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Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File No. 0-29092

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

(Exact name of registrant as specified in its charter)

 

Delaware   54-1708481

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer Identification No.)

7901 Jones Branch Drive, Suite 900,

McLean, VA

  22102
(Address of principal executive offices)   (Zip Code)

(703) 902-2800

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated  filer    ¨    Non-accelerated filer  ¨    Smaller  reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨

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

 

Class

 

Outstanding as of July 31, 2010

Common Stock $0.001 par value   9,743,157

 

 

 


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

INDEX TO FORM 10-Q

 

 

               Page No.

Part I.

   FINANCIAL INFORMATION   
   Item 1.   

FINANCIAL STATEMENTS (UNAUDITED)

  
     

Consolidated Condensed Statements of Operations

   1
     

Consolidated Condensed Balance Sheets

   3
     

Consolidated Condensed Statements of Cash Flows

   4
     

Consolidated Condensed Statements of Comprehensive Income (Loss)

   5
     

Notes to Consolidated Condensed Financial Statements

   7
   Item 2.   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   35
   Item 3.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   52
   Item 4.   

CONTROLS AND PROCEDURES

   53

Part II.

  

OTHER INFORMATION

  
   Item 1.   

LEGAL PROCEEDINGS

   55
  

Item 1A.

  

RISK FACTORS

   55
  

Item 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

   71
  

Item 3.

  

DEFAULTS UPON SENIOR SECURITIES

   71
  

Item 4.

  

(REMOVED AND RESERVED)

   71
  

Item 5.

  

OTHER INFORMATION

   71
  

Item 6.

  

EXHIBITS

   71

SIGNATURES

   72

EXHIBIT INDEX

   73


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

    Successor           Predecessor  
    Three Months
Ended
June 30,
2010
          Three Months
Ended
June 30,
2009
 

NET REVENUE

  $ 205,408           $ 195,559   

OPERATING EXPENSES

        

Cost of revenue (exclusive of depreciation included below)

    131,704             125,175   

Selling, general and administrative

    50,213             49,726   

Depreciation and amortization

    19,316             6,231   

(Gain) loss on sale or disposal of assets

    (189          16   
                    

Total operating expenses

    201,044             181,148   
                    

INCOME (LOSS) FROM OPERATIONS

    4,364             14,411   

INTEREST EXPENSE

    (8,747          (3,359

(ACCRETION) AMORTIZATION ON DEBT PREMIUM/DISCOUNT, net

    (45          —     

GAIN (LOSS) FROM EARLY EXTINGUISHMENT OF DEBT

    164             —     

GAIN (LOSS) FROM CONTINGENT VALUE RIGHTS VALUATION

    (382          —     

INTEREST INCOME AND OTHER INCOME (EXPENSE), net

    154             161   

FOREIGN CURRENCY TRANSACTION GAIN (LOSS)

    (9,713          24,170   
                    

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE REORGANIZATION ITEMS AND INCOME TAXES

    (14,205          35,383   

REORGANIZATION ITEMS, net

    —               (8,656
                    

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

    (14,205          26,727   

INCOME TAX BENEFIT (EXPENSE)

    1,994             (1,110
                    

INCOME (LOSS) FROM CONTINUING OPERATIONS

    (12,211          25,617   

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax

    (1,126          (147

GAIN (LOSS) FROM SALE OF DISCONTINUED OPERATIONS, net of tax

    193             —     
                    

NET INCOME (LOSS)

    (13,144          25,470   

Less: Net (income) loss attributable to the noncontrolling interest

    106             (104
                    

NET INCOME (LOSS) ATTRIBUTABLE TO PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

  $ (13,038        $ 25,366   
                    

BASIC INCOME (LOSS) PER COMMON SHARE:

        

Income (loss) from continuing operations attributable to Primus Telecommunications Group, Incorporated

  $ (1.24        $ 0.18   

Income (loss) from discontinued operations

    (0.12          —     

Gain (loss) from sale of discontinued operations

    0.02             —     
                    

Net income (loss) attributable to Primus Telecommunications Group, Incorporated

  $ (1.34        $ 0.18   
                    

DILUTED INCOME (LOSS) PER COMMON SHARE:

        

Income (loss) from continuing operations attributable to Primus Telecommunications Group, Incorporated

  $ (1.24        $ 0.15   

Income (loss) from discontinued operations

    (0.12          —     

Gain (loss) from sale of discontinued operations

    0.02             —     
                    

Net income (loss) attributable to Primus Telecommunications Group, Incorporated

  $ (1.34        $ 0.15   
                    

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

        

Basic

    9,743             142,695   
                    

Diluted

    9,743             173,117   
                    

AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS OF PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

        

Income (loss) from continuing operations, net of tax

  $ (12,105        $ 25,513   

Income (loss) from discontinued operations

    (1,126          (147

Gain (loss) from sale of discontinued operations

    193             —     
                    

Net income (loss)

  $ (13,038        $ 25,366   
                    

See notes to consolidated financial statements.

 

1


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

    Successor           Predecessor  
    Six Months
Ended
June 30,
2010
          Six Months
Ended
June 30,
2009
 

NET REVENUE

  $ 409,801           $ 388,840   

OPERATING EXPENSES

        

Cost of revenue (exclusive of depreciation included below)

    261,713             253,830   

Selling, general and administrative

    103,105             94,656   

Depreciation and amortization

    38,300             12,307   

(Gain) loss on sale or disposal of assets

    (179          (43
                    

Total operating expenses

    402,939             360,750   
                    

INCOME (LOSS) FROM OPERATIONS

    6,862             28,090   

INTEREST EXPENSE

    (18,084          (14,134

(ACCRETION) AMORTIZATION ON DEBT PREMIUM/DISCOUNT, net

    (89          189   

GAIN (LOSS) FROM EARLY EXTINGUISHMENT OF DEBT

    164             —     

GAIN (LOSS) FROM CONTINGENT VALUE RIGHTS VALUATION

    (2,425          —     

INTEREST INCOME AND OTHER INCOME (EXPENSE), net

    382             388   

FOREIGN CURRENCY TRANSACTION GAIN (LOSS)

    (3,711          21,120   
                    

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE REORGANIZATION ITEMS AND INCOME TAXES

    (16,901          35,653   

REORGANIZATION ITEMS, net

    1             7,912   
                    

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

    (16,900          43,565   

INCOME TAX BENEFIT (EXPENSE)

    3,993             (3,906
                    

INCOME (LOSS) FROM CONTINUING OPERATIONS

    (12,907          39,659   

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax

    (1,293          (585

GAIN (LOSS) FROM SALE OF DISCONTINUED OPERATIONS, net of tax

    193             251   
                    

NET INCOME (LOSS)

    (14,007          39,325   

Less: Net (income) loss attributable to the noncontrolling interest

    (30          32   
                    

NET INCOME (LOSS) ATTRIBUTABLE TO PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

  $ (14,037        $ 39,357   
                    

BASIC INCOME (LOSS) PER COMMON SHARE:

        

Income (loss) from continuing operations attributable to Primus Telecommunications Group, Incorporated

  $ (1.34        $ 0.28   

Income (loss) from discontinued operations

    (0.13          —     

Gain (loss) from sale of discontinued operations

    0.02             —     
                    

Net income (loss) attributable to Primus Telecommunications Group, Incorporated

  $ (1.45        $ 0.28   
                    

DILUTED INCOME (LOSS) PER COMMON SHARE:

        

Income (loss) from continuing operations attributable to Primus Telecommunications Group, Incorporated

  $ (1.34        $ 0.23   

Income (loss) from discontinued operations

    (0.13          —     

Gain (loss) from sale of discontinued operations

    0.02             —     
                    

Net income (loss) attributable to Primus Telecommunications Group, Incorporated

  $ (1.45        $ 0.23   
                    

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

        

Basic

    9,694             142,695   
                    

Diluted

    9,694             173,117   
                    

AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS OF PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

        

Income (loss) from continuing operations, net of tax

  $ (12,937        $ 39,691   

Income (loss) from discontinued operations

    (1,293          (585

Gain (loss) from sale of discontinued operations

    193             251   
                    

Net income (loss)

  $ (14,037        $ 39,357   
                    

See notes to consolidated financial statements.

