Innovate Corp (VATE) 2002 Q2 法說會逐字稿

Thank you for standing by for the Primus Telecommunications conference call. Your conference will begin momentarily. Thank you for your patience. Good evening ladies and gentlemen. And welcome to the Primus Telecommunications second quarter 2002 financial results conference call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. I would like to turn the call over to Mr. Jordan Darryl. Vice President of Primus.

Thank you, good afternoon everyone. Welcome to Primus's second quarter 2002 financial results conference call and webcast. We understand that the wire services were a bit delayed in getting our earnings release out to you all. So in lieu of that I'll read you some of the bullet points that we have on our press release.

In the second quarter Primus set record level of $24 million in EBITDA. We raised our guidance for the full year 2002 to $95 million to $100 million range. We increased revenues by 2.7% over the prior quarter. We generated a record level of income from operations. And we reduced reduced our debt by $13 million.

Now let's proceed to the formalities and introductions for the conference call. Representing Primus are Paul Singh, Chairman and Chief Executive Officer. John DePodesta, Executive Vice President and Neil Hazard, Executive Vice President and Chief Operating and Financial Officer. We'll begin with formal remarks from management regarding the company's second quarter performance and recent developments. This will be followed by a question-and-answer session.

Before we begin please be advised that statements made by the company during this presentation that are not historical facts or forward-looking statements for purposes of safe harbor provisions under the private securities litigation reform act of 1995. These statements may include but are not limited to revenue and earnings projections, statements of business plans and objectives and capital structure and other financial matters.

Forward-looking statements may differ from actuality, and relying on them is subject to risk. Factors that could cause forward looking statements in this presentation to differ materially from actual results are discussed in the company's form 10-Q and 10K filings with the Securities and Exchange Commission. These filings may be obtained from our website at no cost. The company is not necessarily obligated to revise any forward-looking statements whether as a result of new information, future events or otherwise.

I have the pleasure of turning the call over to John DePodesta.

Thank you Jordan and good afternoon ladies and gentlemen. Last quarter I observed that Primus was pumping on all cylinders. EBITDA growth, gross margin expansion, cost and debt reductions, save one critical component revenue growth. I cannot report that Houston, we have lift off, not only has the second quarter recorded improvements in major metrics of performance, it now appears after five quarters that we are again back on the revenue-growth track.

I think that Paul summarized it well in our press release when he stated that contrary to most of reported trends in the telecommunications industry, Primus and it's almost unique to Primus is recording revenue growth, dramatic EBITDA growth, additional customers, continued debt reduction and record levels of operating income. This performance is all the more remarkable considering the devastation occurring around us. This is an environment that has been riddled with under performance as well as corporate collapse that has understandably shaken investor confidence to the core.

Once again, Primus has been victimized by external events as our positive performance and results are overwhelmed by the negative sentiment of the market. That is why we positively acknowledge the initiatives of the executive branch, Congress, regulators and the stock exchanges to restore confidence in our capital markets and integrity as an essential value for leadership of American industry. It is significant to note that many of the proposed corporate governance reforms already reflect Primus's practice.

Primus's 7 person board of directors is compromised of five independent directors and our compensation and audit committees have been solely comprised of independent directors. Speaking on behalf of our board and management I want to assure our customers, business partners, employees and investors that we take our responsibility as stewards for your interest with utmost seriousness and personal commitment. We have encountered a number of obstacles over the last two years but are convinced that our focus business strategy to continue to improve our operating performance while reducing debt is proving to be the right strategy in the current economic climate.

Indeed, we believe that continued execution of this strategy will create the catalyst for our equity value to grow. Today, Primus has one of the most impressive EBITDA growth trajectories in telecommunications with expectations to generate upwards of 95 to $100 million of EBITDA in 2002. Based on our experience with equity evaluation formulas used by private equity firms we believe that further increases in EBITDA rather through revenue growth or operating cost reductions or a combination thereof or a reduction in net debt should start translating into increased equity value. And Primus by pursuing its business strategy is intent on bringing such positive developments to fruition. Consider the following. Our revenues are up and we expect them to grow in the next two quarters. Our customer base is increased. Our gross margins for retail business exceed 40% and we expect them to improve over time.

