,
including the Company's ability to successfully defend against, and
satisfy any liabilities arising out of, the alleged default under the 10%
Notes Indenture;
• our expectations regarding the timing, extent and effectiveness of our cost reduction initiatives and management's ability to moderate or control
discretionary spending;
• management's plans, goals, forecasts, expectations, guidance, objectives,
strategies, and timing for future operations, acquisitions, synergies,
asset dispositions, fixed asset and goodwill impairment charges, tax and
withholding expense, selling, general and administrative expenses, product
plans, performance and results;
• management's assessment of market factors and competitive developments,
including pricing actions and regulatory rulings;
• our possible inability to raise additional capital when needed, on
attractive terms, or at all; and
• our possible inability to hire and retain qualified executive management,
sales, technical and other personnel.
Other unknown or unpredictable factors could also affect our business, financial
condition and results. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, there can be no assurance that
any of the estimated or projected results will be realized. You should not place
undue reliance on these forward-looking statements, which apply only as of the
date hereof. Subsequent events and developments may cause our views to change.
While we may elect to update these forward-looking statements at some point in
the future, we specifically disclaim any obligation to do so.
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