 

2


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except share amounts)

(unaudited)

 

 

    June 30,
2010
    December 31,
2009

ASSETS

   

CURRENT ASSETS:

   

Cash and cash equivalents

  $ 33,976      $ 42,538

Accounts receivable (net of allowance for doubtful accounts receivable of $4,862 and $8,163)

    83,662        89,342

Prepaid expenses and other current assets

    15,881        15,147
             

Total current assets

    133,519        147,027

RESTRICTED CASH

    10,160        10,438

PROPERTY AND EQUIPMENT—Net

    128,828        147,606

GOODWILL

    63,997        64,220

OTHER INTANGIBLE ASSETS—Net

    166,267        178,807

OTHER ASSETS

    9,844        10,816
             

TOTAL ASSETS

  $ 512,615      $ 558,914
             

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

   

CURRENT LIABILITIES:

   

Accounts payable

  $ 41,170      $ 45,819

Accrued interconnection costs

    32,362        37,561

Deferred revenue

    14,198        13,882

Accrued expenses and other current liabilities

    44,965        49,704

Accrued income taxes

    9,182        10,629

Accrued interest

    2,189        1,985

Current portion of long-term obligations

    1,163        4,274
             

Total current liabilities

    145,229        163,854

LONG-TERM OBLIGATIONS

    243,235        253,242

DEFERRED TAX LIABILITY

    31,177        36,052

OTHER LIABILITIES

    8,289        5,857
             

Total liabilities

    427,930        459,005

COMMITMENTS AND CONTINGENCIES (See Note 6.)

   

STOCKHOLDERS’ EQUITY:

   

Preferred stock, $0.001 par value—20,000,000 shares authorized; none issued or outstanding

    —          —  

Common stock, $0.001 par value—80,000,000 shares authorized; 9,743,157 and 9,600,000 shares issued and outstanding

    10        10

Additional paid-in capital

    85,393        85,533

Accumulated earnings (deficit)

    (7,305     6,732

Accumulated other comprehensive income (loss)

    2,984        4,064
             

Total stockholders’ equity before noncontrolling interest

    81,082        96,339
             

Noncontrolling interest

    3,603        3,570
             

Total stockholders’ equity

    84,685        99,909
             

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $ 512,615      $ 558,914
             

See notes to consolidated financial statements.

 

3


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

    Successor           Predecessor  
    Six Months
Ended
June 30,
2010
          Six Months
Ended
June 30,
2009
 

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net income (loss)

  $ (14,007        $ 39,325   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

        

Reorganization items, net

    (1          (8,297

Provision for doubtful accounts receivable

    3,449             5,140   

Stock compensation expense

    204             27   

Depreciation and amortization

    38,413             12,346   

(Gain) loss on sale or disposal of assets

    (372          (294

Accretion (amortization) of debt premium/discount, net

    89             (189

Change in fair value of Contingent Value Rights

    2,425             —     

Deferred income taxes

    (4,823          —     

(Gain) loss on early extinguishment of debt

    (164          —     

Unrealized foreign currency transaction (gain) loss on intercompany and foreign debt

    4,148             (20,702

Changes in assets and liabilities, net of acquisitions:

        

(Increase) decrease in accounts receivable

    (2,820          7,798   

(Increase) decrease in prepaid expenses and other current assets

    (1,114          461   

(Increase) decrease in other assets

    342             2,454   

Increase (decrease) in accounts payable

    (2,513          (12,794

Increase (decrease) in accrued interconnection costs

    (3,489          (5,361

Increase (decrease) in accrued expenses, deferred revenue, other current liabilities and other liabilities, net

    (1,984          1,313   

Increase (decrease) in accrued income taxes

    (1,407          2,113   

Increase (decrease) in accrued interest

    218             (1,600
                    

Net cash provided by operating activities before cash reorganization items

    16,594             21,740   

Cash effect of reorganization items

    (137          (4,595
                    

Net cash provided by operating activities

    16,457             17,145   
                    

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Purchase of property and equipment

    (10,737          (5,660

Sale of property and equipment and intangible assets

    530             179   

Cash from disposition of business, net of cash disposed

    —               232   

Cash used in business acquisitions, net of cash acquired

    —               (199

(Increase) decrease in restricted cash

    (132          (146
                    

Net cash used in investing activities

    (10,339          (5,594
                    

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Principal payments on long-term obligations

    (13,175          (8,292
                    

Net cash used in financing activities

    (13,175          (8,292
                    

EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

    (1,505          1,202   
                    

NET CHANGE IN CASH AND CASH EQUIVALENTS

    (8,562          4,461   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

    42,538             37,000   
                    

CASH AND CASH EQUIVALENTS, END OF PERIOD

  $ 33,976           $ 41,461   
                    

SUPPLEMENTAL CASH FLOW INFORMATION:

        

Cash paid for interest

  $ 17,879           $ 14,909   

Cash paid for taxes

  $ 899           $ 962   

Non-cash investing and financing activities:

        

Capital lease additions

  $ 51           $ 1,882   

See notes to consolidated financial statements.

 

4


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

     Successor           Predecessor  
     Three Months
Ended
June 30,
2010
          Three Months
Ended
June 30,
2009
 

NET INCOME (LOSS)

   $ (13,144        $ 25,470   
 

OTHER COMPREHENSIVE INCOME (LOSS)

         

Foreign currency translation adjustment

     (879          (8,426
                     
 

COMPREHENSIVE INCOME (LOSS)

     (14,023          17,044   

Less: Comprehensive (income) loss attributable to the noncontrolling interest

     213             (319
                     

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO
PRIMUS TELECOMMUNICATIONS GROUP,
INCORPORATED

   $ (13,810        $ 16,725   
                     

See notes to consolidated financial statements.

 

5


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

     Successor           Predecessor  
     Six Months
Ended
June 30,
2010
          Six Months
Ended
June 30,
2009
 

NET INCOME (LOSS)

   $ (14,007        $ 39,325   
 

OTHER COMPREHENSIVE INCOME (LOSS)

         

Foreign currency translation adjustment

     (1,077          (6,954
                     
 

COMPREHENSIVE INCOME (LOSS)

     (15,084          32,371   

Less: Comprehensive (income) loss attributable to the noncontrolling interest

     (33          (117
                     

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO
PRIMUS TELECOMMUNICATIONS GROUP,
INCORPORATED

   $ (15,117        $ 32,254   
                     

See notes to consolidated financial statements.

 

6


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated condensed financial statements of Primus Telecommunications Group, Incorporated and subsidiaries (the “Company” or “Primus”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and Securities and Exchange Commission (“SEC”) regulations. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such principles and regulations. In the opinion of management, the financial statements reflect all adjustments (all of which are of a normal and recurring nature), which are necessary to present fairly the financial position, results of operations, cash flows and comprehensive income (loss) for the interim periods. The results for the Company’s three months and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

As of July 1, 2009, the Company adopted fresh-start accounting in accordance with ASC No. 852, “Reorganizations”. The adoption of fresh-start accounting resulted in the Company becoming a new entity for financial reporting purposes. Accordingly, the financial statements on or prior to July 1, 2009 are not comparable with the financial statements for periods after July 1, 2009. The consolidated condensed statements of operations, cash flows, comprehensive income (loss) and any references to “Successor” or “Successor Company” for the three months and six months ended June 30, 2010, show the operations of the reorganized Company. References to “Predecessor” or “Predecessor Company” refer to the operations of the Company prior to July 1, 2009.

The results for all periods presented in this quarterly Form 10-Q reflect the activities of certain operations as discontinued operations (see Note 11“Discontinued Operations”).

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

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The consolidated financial statements include the Company’s accounts, its wholly-owned subsidiaries and all other subsidiaries over which the Company exerts control. The Company owns 45.6% of Globility Communications Corporations (“GCC”) through direct and indirect ownership structures. The results of GCC and its subsidiary are consolidated with the Company’s results based on guidance from ASC 810, “Consolidation.” All intercompany profits, transactions and balances have been eliminated in consolidation.

 

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Table of Contents

Effective January 1, 2009, the Company adopted ASC No. 810, “Consolidation.” This statement changed the presentation of outstanding noncontrolling interests in one or more subsidiaries or the deconsolidation of those subsidiaries. Reconciliations at the beginning and the end of the period of the total equity, equity attributable to the Company and equity attributable to the noncontrolling interest for Successor’s six months ended June 30, 2010 and Predecessor’s six months ended June 30, 2009 are as follows (in thousands):

 

    Successor  
                As of June 30, 2010        
                Primus Telecommunications Group, Incorporated
Shareholders
       
                Common Stock           Accumulated
Other
Comprehensive
Loss
       
    Total     Comprehensive
Income
    Shares   Amount   Additional
Paid-In
Capital
    Accumulated
Earnings
(Deficit)
      Noncontrolling
Interest
 

Balance as of January 1,
2010

  $ 99,909        9,600   $ 10   $ 85,533      $ 6,732      $ 4,064      $ 3,570   

Stock Option Compensation Expense

    204        —       —       204        —          —          —     

Common shares issued for restricted stock units

    (344     143     —       (344     —          —          —     

Comprehensive Income

      —       —       —          —          —          —     

Net income (loss)

    (14,007   $ (14,007   —       —       —          (14,037     —          30   
                           

Other comprehensive income (loss)

    (1,077     (1,077   —       —       —          —          (1,080     3   

Comprehensive Income

    (15,084   $ (15,084            
                                                         

Balance as of June 30, 2010

  $ 84,685        9,743   $ 10   $ 85,393      $ (7,305   $ 2,984      $ 3,603   
                                                   
    Predecessor  
                As of June 30, 2009        
                Primus Telecommunications Group, Incorporated
Shareholders
       
                Common Stock           Accumulated
Other
Comprehensive
Loss
       
    Total     Comprehensive
Income
    Shares   Amount   Additional
Paid-In
Capital
    Accumulated
Earnings
(Deficit)
      Noncontrolling
Interest
 

Balance as of January 1,
2009

  $ (458,725     142,695   $ 1,427   $ 718,956      $ (1,099,809   $ (82,113   $ 2,814   

Stock Option Compensation Expense

    27        —        —       —       27        —          —          —     

Comprehensive Income

               

Net income (loss)

    39,325        39,325      —       —       —          39,357        —          (32

Other comprehensive income (loss)

    (6,954     (6,954   —       —       —          —          (7,103     149   
                           

Comprehensive Income

    32,371      $ 32,371               
                                                         

Balance as of June 30, 2009

  $ (426,327     142,695   $ 1,427   $ 718,983      $ (1,060,452   $ (89,216   $ 2,931   
                                                   

Discontinued Operations—During the first quarter 2010, the Company initiated the sale of certain assets of its Spain and European agent serviced retail operations; and, therefore, has reported such operations as discontinued operations. In the second quarter of 2010 the Company completed the sale of certain assets of its Spanish operations.