Our EBITDA grew by 13% over the last quarter, and we now expect our EBITDA to continue to grow at double-digit percentage levels in the second half of 2002. On the financing front, we plan to continue to reduce our debt in a deliberate and opportunistic manner. In summary, we have executed in our strategic vision and the company has never been in a better position with a stronger balance sheet and improved cash flow. We are now at the point we're focusing on profitable growth is again feasible. I will now ask Neil to comment on our specific performance in the second quarter.

Good afternoon, ladies and gentlemen.

I'm very pleased to report that we continue to achieve excellent operating results for Primus for the second quarter which ended June 30th. In many ways these are the best quarterly results that we've ever achieved.

In an adverse economic climate and a telecom sector that is in turmoil, Primus has been able to grow revenues sequentially from the first quarter and this growth has come entirely in the retail sector. We also achieved record-setting gross margins. We continue to reduce our SG&A expenses and we delivered record-breaking EBITDA of $24 million for the second quarter. We also continue to reduce our debt which now stands at $615 million.

Our quarterly interest expense on this debt has also been going down and is now less than $16 million per quarter. We now have positive EBITDA to interest expense coverage ratio of 1.5 times which is up from 1.2 times last quarter. In the second quarter, we used $5 million of cash for operations, interest payments, Cap Ex and working capital.

Our ending June cash balance is $68 million versus March's $85 million with a difference being $12 million cash used to pay down debt. We achieved record-breaking income from operations in the second quarter of almost $4 million. One of the goals we set when we reported results last quarter was to deliver sequential quarterly revenue growth and we delivered. Revenue grew $6.6 million sequentially from Q1 to $251 million for the second quarter. And the good news is that this growth came entirely from retail customers, not other carriers.

Our customer base also increased during the second quarter by almost 50,000 customers to over 2.4 million customers. We reached a record high number of data and Internet customers of over 600,000. And data Internet and over I. P. revenues reached $42.3 million for the quarter which is also a new record high. Our gross margin for the second quarter reached one of the highest levels in Primus's history at $85.3 million which is 34.0% of net revenues. This continues to reflect higher margin data and Internet revenues, lower cost from other carriers carrying our traffic and more minutes in data traffic carried on net.

SG&A for the second quarter was reduced to $61.5 million which is down to 24.5% of net revenue which is a recent record low for Primus. We continued to rationalize and downsize or eliminate subscale and EBITDA negative products and businesses as well as consolidate operations and streamline back office and service organizations. The net result of all this was achievement of a of record EBITDA of $23.8 million which with almost 10% of net revenue also a new record high for the second straight quarter. Our interest expense in the second quarter was $16.8 million which is the lowest it has been in the past several years due to our debt reduction efforts. We spent approximately $32 million in interest expense in the year-ago quarter so it's almost down by half in one year.

Cap Ex spending during the second quarter was reduced to $6 million. We are not building any new network this year and new Cap Ex commitments are success based only with emphasis on higher gross margin services. For the full year 2002 we continue to see Cap Ex spending in the range of $25 million. For guidance for the remainder of this year we see continuing modest revenue growth from Q2 levels, modest improvements in gross margin and continued cost-cutting efforts leading to growing EBITDA. For this third quarter we see EBITDA in the $25 million range. For the total year, 2002, our goals, our revenues in the $1 billion range and EBITDA in the 95 to $100 million range.

This is the second time this year that we have raised our EBITDA goals. Efforts to reduce our long-term debt continued during the second quarter. We negotiated reductions with one of our vendors to reduce our vendor lease debt by approximately $5 million in Q2. We made principal payments of $12 million during the quarter which leaves our long-term debt at $615 million with annual interest payments of approximately $63 million going forward.

As I mentioned, we ended the quarter with $68 million cash. With our increasing in EBITDA generation, reduced long-term debt and interest expense and lower Cap Ex spending, we believe we have sufficient liquidity to fund our operations at their present levels for foreseeable future. In summary our business in many respects is doing the best that it has ever had in a tough economic industry and capital markets environment. We will continue to work to reduce our costs, increase our EBITDA, reduce our debt and generate more cash from our operations. With that I'd like to turn it back over to Jordan to open it up for questions.

Operator, would you please introduce the Q&A polling process.

We'll begin the question-and-answer session. If you have a question you will need to press the one on your touch-tone phone. If your question has been answered and you wish to be removed from the queue please press the pound sign. The questions will be used in the order they are received. Once again, if you have a question, please press the one on your touch-tone phone. One moment please. We have David Mackie from Private Investor online with the question. Please state your question.