In the first quarter 2009, the Company sold certain assets of its Japan retail operations. Therefore, the Company reported Japan retail operations as a discontinued operation. During the second quarter of 2008, the Company intended and had the authority to sell certain assets of its German retail operations, and therefore, reported this unit as a discontinued operation. However, buyers were not found; therefore the Company decided it would cease operations of the German retail business effective the first quarter of 2009.

 

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Reorganization Costs—In accordance with Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) No. 852, “Reorganizations,” for periods including and subsequent to the filing of the Chapter 11 petition through the bankruptcy emergence date of July 1, 2009, all revenues, expenses, realized gains and losses, and provisions for losses that result from the reorganization are reported separately as reorganization items, net, in the Consolidated Statements of Operations. Net cash used for reorganization items is disclosed separately in the Consolidated Statements of Cash Flows.

Presentation of Taxes Collected—The Company reports any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between the Company and a customer (including sales, use, value-added and some excise taxes) on a net basis (excluded from revenues).

Stock-Based Compensation—The Company uses a Black-Scholes option valuation model to determine the fair value of stock-based compensation under ASC No. 718, “CompensationStock Compensation,” consistent with that used for pro forma disclosures under ASC No. 718. The Black-Scholes model incorporates various assumptions including the expected term of awards, volatility of stock price, risk-free rates of return and dividend yield. The expected term of an award is no less than the option vesting period and is based on the Company’s historical experience. Expected volatility is based upon the historical volatility of the Company’s stock price. Because of the short trading history of the Successor Company’s common stock, the Company calculates the expected volatility by averaging the historical volatility of the stock price of the Successor Company’s common stock and historical volatility of a peer group in the telecommunication industry with similar market capitalization. The risk-free interest rate is approximated using rates available on U.S. Treasury securities with a remaining term similar to the option’s expected life. The Company uses a dividend yield of zero in the Black-Scholes option valuation model as it does not anticipate paying cash dividends in the foreseeable future.

Use of Estimates—The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of net revenue and expenses during the reporting period. Actual results may differ from these estimates. Significant estimates include allowance for doubtful accounts receivable, accrued interconnection cost disputes, the fair value of embedded derivatives, market assumptions used in estimating the fair values of certain assets and liabilities, the calculation used in determining the fair value of the Company’s stock options required by ASC No. 718 and various tax contingencies.

Under fresh-start accounting, the Company’s asset values were remeasured and allocated in conformity with ASC No. 805, “Business Combinations.” Deferred taxes are reported in conformity with ASC No. 740, “Income Taxes.”

Upon emergence from bankruptcy on July 1, 2009, the Company entered into an arrangement for issuing Contingent Value Rights (CVRs) that contained derivative features. The Company accounted for the arrangement in accordance with ASC No. 815, “Derivatives and Hedging.” The Company determined these CVRs to be derivative instruments to be accounted for as liabilities and marked to fair value at each balance sheet date. Upon issuance, the Company recorded CVRs as a liability in its balance sheet at their estimated fair value. Changes in their estimated fair value are recognized in earnings during the period of change.

Estimates of fair value represent the Company’s best estimates developed with the assistance of independent appraisals or various valuation techniques including Black-Scholes and, where the foregoing have not yet been completed or are not available, industry data and trends and by reference to relevant market rates and transactions. The estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the control of the Company. Accordingly, the Company cannot provide assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially. Any adjustments to the recorded fair values of these assets and liabilities may impact the amount of recorded goodwill.

 

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Property, Plant and Equipment—Property and equipment is recorded at cost less accumulated depreciation, which was provided on the straight-line method over the estimated useful lives of the assets. Cost included major expenditures for improvements and replacements which extend useful lives or increase capacity of the assets as well as expenditures necessary to place assets into readiness for use. Expenditures for maintenance and repairs were expensed as incurred. The estimated useful lives of property and equipment were as follows: network equipment—5 to 8 years, fiber optic and submarine cable—8 to 25 years, furniture and equipment—5 years, leasehold improvements and leased equipment—shorter of lease or useful life. In accordance with ASC No. 350, “Intangible—Goodwill and Other,” costs for internal use software that were incurred in the preliminary project stage and in the post-implementation stage were expensed as incurred. Costs incurred during the application development stage were capitalized and amortized over the estimated useful life of the software.

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by FASB and are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued accounting pronouncements that are not discussed will not have a material impact on consolidated financial position, results of operations, and cash flows, or do not apply to our operations.

Accounting Standards Update No. 2010-12 “Income Taxes (Topic 740): Accounting for Certain Tax effects of the 2010 Health Care Reform Acts” (“ASU No. 2010-12”)

In April 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-12, Income Taxes (Topic 740): Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts, which contains an SEC staff announcement addressing a potential accounting issue specific to companies with period ends between March 23 and March 30, 2010. On March 30, 2010, the President signed the Health Care and Education Reconciliation Act of 2010, which is a reconciliation bill that amends the Patient Protection and Affordable Care Act that was signed by the President on March 23, 2010 (collectively the “Acts”). Recently, questions have arisen about the effect, if any, that the different signing dates might have on the accounting for these two Acts. The FASB staff and the Office of the Chief Accountant have concluded that they would not object to a view that the two Acts should be considered together for accounting purposes. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

Accounting Standards Update No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU No. 2010-06”)

We adopted certain provisions of ASU No. 2010-06 in the first quarter of 2010. These provisions of ASU No. 2010-06 amended Subtopic 820-10, “Fair Value Measurements and Disclosures—Overall,” by requiring additional disclosures for transfers in and out of Level 1 and Level 2 fair value measurements, as well as requiring fair value measurement disclosures for each “class” of assets and liabilities, a subset of the captions disclosed in our Consolidated Balance Sheets. The adoption did not have a material impact on our financial statements or our disclosures, as we did not have any transfers between Level 1 and Level 2 fair value measurements and did not have material classes of assets and liabilities that required additional disclosure.

Certain provisions of ASU No. 2010-06 are effective for fiscal years beginning after December 15, 2010, which for us will be our 2011 first quarter. These provisions of ASU No. 2010-06, which amended Subtopic 820-10, will require us to present as separate line items all purchases, sales, issuances, and settlements of financial instruments valued using significant unobservable inputs (Level 3) in the reconciliation for fair value measurements, whereas currently these are presented in aggregate as one line item. Although this may change the appearance of our reconciliation, we do not believe the adoption will have a material impact on our financial statements or disclosures.

 

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Accounting Standards Update No. 2010-09 “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements” (“ASU No. 2010-09”)

We adopted ASU No. 2010-09 in the first quarter of 2010. ASU No. 2010-09 amended Subtopic 855-10, “Subsequent Events—Overall” by removing the requirement for a United States Securities and Exchange Commission (“SEC”) registrant to disclose a date, in both issued and revised financial statements, through which that filer had evaluated subsequent events. Accordingly, we removed the related disclosure from Footnote No. 1, “Basis of Presentation.” The adoption did not have a material impact on our financial statements.

Accounting Standards Update No. 2009-17 “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU No. 2009-17”)

We adopted ASU No. 2009-17 in the first quarter of 2010. The provisions of ASU No. 2009-17 replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. In addition, ASU No. 2009-17 amends the Consolidation Topic of the FASB ASC regarding when and how to determine, or re-determine, whether an entity is a VIE, which could require consolidation. Furthermore, ASU No. 2009-17 requires ongoing assessments of whether an entity is the primary beneficiary of a VIE. The provisions in this update also require additional disclosures about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements. The adoption of this standard did not have an impact on the Company’s financial position, results of operations, cash flows, or comprehensive income.

 

3. FRESH START ACCOUNTING

On July 1, 2009, the Company adopted fresh-start accounting in accordance with ASC No. 852, “Reorganizations.” Fresh-start accounting results in the Company becoming a new entity for financial reporting purposes. Accordingly, the Successor Company’s consolidated financial statements are not comparable to consolidated financial statements of the Predecessor Company.

Under ASC No. 852, the Successor Company must determine a value to be assigned to the equity of the emerging company as of the date of adoption of fresh-start accounting. To facilitate this calculation the Company first determined the enterprise value of the Successor Company. The valuation methods included (i) a discounted cash flow analysis, considering a range of the weighted average cost of capital between 14.0% and 16.0% and multiples of projected earnings of between 4.5 and 5.0 times for its terminal value, and (ii) a market multiples analysis. This analysis resulted in an estimated enterprise value of between $320 million and $360 million, and with the midpoint of $340 million chosen for purposes of applying fresh-start accounting.

The estimated enterprise value, and corresponding equity value, is highly dependent upon achieving the future financial results set forth in the financial projections included in the Company’s Plan, as filed with the Bankruptcy Court. These projections were limited by the information available to the Company as of the date of the preparation of the projections and reflected numerous assumptions concerning anticipated future performance and prevailing and anticipated market and economic conditions that were and continue to be beyond the Company’s control and that may not materialize. Projections are inherently subject to uncertainties and to a wide variety of significant business, economic and competitive risks. Therefore variations from the projections may be material.

Fresh-start accounting reflects the value of the Company as determined in the confirmed Plan. Under fresh-start accounting, the Company’s asset values are remeasured and allocated in conformity with ASC No. 805,

 

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“Business Combinations.” The excess of reorganization value over the fair value of tangible and identifiable intangible assets is recorded as goodwill in the accompanying consolidated balance sheet. Fresh-start accounting also requires that all liabilities, other than deferred taxes and pension and other postretirement benefit obligations, should be stated at fair value.

Estimates of fair value included in the Successor Company financial statements, in conformity with ASC No. 820, represent the Company’s best estimates and valuations developed with the assistance of independent appraisers and, where the foregoing have not yet been completed or are not available, represent industry data and trends by reference to relevant market rates and transactions. The foregoing estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the control of the Company. Accordingly, the Company cannot provide assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially. In accordance with ASC No. 805, the allocation of the reorganization value is subject to additional adjustment until the Company has completed its analysis, but not to exceed one year after emergence from bankruptcy. As of March 31, 2010 the Company had completed the valuation of its assets and liabilities and has completed its adoption of fresh-start accounting in accordance with ASC No. 852, “Reorganizations.”

The following fresh-start Consolidated Condensed Balance Sheet presents the financial effects on the Company of the implementation of the Plan and the adoption of fresh-start accounting.

 

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Table of Contents

The effects of the Plan and fresh-start reporting on the Company’s Consolidated Condensed Balance Sheet are as follows:

 

    Predecessor                  Successor
    July 1, 2009     Plan of
Reorganization
Adjustments
       Fresh-Start
Accounting
Adjustments
  July 1, 2009

ASSETS

               

CURRENT ASSETS:

               

Cash and cash equivalents

  $ 41,461      $ —              $ —          $ 41,461

Accounts receivable

    93,826        —                —            93,826

Prepaid expenses and other current assets

    16,955        —                —            16,955
                                     

Total current assets

    152,242        —                —            152,242

RESTRICTED CASH

    9,467        —                —            9,467

PROPERTY AND EQUIPMENT—Net

    117,840        —                32,298      d     150,138

GOODWILL

    35,351        —                25,947      d, h     61,298

OTHER INTANGIBLE ASSETS—Net

    482        —                184,318      d     184,800

OTHER ASSETS

    19,155        —                1,461      d, h     20,616
                                     

TOTAL ASSETS

  $ 334,537      $ —              $ 244,024        $ 578,561
                                     

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

               

CURRENT LIABILITIES:

               

Accounts payable

  $ 50,890      $ —              $ —          $ 50,890

Accrued interconnection costs

    38,778        —                —            38,778

Deferred revenue

    12,322        —                —            12,322

Accrued expenses and other current liabilities

    53,982        —                (1,767   d     52,215

Accrued income taxes

    20,986        —                —            20,986

Accrued interest

    19        —                —            19

Current portion of long-term obligations

    107,097        (91,100   g         —            15,997
                                     

Total current liabilities

    284,074        (91,100           (1,767       191,207

LONG-TERM OBLIGATIONS

    25,740        214,572      e, g         —            240,312

OTHER LIABILITIES

    —          2,557      b         57,162      h     59,719
                                     

Total liabilities not subject to compromise

    309,814        126,029              55,395          491,238

LIABILITIES SUBJECT TO COMPROMISE

    451,050        (451,050   a         —            —  
                                     

Total Liabilities

    760,864        (325,021           55,395          491,238
                                     

COMMITMENTS AND CONTINGENCIES

               
 

STOCKHOLDERS’ EQUITY (DEFICIT):

               

Primus Telecommunications Group, Incorporated Stockholders’ Equity (Deficit):

               

Predecessor Common stock, $0.01 par value—300,000,000 shares authorized; 142,695,390 shares issued and outstanding

    1,427        (1,427   c         —            —  

Successor Common stock, $0.001 par value—80,000,000 shares authorized; 9,600,000 shares issued or outstanding

    —          10      a         —            10

Predecessor Additional paid-in capital

    718,983        (1,129   c, b         (717,854   f     —  

Successor Additional paid-in capital

    —          84,382      a         —            84,382

Accumulated income (deficit)

    (1,060,452     243,185      a         817,267      d, f     —  

Accumulated other comprehensive income (loss)

    (89,216     —                89,216      f     —  
                                     

Total Primus Telecommunications Group, Incorporated stockholders’ income (deficit)

    (429,258     325,021              188,629          84,392
                                     

Noncontrolling interest

    2,931        —                —            2,931
                                     

Total stockholders’ income (deficit)

    (426,327     325,021              188,629          87,323
                                     

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

  $ 334,537      $ —              $ 244,024        $ 578,561
                                     

 

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Notes to Plan of Reorganization and fresh-start accounting adjustments:

 

  (a) This adjustment reflects the discharge of $451.1 million of liabilities subject to compromise (see “Liabilities Subject to Compromise” below), of which includes $123.5 million Senior Subordinated Secured Notes reclassed to long-term obligations, in accordance with the terms of the Plan and the issuance of 4.8 million shares of Successor Company common stock to the holders of each of the Senior Subordinated Secured Notes and the Holding Senior Notes.

 

  (b) To record the issuance of Contingent Value Rights to the holders of the Old Common Stock.

 

  (c) To record the cancellation of the Old Common Stock.

 

  (d) To record assets and liabilities at their estimated fair values per fresh-start accounting. These amounts include adjustments to the estimated fair values from what was originally reported in the quarter ending September 30, 2009.

 

  (e) To reclass Term Loan from current portion of long-term obligations to long-term obligations and record the issuance of the Senior Subordinated Secured Notes.

 

  (f) To reset additional paid-in capital, accumulated other comprehensive loss and accumulated deficit to zero.

 

  (g) To reclass long-term portion of the Term Loan to long-term obligations.

 

  (h) To record the deferred tax attributes related to fresh-start accounting.

In the first six months of 2010, the Company made no further fresh-start accounting adjustments to the fair value of its assets or liabilities.

 

4. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill reflects the excess of the reorganization value of the Successor over the fair value of tangible and identifiable intangible assets as determined upon the adoption of fresh-start accounting. The Company recorded goodwill of $61.3 million upon emergence from bankruptcy as well as intangible assets of $184.8 million, which includes $81.6 million of indefinite-lived trade names, $99.2 million of amortizable customer relationships, and $4.0 million of amortizable trade names.

The intangible assets not subject to amortization consisted of the following (in thousands):

 

     June 30,
2010
   December 31,
2009

Trade names

   $ 81,126    $ 81,372

Goodwill

   $ 63,997    $ 64,220

The Company allocated goodwill to all of its reporting units as part of fresh-start accounting, excluding the wholesale reporting unit which had nominal value relative to the total value of the Company. The changes in the carrying amount of trade names and goodwill by reporting unit for the six months ended June 30, 2010 are as follows (in thousands):

Goodwill

 

     United States    Canada    Australia     Europe     Brazil     Total  

Balance as of January 1, 2010

   $ 29,960    $ 30,285    $ 1,714      $ 2,217      $ 44      $ 64,220   

Effect of change in foreign currency exchange rates

     —        29      (70     (181     (1     (223
                                              

Balance as of June 30, 2010

   $ 29,960    $ 30,314    $ 1,644      $ 2,036      $ 43      $ 63,997   
                                              

 

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Trade Names

 

     United States    Canada    Australia    Europe     Brazil    Total  

Balance as of January 1, 2010

   $ 76,200    $ —      $ —      $ 5,172      $ —      $ 81,372   

Effect of change in foreign currency exchange rates

     —        —        —        (246     —        (246
                                            

Balance as of June 30, 2010

   $ 76,200    $ —      $ —      $ 4,926      $ —      $ 81,126   
                                            

The Company’s other intangible assets consist of trade names and customer relationships. Intangible assets subject to amortization consisted of the following (in thousands):

 

     June 30, 2010    December 31, 2009
     Gross
Carrying
Amount
   Accumulated
Amortization
    Net Book
Value
   Gross
Carrying
Amount
   Accumulated
Amortization
    Net Book
Value

Trade names

   $ 4,042    $ (415   $ 3,627    $ 4,057    $ (203   $ 3,854

Customer relationships

     106,779      (25,265     81,514      107,612      (14,032     93,580
                                           

Total

   $ 110,821    $ (25,680   $ 85,141    $ 111,669    $ (14,235   $ 97,434
                                           

Successor

Amortization expense for trade names and customer relationships for the three months and six months ended June 30, 2010 was $6.0 million and $11.8 million, respectively.