First of all, congratulations, another great quarter. I actually have a couple different questions. First one's for Neil Hazard, could you comment on the cash burn rate going into the third and fourth quarter? Is part of the $12 million cash burn from the second quarter, was that a Cisco repayment or something else, that's the first part. Second, part for anybody. Do you figure basically in the near future or in the next six to 12 months to be a consolidator consolidatee within the industry and/or both. Are you starting to see any benefit from WorldCom's demise or are customers beginning to come over. They normally go to tier one assets or are you starting to see any fall out positively for Primus. Thank you very much.

Thank you, David. To answer the first question on the cash-burn rate, as I mentioned, we use $17 million in the second quarter. 12 of which was actually to repay debt. You know, our goal, you know, is that EBITDA is about 1 1/2 times interest so our goal is that working capital stays flat and that basically between our -- with our EBITDA that we could cover in the future both our working capital needs and our Cap Ex spending which is down to $6 million or so per quarter.

So our goal is to really stay even, kind of on the cash from, you know, operations we have to pay out. There are principal payments on some of the cap leases that will continue on in the third and fourth quarter and so that would be a use of the cash, and-but if we are successful in raising more money obviously that would be cash in flow, but yeah, basically we're trying to stay even. And I think we've hit some stability at least for the foreseeable future that we can meet our interest obligations, our Cap Ex needs going forward.

And the third one on the benefits of WorldCom, it's a little bit early to see that yet. You know, they I guess -- maybe the good news is that, you know, they won't be desperate to have crazy pricing and drive prices down in the market because they're no longer trying to increase revenues. We have seen an increase in the number of requests for proposals from businesses in the U.S., you know, who were WorldCom customers. And, you know, they're interested in diversifying, you know, their network provider. And, you know, probably at the end -- for the Q3 conference call we'll have a better sense of where all this is falling out. I wanted to mention too that we use WorldCom a lot, you know, as an interline carrier in the U.S. and they use us too for international calls on a net basis. We owe them money, so, you know we really don't have any accounts receivable exposure to them because we're a net payor to WorldCom.

David, with respect to your question of whether or not we plan to be a consolidator or consolidatee. We tipped our hands in this release in talking about our continuing efforts to raise some additional financing, not just to further strengthen our balance sheet but also to pursue our opportunities to growth. So put us in the consolidator column.

We have Mark Pleen from American Fund Advisors on the phone. Please state your question.

Nice quarter. It's a pleasure to see companies raising guidance for a change. I want to follow up on the WorldCom situation for a minute, have you seen any difference in pricing yet, and specifically in Australia, are you seeing any situations whereby customers are coming to you or talking to you or you mentioned RFP's in the states. How about in Australia? And one other thing on Worldcom. Has anything changed on the interline situation whereby you're looking for other carriers to potentially carry traffic for you?

This is Paul, Mark. I think the answer to your question is in terms of business, customers coming to us. I think consumer, first-time business customers activity level has gone up slightly. As you know, many business customers don't have a contract, they're on the large side so it takes time and the contracts that are expiring, I think we'll see more activity, but it's going to take some time to start seeing that one.

If you're -- if you're on the consumer side, you normally have customers switching anyway it's hard to tell. But we believe over time it's going to be positive, in short-term we don't expect major improvements coming because of the customers switching to us. And in terms of suppliers, I think in spite of their bankruptcy, the kind of things we use them for, those network assets are going to stay in operation. So day to day we don't worry about them going out of business because networks will continue to operate, plus we already have, you know, dozens of carriers that he connect with our network globally so it won't make such difference. In a forward time if they were going to go out of business or liquidation which I don't think it's going to happen but even if it were to happen it won't affect our business because we'll be able to migrate.

Are there areas of the world pool where you're exclusively using WorldCom?

No we never use one carrier exclusively anyway.

The biggest use of WorldCom and the company is here in the U.S. We don't use them much overseas really, and we do have the same -- we use AT&T and Sprint and Bust and the other guys too, so we're not entirely dependent on them. But as I said, the net business is we buy more from them than they buy from us. You know, it's a little early to tell on the pricing I think if that'll change. You mentioned Australia, and, you know, pricing in Australia continues to be very competitive because Telstra is starting to act up again and cut local prices, so we have to lower our prices so they're getting ready to sell the rest of Telstra that the government owns to the public somewhere in the fall of next year, so if anything Australia is getting more competitive right now because Telstra not so much Worldcom has a big ISP, Ozzie Mail and the big question is what are they going to do, so it's still operating so it's early to tell.

I have one other question on a different topic if I may. We've seen a lot of companies where the stock prices have come down sharply and the insiders have been aggressive buyers of stock. Sort of surprised that I'm not seeing that here. Do you want to make any comments on that?

Yes, Mark, John DePodesta. I really would like to answer that question, I'd like to answer that question because it's come up quite frequently through conversations with investors. As insiders there are restricted periods in which we can buy stock. Generally there is a truncated window after we report our quarterly announcement. While many of us in senior management think that Primus stock at this level is a very attractive investment opportunity, because of our ongoing efforts in terms of debt reduction and our ongoing negotiations with respect, financing source, we have been advised by our outside council that would not be appropriate for insiders to purchase stock. So basically we have been blocked out of these windows.

We'll give you a general council's number: maybe you can talk to him. I have asked the question.

All right. Legitimate answer, frankly, didn't realize that was the case, and, you know, I was quite surprised that you guys haven't been more aggressive about it but if that's counsel telling you given today's society go with counsel. Thanks a lot and congratulations, guys.

Thank you.

Thank you.

We have Chris Roberts from Securities Group on the line.

Hey, guys, congratulations on another good quarter. I had two questions. The first and not to be redundant, but I'm trying to reconcile the cash burn during the quarter. I'm coming up about $5 million short. Neil, was there something else in there that was a use of cash other than the principal payment?

Yes, I mean, we used our working capital got -- we used cash working capital in this quarter got less favorable. So we had the EBITDA, we had gains on foreign currency. We had, you know, interest payments. We had working capital needs. And then $6 million in Cap Ex and $12 million of debt principal payments.

Do you know that specific working capital use?

It's -- well, if you take the difference, I think it works out to about $7 million.

$7 million, okay. So that's probably where. I'm trying to reconcile from the $85 million at the end of the quarter versus your ending balance.

Right, part of that working capital increase is the foreign currency rates went up so that increases receivables, and others I think, just the general slow down of payments and economy and other carriers getting, -- stretching things out but the general slow down, and one of our goals in the next six months is to turn that around and get back to where we get that money back and get back to where we were last quarter.

Okay. My second question is in regards to your vendor debt. There was some language in your 10K about possibly restructuring a chunk of it by deferring principal payments out into the future. Has any progress been made on that front? I think it's the GE capital facility?

Yes, Chris, I'll responds to that. We have entered into a letter of intent with GECC to restructure our vendor debt which would involve basically a deferral of principal payments, if I recall about a 15-month period and a stepdown in interest rates during that similar period. We are still working with GECC in terms of the definitive documentation on that transaction. But while we're doing that, to show their good faith, GECC has permitted us to have the benefit of the bargain. So what they basically agreed to in the term sheet, we are, in fact, executing on while we're working on the definitive documentation. So while we have had a delay in getting the documentation done, it's been because GECC has been pretty active in its portfolio investments but we hope to get that wrapped up here in the near future.

So it sounds fairly favorable?

Absolutely. Yeah, and again, it's -- we're currently experiencing the benefit of the bargain which is an expression of GECC's good faith for this whole transaction.

I see. Okay. Thanks a lot and congrats again on the good numbers.

Thank you.

Thanks.

We have Vic Grover from Kaufman Brothers on the line. Please state your question.

Good quarter.

Thanks, Victor.

Number of questions have already been asked but I wanted to drill down under the minutes of use. They were somewhat flat and I wanted to get your response on, the revenue increase, was it partially because of increased pricing? It looks like it was up across all markets except for Asia or is it due to a slightly improved retail mix or possibly because of the impact of the weak U.S. dollars. I'm trying to get my arms around some of the issues that might have impacted pricing.

Our minutes were flat to down. It's primarily in the domestic minutes, our international minutes went up which is good for us. During the quarter we continued to see the wholesale business decline, so the minutes of use going down is primarily the result of less wholesale traffic which, you know, in the longer range, you know, isn't bad. It's probably a good thing. The retail businesses grew. As you said, we also got a bump from the foreign currency. So if you look at the revenue divided by minutes, rates per minutes, it looks like prices had a nice jump up but before we get too excited I caution a lot of that was due to less wholesale minutes in the mix and higher foreign currency. So again if the foreign currency rates, you know, continue where they are hopefully we can enjoy those higher prices. If they fall back to where they were in the first quarter, then that would go the other way.