The Company expects amortization expense for trade names and customer relationships for the remainder of 2010, the years ended December 31, 2011, 2012, 2013, 2014, and thereafter to be approximately $11.5 million, $18.4 million, $13.0 million, $9.5 million, $7.1 million and $25.5 million, respectively.

Predecessor

Amortization expense for trade names and customer relationships for the three months and six months ended June 30, 2009 was $0.2 million and $0.5 million, respectively.

 

5. LONG-TERM OBLIGATIONS

Long-term obligations consisted of the following (in thousands):

 

     June 30,
2010
    December 31,
2009
 

Obligations under capital leases and other

   $ 2,238      $ 3,178   

Leased fiber capacity

     —          2,809   

Senior secured notes

     130,000        130,000   

Senior subordinated secured notes

     114,015        123,472   
                

Subtotal

     246,253        259,459   

Original issue discount on senior secured notes

     (1,855     (1,943
                

Subtotal

     244,398        257,516   

Less: Current portion of long-term obligations

     (1,163     (4,274
                

Total long-term obligations

   $ 243,235      $ 253,242   
                

 

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The following table reflects the contractual payments of principal and interest for the Company’s long-term obligations as of June 30, 2010 as follows:

 

Year Ending December 31,

   Capital Leases
and Other
    13% Senior
Secured Notes
    14  1/4% Senior
Subordinated
Secured Notes
    Total  

2010 (as of June 30, 2010)

   $ 731      $ 8,450      $ 8,124      $ 17,305   

2011

     1,262        16,900        16,247        34,409   

2012

     314        16,900        16,247        33,461   

2013

     86        16,900        122,139        139,125   

2014

     3        16,900        —          16,903   

Thereafter

     —          163,847        —          163,847   
                                

Total Minimum Principal & Interest Payments

     2,396        239,897        162,757        405,050   

Less: Amount Representing Interest

     (158     (109,897     (48,742     (158,797
                                

Total Long Term Obligations

   $ 2,238      $ 130,000      $ 114,015      $ 246,253   
                                

The foregoing table assumes that the 14 1/4% Senior Subordinated Secured Notes are refinanced before January 21, 2013. In the event the 14.25% Senior Secured Notes have not been refinanced in accordance with the terms of the 13% Senior Secured Notes indenture by January 21, 2013, then the Issuers will be required to redeem the full principal of the 13% Senior Secured Notes at a price equal to the then applicable optional redemption price on such date. In addition, the table assumes that the holders of 13% Senior Secured Notes do not accept any Excess Cash Flow Offer to purchase 13% Senior Secured Notes. In this regard, the Company must extend an offer annually to the holders of the 13% Senior Secured Notes to repurchase an applicable amount, (equal to 50% of Excess Cash Flow), of the 13% Senior Secured Notes at par, in the event the Company and certain subsidiaries have excess cash flow for any fiscal year commencing with the fiscal year ending December 31, 2010.

In May 2010, the Company paid $9.4 million in cash and retired $9.5 million in principal of its 14 1/4% Senior Subordinated Secured Notes. As a result, the Company recognized a $0.1 million gain from the early extinguishment of debt in its statement of operations for the three months ended June 30, 2010.

 

6. COMMITMENTS AND CONTINGENCIES

Future minimum lease payments under capital leases and other (“Vendor Financing”), purchase obligations and non-cancellable operating leases as of June 30, 2010 are as follows (in thousands):

 

Year Ending December 31,

   Capital Leases
and Other
    Purchase
Obligations
   Operating
Leases

2010 (as of June 30, 2010)

   $ 731      $ 14,518    $ 11,264

2011

     1,262        27,767      13,995

2012

     314        3,142      11,908

2013

     86        162      8,941

2014

     3        162      3,986

Thereafter

     —          54      10,973
                     

Total minimum lease payments

     2,396        45,805      61,067

Less: Amount representing interest

     (158     —        —  
                     
   $ 2,238      $ 45,805    $ 61,067
                     

The Company has contractual obligations to utilize an external vendor for certain customer support functions and to utilize network facilities from certain carriers with terms greater than one year. Generally, the Company does not purchase or commit to purchase quantities in excess of normal usage or amounts that cannot be used within the contract term or at rates below or above market value.

Successor

Purchases made under purchase commitments were $8.3 million and $15.3 million, respectively, for the three months and six months ended June 30, 2010.

 

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Rent expense under operating leases was $3.9 million and $7.8 million, respectively, for the three months and six months ended June 30, 2010.

Predecessor

Purchases made under purchase commitments were $6.5 million and $12.8 million, respectively, for the three months and six months ended June 30, 2009.

Rent expense under operating leases was $3.4 million and $6.7 million for the three months and six months ended June 30, 2009.

Litigation

Group and its subsidiaries are subject to claims, legal proceedings and potential regulatory actions that arise in the ordinary course of its business. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be decided unfavorably. The Company believes that any aggregate liability that may result from the resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

 

7. SHARE-BASED COMPENSATION

Successor

The Management Compensation Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, and other stock-based or cash-based performance awards (collectively, “awards”).

Restricted Stock Units (RSU)

For the three months and six months ended June 30, 2010, the Company recognized $0.1 million and $0.2 million, respectively, of stock compensation expense related to the RSU.

Stock Options

A summary of the Company’s stock option activity during the six months ended June 30, 2010 is as follows:

 

     Six Months Ended
June 30, 2010
     Shares     Weighted
Average
Exercise
Price

Outstanding—December 31, 2009

   478,199      $ 12.22

Granted

   —        $ —  

Exercised

   —        $ —  

Forfeitures

   (93,191   $ 12.22
        

Outstanding—June 30, 2010

   385,008      $ 12.22
        

Eligible for exercise

   133,464      $ 12.22

 

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The following table summarizes information about the Company’s stock options outstanding at June 30, 2010:

 

    Options Outstanding   Options Exercisable

Range of Option Prices

  Total
Outstanding
  Weighted
Average
Remaining
Life in
Years
  Weighted
Average
Exercise
Price
  Intrinsic
Value
  Total
Exercisable
  Weighted
Average
Remaining
Life in
Years
  Weighted
Average
Exercise
Price
  Intrinsic
Value

$12.22

  385,008   9.00   $ 12.22   $ —     133,464   9.00   $ 12.22   $ —  
                                       

For Emergence Performance Option and RSU compensation expense calculation, the Company assumed that it will meet the specified Adjusted EBITDA Target in 2010; therefore, according to the Plan, the remaining options and RSUs will vest in 2010.

As of June 30, 2010, the Company had 0.4 million unvested awards outstanding of which $0.2 million of compensation expense is expected to be recognized over the weighted average remaining period of 0.52 years. The number of unvested awards expected to vest is 0.4 million shares, with a weighted average remaining life of 9.00 years, a weighted average exercise price of $12.22, and an intrinsic value of $0.

Predecessor

Under the Plan of Reorganization, all stock options granted under the Predecessor’s Equity Incentive Plan were cancelled as of July 1, 2009. The Predecessor Company recorded $11 thousand and $27 thousand stock-based compensation expenses for the three months and six months ended June 30, 2009, respectively.

 

8. INCOME TAXES

The Company conducts business globally, and as a result, the Company or one or more of its subsidiaries files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world.

The following table summarizes the open tax years for each major jurisdiction:

 

Jurisdiction

  

Open Tax Years                                

United States Federal

   2000, 2002 – 2009

Australia

   2002 – 2009

Canada

   2003 – 2009

United Kingdom

   2004 – 2009

Netherlands

   2007 – 2009

The Company is currently under examination in Canada and certain other non-material foreign tax jurisdictions not listed above, none of which are individually material.

The Company adopted the uncertain tax position related provisions of ASC No. 740, “Income Taxes,” on January 1, 2007. It is expected that the amount of unrecognized tax benefits, reflected in the Company’s financial statements, will change in the next twelve months; however, the Company does not expect the change to have a significant impact on the results of operations or the financial position of the Company. During the three months ended June 30, 2010, the Company recorded $.4 million of gross unrecognized tax benefit and $0.1 million of unrecognized tax benefit which impacted the rate including $0.1 of penalties and interest. As of June 30, 2010, the gross unrecognized tax benefit on the balance sheet was $89.9 million.