Okay. Another question: could you talk, Neil, about the increase in the accrued and connection costs? It looks like they went from 107 to 121. Is that trends going to continue or will they kind of level off there around the 120 range? And what would be the impact if any on your P&L?

Again, that balance is really a function of one, we had higher revenue this quarter so we had higher telco-expense. So you'd expect it to go up. The receivables went up also. The payables went up but not as much as the receivables, we had a net use of work capital, and again I don't think there's any real story. If anything, you know, we are getting pushed increasingly by -- and the other thing is a lot of that, you know, 70% of telco-costs are in foreign currencies, they're with Telstra and BT and the Bells in Canada. So the currencies increase those payable balances increase because of the exchange rates and U.S. dollars. So those factors are all going in.

But in any event, going forward I would expect that to probably be coming down because we are getting a lot of pressure from carriers in general around the world to pay quicker, have less exposure because everybody's so nervous with all the people going bankrupt. So, you know, the pressure is going to be on to pay quicker and have, you know, payables go down. And we just now have to try to push our customers to get the receivables down, you know, by the same amount.

Okay. Great. And one last question. I guess this will be for you Paul, and I can't say congratulations enough to all you guys. It's been a long road and you're finally coming out of this. Now that you're really focusing on growth, with regard to growth, can you comment on India, with India deregulating that's an opportunity. Where do you see Primus playing in that market? Will you go into the international origination termination market that was just deregulated or possibly extend your voice over IP presence into the country?

I could -- let me just give you an answer. India itself is not -- will not site the growth or lack of growth because we are, -- our focus continues to be staying in the current markets we are in where we have customer bases and building scale and scope in those countries. I mean, I've seen press releases from other countries that India is deregulating and all the other stuff. Now the V over IP on the other hand, the platform that allows us, carriers in India can use it and give us traffic to complete or we can give them traffic, that one is going very well on the V over IP side.

You should not expect us to increase of our presence in India and get into, you know, domestic activities in India. That's not part of our plan. That will take too much Cap Ex. Those markets in developing countries with the currency and all the other stuff that is too high and we have plenty of opportunities in the countries we're already operate. So we don't need to go to new ones. But the V over IP part of it is a global platform whether it's India or china or Russia, it doesn't matter which country. That will give us opportunities.

This is Neil. I just want to mention that we have expanded our V over IP routes to India and have connections with both ourselves as well as other ISP's so that is part of transporting calls to India via the Internet is growing nicely.

And we have have -- I think we have enough, what I would say, connections with the deals there to do business with them. I just wanted to let you know we don't want to spend all the resources setting up things in India. It's enough to do a partnership and do the work.

Thanks, a lot, guys. See you next month at the conference.

All right. Take care, Vic.

We have Al King on the line. Please state your question.

Let me add my congratulations, a great quarter. I've got two questions. With most of your competitors already having gone into bankruptcy, and with more very close if they're any left that haven't so far, and with the fact that much of their debt is going to be wiped away, and they'll either come back as an entity or else their assets will be bought by someone else, how does that affect the competitive landscape, and how does that affect Primus's ability to compete in that landscape. Number one. And number two, just a quick question on the GE capital. What's the size of that vendor debt and what effect does the reduction in the payment have on a quarterly basis?

Al, let me respond to the GECC. I think it's $57 million is the total amount. And I think what you're talking about in terms of deferral of principal payments, it could be upwards of 25, $25 million. So that's the range of magnitude. I don't have it here precisely in front of me. That's the range.

All right.

With respect to your other question about what is the potential impact of the serial bankruptcies that we seem to be witnessing. Let me offer a few observations. Number one, I am not aware of any telecom services company that has successfully emerged from bankruptcy at all. No less being a stronger competitor. There is much being written and speculated about today in terms of how bankruptcy is going to be this therapeutic process that all the sudden eradicates debts and has people emerge as robust competitors. Let's wait and see what happens.

There aren't too many bond holders that exit those kind of bankruptcies without assuring that they've got a senior position, and it's unlikely that any of those companies would emerge with a debt-free balance sheet. I think there will be debt to be serviced. But you really have to focus on is what is sort of the net debt to EBITDA ratios that those entities are going to have to in effect meet in order to be competitive. And, you know, our sort of standard for that is, you know, about a four times debt ratio to EBITDA ratio for them to be competitive. But once you go into the process, it's not painless, it's not risk-free and there is a cost to be paid, both in terms of momentum, brand, reputation and ultimately how long does it take to resolve the varying contending fashions and when it's all over do you really emerge with a capital structure that's going to work.

Just one other comment. I think, Al, you do bring up a good question because it gets asked all the time and somebody I think on television said when somebody brought up the question and said why don't all the companies declare bankruptcy and be very competitive and be successful in the future. But I think the key issues are these are the assumptions we make and so far a couple of companies who have restructed actually out of the bankruptcy. We believe that after all the -- you know, through the bankruptcy the debt to equity ratios would be about four times. And generally what happens is by the time they come out of the bankruptcy, by the time they agree to the business plan and so on, from there by the time they come out, generally they end up much higher ratios but generally agree to four times. And we are looking at Primus and saying that's a good number for us as a next goal to have which is our net to debt EBITDA ratio to be about four which means we would be the same as some other company went through bankruptcy and lost all of its equity value and the shareholders, but we'll be at the same point with respect to a competitiveness on the balance sheet and cash flow.

With our share .

With our shareholder base intact and our reputation intact. If you plot out the trends, Primus, you will see that's a goal we can achieve. So that's first part which is a related part of that is debt to interest coverage. Again if you have debt to interest coverage of about 2 1/2 times which also shows the debt to equity of about four, that's another one that gets you to be a fairly strong candidate in terms of balance sheet. And what we have been looking at this is those two criteria kind of make commercial quality type of range. So whether somebody comes out of bankruptcy by losing all their shareholder value they should not be -- should not have any more strength than we will have except that we will, you know, keep shareholder value intact and grow.

Excellent. Thank you.

Steve Hypowitz from CIBC World Markets with a question. Please state your question.

Nice quarter, gentlemen.

Thanks.

A couple of just some points here. Just going through the notes. I read $130 million of the $200 million of receivables is unencumbered so I take that to mean that $70 million of your receivables are encumbered. I'd like to you elaborate if I'm correct or explain if I'm wrong and then I have a couple of questions.

You're absolutely correct as we've announced previously in previous quarters, we have a two accounts receivable lines of credit funding facilities with Textron Financial one company in Canada for our Canadian receivables and the other in Australia for Australian receivables so that makes up the difference between the AR balance and how much was unencumbered. Okay, and how much was drawn this quarter?

The total facility of both is, you know, it's limited to $29 million. We have approximately $25 million outstanding.

$25 million outstanding. Okay. So if I've -- I'm just trying to get what was a proxy or surrogate for cash in the quarter and I guess this facility represented how much in cash for you this quarter this additional liquidity.

It went up. It was 2 to $3 million this quarter, yeah, versus last quarter

So in total, even though $70 million is encumbered, approximately you can draw up to $29 million and you've done five or $6 million so far. Is that about right?

No, no, I said increase. I said it's $25 million so the increase from last quarter because it goes up and down every month depending on the receivables.

Sure. I understand. So about $25 million or so, net change of the quarter was just a few million. That's really what I'm driving at.

Yeah.

Couple other points if you could talk about what happened with the leasing. It seems to me as though there was an issue about a classification last quarter and we were just a little confused about, the sequence of events if you could go through that for us we'd appreciate it. Seems to me as though as I read the press release, what was assumed to be a line of credit was, in fact, a capital lease and, therefore, a reduction instead of being an early gain on retirement it turned out to be a charge to net PP and E for the early termination of a lease. I understand the thought process of what it is now. I was just kind of curious how we got here.

Well, you did a pretty good job of explaining it. That's pretty accurate. You know, we had during 2001 and first quarter 2002, we had been, you know, repurchasing a lot of our debt in the open market. We had been exchanging debt for shares. We had been, you know, issuing shares and cash for debt, and all of those transactions, the appropriate accounting was to recognize an extraordinary gain for the amount of debt that we actually did reduce.

Sure.

In the first quarter, you know, we had previously announced a deal with Cisco where we were, you know, settling, you know, vendor debt, vendor line of credit for cash, and wiping out any debt from Cisco in the first quarter and we had -- and this is with advice, consulting with our external auditors, had to book that in a similar fashion as the, you know, retirement or reduction of the external, the bond, the external debt.