Pursuant to Section 382 of the Internal Revenue Code, the Company believes that it underwent an ownership change for tax purposes (i.e., a more than 50% change in stock ownership) on the July 1, 2009

 

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emergence date. As a result, the use of any of the Company’s federal and state net operating loss carryforwards and tax credits generated prior to the ownership change that are not reduced will be subject to an annual limitation of approximately $1.7 million. The annual limitation will be determined based upon an Internal Revenue Code section that allows corporations emerging from bankruptcy to determine their section 382 limitation based upon the post emergence stock value. The Company has prepared its financial statements assuming the annual limitation will apply. However, Section 382 provides that a taxpayer emerging from bankruptcy can elect out of the annual limitation. If the Company elects not to apply the limitation, there are adverse consequences if an ownership change occurs before July 1, 2011. The election is not required to be made until the extended due date of the 2009 return, which is September 15, 2010. The company has reviewed its 13-G filings, as filed with the United States Securities Exchange Commission, subsequent to emergence from bankruptcy and believes that a change in ownership has not occurred during this period of July 1, 2009 to June 30, 2010.

 

9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVES

In 2008 and 2009, the Company adopted the provisions of ASC No. 820, “Fair Value Measurements.” The valuation techniques required by ASC No. 820 are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1: Quoted prices for identical instruments in active markets.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3: Significant inputs to the valuation model are unobservable.

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to relatively short periods to maturity. The estimated aggregate fair value of the Successor Company’s 13% Senior Secured Notes and 14 1/4% Senior Subordinated Secured Notes, based on quoted market prices, was $239.8 million and $244.7 million at June 30, 2010 and December 31, 2009, respectively.

See table below for summary of the Company’s financial instruments accounted for at fair value on a recurring basis:

 

     June 30,
2010
   Fair Value as of June 30, 2010, using:
        Quoted prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)

Liabilities:

           

Contingent Value Rights (CVR)

   $ 7,787    —      $ 7,787    —  
                       

Total

   $ 7,787    —      $ 7,787    —  
                       

The CVRs are marked to fair value at each balance sheet date. The change in value is reflected in our Statements of Operations. Estimates of fair value represent the Company’s best estimates based on a Black-Scholes pricing model. During the three months and six months ended June 30, 2010, the Company recognized $0.4 million and $2.4 million, respectively, of expense as a result of marking the CVRs to their fair value.

 

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10. OPERATING SEGMENT AND RELATED INFORMATION

The Company has six reportable operating segments based on management’s organization of the enterprise into geographic areas—United States, Canada, Europe, Australia, Brazil and the wholesale business from the United States and Europe managed as a separate global segment. The Company evaluates the performance of its segments and allocates resources to them based upon net revenue and income (loss) from operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Corporate assets, capital expenditures and property and equipment-net are included in the United States segment, while corporate expenses are presented separately in Income (loss) from operations. The wholesale business’ assets are indistinguishable from the respective geographic segments. Therefore, any reporting related to the wholesale business for assets, capital expenditures or other balance sheet items is impractical.

Summary information with respect to the Company’s operating segments is as follows (in thousands):

 

     Successor          Predecessor  
     Three Months
Ended
June 30,
2010
         Three Months
Ended
June 30,
2009
 

Net Revenue by Segment

        

United States

   $ 12,536          $ 16,918   

Canada

     58,024            55,061   

Europe

     11,119            11,848   

Australia

     67,487            58,475   

Wholesale

     49,192            50,279   

Brazil

     7,050            2,978   
                    

Total

   $ 205,408          $ 195,559   
                    

Provision for Doubtful Accounts Receivable

        

United States

   $ 577          $ 863   

Canada

     624            541   

Europe

     127            76   

Australia

     625            1,120   

Wholesale

     (499         243   

Brazil

     110            50   
                    

Total

   $ 1,564          $ 2,893   
                    

Income (Loss) from Operations

        

United States

   $ 758          $ 2,921   

Canada

     3,041            9,310   

Europe

     (287         145   

Australia

     1,402            5,862   

Wholesale

     1,794            678   

Brazil

     179            95   
                    

Total From Operating Segments

     6,887            19,011   

Corporate

     (2,523         (4,600
                    

Total

   $ 4,364          $ 14,411   
                    

Capital Expenditures

        

United States

   $ 427          $ 18   

Canada

     2,723            1,179   

Europe

     201            37   

Australia

     2,037            1,488   

Brazil

     436            152   
                    

Total

   $ 5,824          $ 2,874   
                    

 

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     Successor          Predecessor  
     Six Months
Ended
June 30,
2010
         Six Months
Ended
June 30,
2009
 

Net Revenue by Segment

        

United States

   $ 26,112          $ 35,013   

Canada

     115,500            108,306   

Europe

     22,785            24,291   

Australia

     137,385            110,502   

Wholesale

     95,699            104,482   

Brazil

     12,320            6,246   
                    

Total

   $ 409,801          $ 388,840   
                    

Provision for Doubtful Accounts Receivable

        

United States

   $ 1,102          $ 1,455   

Canada

     1,468            1,107   

Europe

     229            165   

Australia

     1,362            1,737   

Wholesale

     (989         516   

Brazil

     193            115   
                    

Total

   $ 3,365          $ 5,095   
                    

Income (Loss) from Operations

        

United States

   $ (113       $ 4,304   

Canada

     5,983            18,738   

Europe

     (737         (8

Australia

     5,196            10,123   

Wholesale

     2,645            1,372   

Brazil

     501            230   
                    

Total From Operating Segments

     13,475            34,759   

Corporate

     (6,613         (6,669
                    

Total

   $ 6,862          $ 28,090   
                    

Capital Expenditures

        

United States

   $ 618          $ 74   

Canada

     4,948            3,127   

Europe

     284            174   

Australia

     4,311            1,997   

Brazil

     576            288   
                    

Total

   $ 10,737          $ 5,660   
                    

The above capital expenditures exclude assets acquired under terms of capital lease and vendor financing obligations.

 

     June 30,
2010
   December 31,
2009

Property and Equipment—Net

     

United States

   $ 9,077    $ 10,760

Canada

     55,614      58,927

Europe

     3,116      4,955

Australia

     59,305      71,682

Brazil

     1,716      1,282
             

Total

   $ 128,828    $ 147,606
             

 

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Table of Contents
     June 30,
2010
   December 31,
2009

Assets

     

United States

   $ 126,782    $ 133,276

Canada

     179,732      194,600

Europe

     74,581      84,587

Australia

     122,007      138,988

Brazil

     9,513      7,463
             

Total

   $ 512,615    $ 558,914
             

 

11. DISCONTINUED OPERATIONS

In the second quarter 2010, the Company sold certain assets of its Spain retail operations. The sale price was $0.3 million. The Company recorded a $0.2 million gain from sale of these retail operations during the second quarter 2010.

In the first quarter of 2010, the Company initiated the sale of certain assets of its retail operations in Spain, which was completed in the second quarter 2010, and the sale of its European agent serviced retail operations.

In the first quarter 2009, the Company sold certain assets of its Japan retail operations. The sale price was $0.4 million (40 million Japanese yen), which included $0.2 million (20 million Japanese yen) in cash and $0.2 million (20 million Japanese yen) receivable. The Company recorded a $0.3 million gain from sale of assets.

In the second quarter 2008, the Company determined it would sell its German retail operations. However, buyers were not found; therefore the Company decided to cease operations of the German retail business during the first quarter of 2009.

As a result of these events, the Company’s consolidated financial statements for all periods presented reflect the Spain and European agent serviced retail operations, the Japan retail operations and German retail operations as discontinued operations. Accordingly, revenue, costs, and expenses of the discontinued operations have been excluded from the respective captions in the consolidated statements of operations. The net operating results of the discontinued operations have been reported, net of applicable income taxes as loss from discontinued operations.

Summarized operating results of the discontinued operations are as follows (in thousands):

 

     Successor          Predecessor  
     Three Months
Ended
June 30,
2010
         Three Months
Ended
June 30,
2009
 

Net revenue

   $ 823          $ 1,189   

Operating expenses

     1,923            1,723   
                    

Loss from operations

     (1,100         (534

Interest expense

     —              —     

Interest income and other income

     235           2  

Foreign currency transaction gain (loss)

     (260         —     

Reorganization items, net

     —              385   
                    

Income (loss) before income tax

     (1,125         (147

Income tax expense

     (1 )         —     
                    

Loss from discontinued operations

   $ (1,126       $ (147
                    

 

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     Successor          Predecessor  
     Six Months
Ended
June 30,
2010
         Six Months
Ended
June 30,
2009
 

Net revenue

   $ 2,211          $ 2,676   

Operating expenses

     3,440            3,670   
                    

Loss from operations

     (1,229         (994

Interest expense

     —              (1

Interest income and other income

     218            26   

Foreign currency transaction gain (loss)

     (280         —     

Reorganization items, net

     —              385   
                    

Income (loss) before income tax

     (1,291         (584

Income tax expense

     (2         (1
                    

Loss from discontinued operations

   $ (1,293       $ (585
                    

 

12. BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE

Basic income (loss) per common share is calculated by dividing income (loss) attributable to common stockholders by the weighted average common shares outstanding during the period. Diluted income per common share adjusts basic income per common share for the effects of potentially dilutive common share equivalents.