And because it was a line credit with Cisco and just recently within the last week or so, the auditors, national office had been reviewing it and they had looked at this financial interpretation number, 26, on FASB 13 and they had a lot of internal debate and the bottom line of all the study and debate was that well, it was a line of credit but it was provided by vendor for, you know, purchasing Cisco, routers for our IP's so that was capital equipment so they said we really think it should be properly characterized as a capital lease, not a line of credit which flips the accounting from an extraordinary gain to a reduction in property planned equipment.

So an effort to do the right thing and make sure everything is, you know, in accordance with accounting standard, they recommended that we, you know, change the accounting for that one extraordinary gain item of approximately $8 million out of our gains we recorded in the first quarter and we reduced the extraordinary gain in Q1 and reduced PP and E for that one-time transaction.

Got you.

So we will file a 10-Q A in the next several weeks to reflect the change in the extraordinary gain.

As he pointed out in the press release, that recharacterization has no impact on our previously-reported revenues, our income from operations or --

Not at all.

Or EBITDA.

Not at all. And I think folks are glad to see the bottom line is there, net debt reduction which is obviously beyond the universal goal. I was just kind of curious the sequence of events.

And the other hidden benefit going forward is our depreciation expenses might be lower.

Absolutely. One other just to follow up. So if I look at your sources of liquidity before your EBITDA generation, I have about $68 million in cash and restricted cash in the balance sheet. I have how much in the receivable program at this juncture that you could borrow against?

Probably another to to $3 million. So we got about $70 million in liquidity or so.

I see an EBITDA target of around $95 million this year and based on trends and what have you, it looks to be a relatively sustainable number. Perhaps going into 2003, I don't want to speak for everybody. My question is: with your given resources, your Cap Ex budget how far in the future date-wise, is it the middle of next year, toward the end of next year? Do you feel comfortably funded?

As you know, the big hurdle for us really is August of 04 when we have approximately $80 million in high-yield bonds coming through. Again, as we've sort of tried to portray and we think we're comfortable between now and then.

So you're comfortable. That's a big difference. That's something that I personally was not aware that you feel that you have the funding and the business model now that you could take you to that point in time. That's a big difference.

I mean, there's no guarantees, it's all depends what's going to happen in the world as we know, but either we have renegotiated a lot of our vendor debts so that's down. Either we have postponed principal payments under the-well, we're in the process of working with GECC, those payments will start toward the latter half of next year. But if our EBITDA continues growing on this trajectory, we feel that generally we should be able to generate enough to cover those principal payments and, you know, work on the August '04 hurdle.

I understand.

Steven, this is Paul. Just in broader terms, I think if you have an EBITDA to take a number, $100 million, and the interest is about $52 million.

Right.

Or so, Cap Ex is about $25 million, that's about $87 million, and then you have working capital, but I think working capital I know this quarter working capital went up but I think it will also come back down as we -- in the next couple of quarters so we assume that is going to sort of stay neutral, maybe one to $2 million more depending on how much top-line growth is there. Then you have, what Neil is saying. You have some principal payments that are due that will come out of what is left over from EBITDA, plus maybe some cash. And then you get to the 84 -- I mean, August 2004 when we have the next bond payment due. But if our EBITDA keeps ongoing up and the ratio of debt to EBITDA gets to where we want to get to that hurdle can also be covered.

I understand. Okay. I've got a better feel for the financing numbers. I guess my last question would be at some point, and I understand the basic premise, $100 million in EBITDA, you know, 63, 64, just expense, $25 million in Cap Ex, at some juncture you will have to increase the Cap Ex to support greater growth. High class problem, of course, but --

which means our top line will grow and EBITDA will grow. We have given it 85 to 100, we expect this is what we are working towards is each quarter we grow EBITDA and I hope economy picks up a little bit in 2003, somewhere it's going to pick up. We have 2 1/2 million or close to that customers. So as people start using the services little bit more, business started buying more. Those are sort. What we are expecting for next 12, 24 months. So EBITDA will go up as top line goes up. So then you don't mind having your working capital needing up with growth. Those are good problems to have.

Absolutely. Okay. Guys, thank you very much.

Okay.

And good quarter.

Thanks. We have time for one last question.