Successor

Potentially dilutive common shares for Successor include the dilutive effects of common shares issuable through stock options, restricted stock units, stock warrants and contingent value rights using the treasury stock method.

For Successor’s three months and six months ended June 30, 2010, the following could potentially dilute income per common share in the future but was excluded from the calculation of diluted income per common share due to its antidilutive effect:

 

   

0.6 million shares issuable upon exercise of stock options and RSUs,

 

   

4.5 million shares issuable upon exercise of stock warrants, and

 

   

2.7 million shares issuable upon exercise of CVRs.

Predecessor

Potentially dilutive common shares for Predecessor primarily included the dilutive effects of common shares issuable through stock options computed using the treasury stock method and the dilutive effects of shares issuable upon conversion of its 3 3/4% Convertible Senior Notes.

 

   

7.8 million shares issuable under the exercise of stock options, and

For the three months and six months ended June 30, 2009, the following could potentially dilute income per common share in the future but were excluded from the calculation of diluted income per common share due to their antidilutive effect:

 

   

8.0 million shares issuable upon exercise of stock options,

 

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A reconciliation of basic income per common share to diluted income per common share is below (in thousands, except per share amounts):

 

    Three Months Ended     Six Months Ended  
    June 30, 2010
Successor
        June 30, 2009
Predecessor
    June 30, 2010
Successor
        June 30, 2009
Predecessor
 

Income (loss) from continuing operations

  $ (12,105       $ 25,513      $ (12,937       $ 39,691   

Income (loss) from discontinuing operations, net of tax

    (1,126         (147     (1,293         (585

Gain (loss) from sale of discontinued operations, net of tax

    193            —          193            251   
                                       

Net income (loss) attributable to common stockholders—basic

    (13,038         25,366        (14,037         39,357   

Adjustment for interest expense on Step Up Convertible Subordinated Debentures

    —              —          —              210   

Adjustment for interest expense on Step Up Convertible Subordinated Debentures

    —              —          —              332   
                                       

Income (loss) attributable to common stockholders—diluted

  $ (13,038       $ 25,366      $ (14,037       $ 39,899   
                                       

Weighted average common shares outstanding—basic

    9,743            142,695        9,694            142,695   

5% Exchangeable Senior Notes

    —              19,474        —              19,474   

Step Up Convertible Subordinated Debentures

    —              7,280        —              7,280   

 33/4 % Convertible Senior Notes

    —              3,668        —              3,668   
                                       

Weighted average common shares outstanding—diluted

    9,743            173,117        9,694            173,117   
                                       

Basic income (loss) per common share:

               

Income (loss) from continuing operations attributable to common stockholders

  $ (1.24       $ 0.18      $ (1.34       $ 0.28   

Income (loss) from discontinued operations

    (0.12         —          (0.13         —     

Gain (loss) from sale of discontinued operations

    0.02            —          0.02            —     
                                       

Net income (loss) attributable to common stockholders

  $ (1.34       $ 0.18      $ (1.45       $ 0.28   
                                       

Diluted income (loss) per common share:

               

Income (loss) from continuing operations attributable to common stockholders

  $ (1.24       $ 0.15      $ (1.34       $ 0.23   

Income (loss) from discontinued operations

    (0.12         —          (0.13         —     

Gain (loss) from sale of discontinued operations

    0.02            —          0.02            —     
                                       

Net income (loss) attributable to common stockholders

  $ (1.34       $ 0.15      $ (1.45       $ 0.23   
                                       

 

13. REORGANIZATION ITEMS, NET

Reorganization items, net, represents amounts incurred as a direct result of the bankruptcy filings and is presented separately in the Consolidated Condensed Statements of Operations. The following describes the components of reorganization items, net (in thousands):

 

    Three Months Ended     Six Months Ended  
    June 30, 2010
Successor
      June 30, 2009
Predecessor
    June 30, 2010
Successor
      June 30, 2009
Predecessor
 

Professional Fees

  $ —         $ (8,271   $ 1       $ (12,067

Debt Premium, Discount and Deferred Financing Costs Write-off

    —           —          —           (91 )

Reversal of Future Interest Payments Recorded as Long Term Obligations

    —           —          —           20,453   

Interest Income

    —           —          —           2   
                                   

Reorganization Items, net

  $ —         $ (8,271   $ 1       $ 8,297   
                                   

 

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Predecessor

Payments for the six months ended June 30, 2009 for professional fees and retainers were $4.6 million. In accordance with ASC No. 852, the Company ceased amortization of debt premiums, discounts and deferred financing costs related to the liabilities subject to compromise on the Petition Date. The $3.5 million of unamortized debt premiums and discounts has been written off and recorded as a gain, offset by the expensing of $3.6 million of unamortized deferred financing costs, as an adjustment to the net carrying value of the pre-petition debt. Long term debt was further reduced by $20.5 million of future interest payable that previously had been recorded as a portion of long-term obligations for the 14 1/4% Senior Subordinated Secured Notes and 5% Exchangeable Senior Notes as the issuance of these notes had been deemed troubled debt restructurings.

 

14. GUARANTOR/NON-GUARANTOR CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Primus Telecommunications IHC, Inc.’s 14 1/4% Senior Subordinated Secured Notes were fully, unconditionally, jointly and severally guaranteed by Group on a senior basis and by Holding, Primus Telecommunications, Inc., TresCom International Inc., Least Cost Routing, Inc., TresCom U.S.A., Inc., iPRIMUS USA, Inc., and iPRIMUS.com, Inc., all 100% indirectly owned subsidiaries of Group (collectively, the “Other Guarantors”). Group has a 100% ownership in Holding and no direct subsidiaries other than Holding.

On the Effective Date, IHC, each of the Grantors party and U.S. Bank National Association, as collateral agent, entered into a First Amendment to the Collateral Agreement (the “Amended Collateral Agreement”), to provide that the obligations of both IHC and Primus Telecommunications International, Inc. (“PTII”), an indirect wholly owned subsidiary of Group, were secured by PTII’s assets, including 65% of the voting stock of foreign subsidiaries owned by PTII. In addition, on the Effective Date, Group and Holding entered into an Assumption Agreement in favor of U.S. Bank National Association, as collateral agent, pursuant to which each of Group and Holding became party to the Amended Collateral Agreement. As a result, Group and Holding’s existing guarantees of the 14 1/4% Senior Subordinated Secured Notes are secured by a lien on the property of Group and Holding, respectively.

Accordingly, the following consolidating condensed financial information for the three and six months ended June 30, 2010 for Successor and three months and six months ended June 30, 2009 for Predecessor are included for (a) Group on a stand-alone basis; (b) Primus Telecommunications IHC, Inc. (IHC) on a stand-alone basis; (c) the Other Guarantor subsidiaries on a combined basis; (d) Group’s indirect non-guarantor subsidiaries on a combined basis and (e) Group on a consolidated basis. The plan and fresh-start accounting adjustments reflected in Predecessor’s Consolidated Condensed Statements of Operations on July 1, 2009 are not presented separately in this presentation.

Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries eliminate investments in subsidiaries, intercompany balances and intercompany transactions.