Our final question comes from Chris Green, a Private Investor. Please go ahead.

Thanks very much. Congratulations on a great, great quarter and admittedly very tough environment. Three part question, first is a bit nitpicky but there seems to be a trend of providing guidance coming into the quarter and given what's been happening in the market over the last two weeks I certainly have used this good news two weeks ago. So I was wondering is that something that you plan on doing moving forward or, no, just pure curiosity. Second question real quickly was just on elaborating on debt reduction moving forward. Is that something seen as the best way to generate EBITDA growth right now is to lower debt. Can you kind of elaborate on how you plan to doing that moving forward? I know you've touched on it already. And finally are you continuing to lower expenses, I know that you're lean and mean, but are there still opportunities to bring down expenses moving forward?

Chris, let me address the first part of your question in terms of guidance. One of the things I think you've noticed we have now accelerated our reporting. We have moved it up from where we had traditionally reported and that's the way I think we would like to sort of maintain this, so we can report to the investors earlier than we have traditionally done. So hopefully that would eliminate some of the need for some of the preguidance in terms of extended periods between the close of the quarter and when one reports. Obviously to the extent under the securities laws, we are aware of any material departures in terms of what guidance exists out there. We were obviously obliged to make an announcement but only in those circumstances would we do so.

Got it.

On the -- Chris on the third part, yes, we are lean and mean, but we are always looking for opportunities to lower expenses further. You know, some of the things we're doing, for example, as you you're work in the process of consolidating our customer service call centers from Europe from being in five to six different countries to being in one location in Glasgow, Scotland that has multi-lingual service representatives and it's much cheaper to run centrally in one place than others. We have other initiatives looking at moving customer services centers out of the U.S. and Canada to overseas locations. Those are pilot programs. If we continue to, you know, pare down and rationalize our network so the network fits to the business we have. So, you know, yes, we've made tremendous progress in lowering SG&A costs and network costs but we continue to expect that, you know, going forward.

Right.

You know, again, SG&A will go up as revenue increases, but we're resting on our laurels and not looking to lower costs.

Right.

Just on, I have to just say it's pretty exciting. I think what our management team and the different country GM's are doing, I think SG&A reductions coming in it has been quite impressive at least for me to see the changes we are making to make sure our foundation is strong by combining operations. That makes us more efficient, customer service gets better while the SG&A cost comes down and that's a major achievement than just cutting cost and that should continue. Just on the debt reduction side, your next question, let me just tell you a little approach and then you will see the results as they come. We are basically three times we -- we do which is EBITDA is one part, amount of debt is another part and then the future investments, you know, that may come as the cash infusion from investment. Those are the three pieces of the puzzle, and we try to stay opportunistic. Our good news is the bond prices have, as you know, have appreciated by three to 400% depending on what course you get which is a great deal for our stake holders. Which means the approach we had taken before buying on the open market is obviously with whatever cash we have, that doesn't make sense today.

Sure.

That's not to say we're excluding any of the options but just in general doesn't make sense. What we are trying to do is to see if we can, one, through negotiations with all the parties that we have debt from, can we negotiate something to reduce the face value of the debt. And second, if same thing we do with the senior secure debt folks, or equity infusion, equity investors. Work with them to see if we can raise capital from them. The issue for us has been I think there are opportunities to do that. But John and I have been just doing this to make sure terms and conditions under which we do those things do not stop or in any way inhibit our future growth as a consolidator opportunities to acquire companies, opportunities to, you know, financial flexibility. Those have been the things that sometime, you know, we need to have more patience to making sure we do deals that make sense for the company. If you got to wait for -- wait until the time is right, so be it. So that's the approach we have. It's opportunistic and deliberate.

Chris, I think the thing I would add is every quarter it gets better. As we put this kind of performance on the board and continue to grow our EBITDA, continue to reduce our debt, quite frankly, the kind of terms that we can get in the marketplace in terms of new financing improve. So we are not victims of delay, the passage of time has only given us more to deal with.

Congratulations again.

Thank you.

Thank you.

Ladies and gentlemen, that concludes Primus's second quarter financial results conference call. Replay information can be found on our website at WWW.Primustell.com. The replay will be available in about an hour and can be accessed to the end of August. In the meantime, time as Vic Grover said earlier management can be seen at the Calvin Brothers Communications conference in New York on September 5th. Thanks for joining us this evening and have a good night.