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

(in thousands)

 

    Successor  
    For the Three Months Ended June 30, 2010  
    PTGI     IHC     Guarantor
Subsidiaries
    Non Guarantor
Subsidiaries
    Eliminations   Consolidated  

NET REVENUE

  $ —        $ —        $ 24,282      $ 181,126      $ —     $ 205,408   

OPERATING EXPENSES

           

Cost of revenue (exclusive of depreciation included below)

    —          —          17,853        113,851        —       131,704   

Selling, general and administrative

    1,407        1        5,651        43,154        —       50,213   

Depreciation and amortization

    —          —          1,264        18,052        —       19,316   

(Gain) loss on sale or disposal of assets

    —          —          (196     7        —       (189
                                             

Total operating expenses

    1,407        1        24,572        175,064        —       201,044   
                                             

INCOME (LOSS) FROM OPERATIONS

    (1,407     (1     (290     6,062        —       4,364   

INTEREST EXPENSE

    —          (4,187     (2,933     (1,627     —       (8,747

ACCRETION ON DEBT PREMIUM (DISCOUNT)

    —          —          (29     (16     —       (45

GAIN ON EARLY EXTINGUISHMENT OR RESTRUCTURING OF DEBT

    —          91       73        —          —       164   

GAIN (LOSS) FROM CONTINGENT VALUE RIGHTS VALUATION

    (382     —          —          —          —       (382

INTEREST AND OTHER INCOME

    —          —          152        2        —       154   

FOREIGN CURRENCY TRANSACTION GAIN (LOSS)

    —          (1,136     19        (8,596     —       (9,713

INTERCOMPANY INTEREST

    (263     3,955        (2,490     (1,202     —       —     

MANAGEMENT FEE

    —          —          949        (949     —       —     

ROYALTY FEE

    —          3,254        —          (3,254     —       —     
                                             

INCOME (LOSS) BEFORE REORGANIZATION ITEMS, INCOME TAXES AND EQUITY IN NET INCOME OF SUBSIDIARIES

    (2,052     1,976        (4,549     (9,580     —       (14,205

REORGANIZATION ITEMS—NET

    —          —          —          —          —       —     
                                             

INCOME (LOSS) BEFORE INCOME TAX AND EQUITY IN NET INCOME OF SUBSIDIARIES

    (2,052     1,976        (4,549     (9,580     —       (14,205

INCOME TAX BENEFIT (EXPENSE)

    —          (238     (1     2,233        —       1,994   
                                             

INCOME (LOSS) BEFORE EQUITY IN NET INCOME OF SUBSIDIARIES

    (2,052     1,738        (4,550     (7,347     —       (12,211

EQUITY IN NET INCOME (LOSS) OF SUBSIDIARIES

    (10,986     —          (6,436     —          17,422     —     
                                             

INCOME (LOSS) FROM CONTINUING OPERATIONS

    (13,038     1,738        (10,986     (7,347     17,422     (12,211

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax

    —          —          —          (1,126     —       (1,126

GAIN (LOSS) FROM SALE OF DISCONTINUED OPERATIONS, net of tax

    —          —          —          193        —       193   
                                             

NET INCOME (LOSS)

   
(13,038

    1,738        (10,986     (8,280     17,422     (13,144

Less: Net (income) loss attributable to the noncontrolling interest

    —          —          —          106        —       106   
                                             

NET INCOME (LOSS) ATTRIBUTABLE TO

           

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

  $ (13,038   $ 1,738      $ (10,986   $ (8,174   $ 17,422   $ (13,038
                                             

AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS OF PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

           

Income (loss) from continuing operations, net of tax

  $ (13,038   $ 1,738      $ (10,986   $ (7,241   $ 17,422   $ (12,105

Income (loss) from discontinued operations

    —          —          —          (1,126     —       (1,126

Gain (loss) from sale of discontinued operations

    —          —          —          193        —       193   
                                             

Net income (loss)

  $ (13,038   $ 1,738      $ (10,986   $ (8,174   $ 17,422   $ (13,038
                                             

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

(in thousands)

 

    Predecessor  
    For the Three Month Ended June 30, 2009  
    PTGI     IHC     Guarantor
Subsidiaries
    Non  Guarantor
Subsidiaries
    Eliminations     Consolidated  

NET REVENUE

  $ —        $ —        $ 30,470      $ 165,089      $ —        $ 195,559   

OPERATING EXPENSES

           

Cost of revenue (exclusive of depreciation included below)

    —          —          23,291        101,884        —          125,175   

Selling, general and administrative

    3,599        4        6,015        40,108        —          49,726   

Depreciation and amortization

    —          —          638        5,593        —          6,231   

(Gain) loss on sale or disposal of assets

    —          —          (119 )     135        —          16   
                                               

Total operating expenses

    3,599        4        29,825        147,720        —          181,148   
                                               

INCOME (LOSS) FROM OPERATIONS

    (3,599 )     (4 )     645        17,369        —          14,411   

INTEREST EXPENSE

    —          —          (2,242 )     (1,117 )     —          (3,359 )

INTEREST AND OTHER INCOME

    —          —          3        158        —          161   

FOREIGN CURRENCY TRANSACTION GAIN (LOSS)

    2,699        9,405        (565 )     12,631        —          24,170   

INTERCOMPANY INTEREST

    (2,091 )     7,340        (4,397 )     (852 )     —          —     

MANAGEMENT FEE

    —          —          3,023        (3,023 )     —          —     

ROYALTY FEE

    —          2,768        —          (2,768 )     —          —     
                                               

INCOME (LOSS) BEFORE REORGANIZATION ITEMS, INCOME TAXES AND EQUITY IN NET INCOME OF SUBSIDIARIES

    (2,991 )     19,509        (3,533 )     22,398        —          35,383   

REORGANIZATION ITEMS—NET

    (6,580 )     (1 )     (1,691 )     (384     —          (8,656 )
                                               

INCOME (LOSS) BEFORE INCOME TAX AND EQUITY IN NET INCOME OF SUBSIDIARIES

    (9,571 )     19,508        (5,224 )     22,014        —          26,727   

INCOME TAX EXPENSE

    —          (197 )     617        (1,530 )     —          (1,110 )
                                               

INCOME (LOSS) BEFORE EQUITY IN NET INCOME OF SUBSIDIARIES

    (9,571 )     19,311        (4,607 )     20,484        —          25,617   

EQUITY IN NET INCOME OF SUBSIDIARIES

    34,937        —          41,885        —          (76,822 )     —     
                                               

INCOME FROM CONTINUING OPERATIONS

    25,366        19,311        37,278        20,484        (76,822 )     25,617   

LOSS FROM DISCONTINUED OPERATIONS, net of tax

    —          —          —          (147 )     —          (147 )
                                               

NET INCOME

    25,366        19,311        37,278        20,337        (76,822 )     25,470   

Less: Net income attributable to the noncontrolling interest

    —          —          —          (104 )     —          (104 )
                                               

NET INCOME ATTRIBUTABLE TO PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

  $ 25,366      $ 19,311      $ 37,278      $ 20,233      $ (76,822 )   $ 25,366   
                                               

AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS OF PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

           

Income from continuing operations, net of tax

  $ 25,366      $ 19,311      $ 37,278      $ 20,380      $ (76,822 )   $ 25,513   

Loss from discontinued operations

    —          —          —          (147 )     —          (147 )
                                               

Net income

  $ 25,366      $ 19,311      $ 37,278      $ 20,233      $ (76,822 )   $ 25,366   
                                               

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

(in thousands)

 

    Successor  
    For the Six Months Ended June 30, 2010  
    PTGI     IHC     Guarantor
Subsidiaries
    Non Guarantor
Subsidiaries
    Eliminations   Consolidated  

NET REVENUE

  $ —        $ —        $ 46,318      $ 363,483      $ —     $ 409,801   

OPERATING EXPENSES

           

Cost of revenue (exclusive of depreciation included below)

    —          —          34,762        226,951        —       261,713   

Selling, general and administrative

    2,267        6        14,736        86,096        —       103,105   

Depreciation and amortization

    —          —          2,798        35,502        —       38,300   

(Gain) loss on sale or disposal of assets

    —          —          (196     17        —       (179
                                             

Total operating expenses

    2,267        6        52,100        348,566        —       402,939   
                                             

INCOME (LOSS) FROM OPERATIONS

    (2,267     (6     (5,782     14,917        —       6,862   

INTEREST EXPENSE

    —          (8,586     (5,951     (3,547     —       (18,084

ACCRETION ON DEBT PREMIUM (DISCOUNT)

    —          —          (57     (32     —       (89

GAIN ON EARLY EXTINGUISHMENT OR RESTRUCTURING OF DEBT

    —          91       73       —          —       164   

GAIN (LOSS) FROM CONTINGENT VALUE RIGHTS VALUATION

    (2,425     —          —          —          —       (2,425

INTEREST AND OTHER INCOME

    —          —          153        229        —       382   

FOREIGN CURRENCY TRANSACTION GAIN (LOSS)

    —          340        15        (4,066     —       (3,711

INTERCOMPANY INTEREST

    (564     7,802        (4,993     (2,245     —       —     

MANAGEMENT FEE

    —          —          2,539        (2,539     —       —     

ROYALTY FEE

    —          6,561        —          (6,561     —       —     
                                             

INCOME (LOSS) BEFORE REORGANIZATION ITEMS, INCOME TAXES AND EQUITY IN NET INCOME OF SUBSIDIARIES

    (5,256     6,202        (14,003     (3,844     —       (16,901

REORGANIZATION ITEMS—NET

    1        —          —          —          —       1   
                                             

INCOME (LOSS) BEFORE INCOME TAX AND EQUITY IN NET INCOME OF SUBSIDIARIES

    (5,255     6,202        (14,003     (3,844     —       (16,900

INCOME TAX EXPENSE

    —          (467     (431     4,891        —       3,993   
                                             

INCOME (LOSS) BEFORE EQUITY IN NET INCOME OF SUBSIDIARIES

    (5,255     5,735        (14,434     1,047        —       (12,907

EQUITY IN NET INCOME (LOSS) OF SUBSIDIARIES

    (8,782     —          5,652        —          3,129     —     
                                             

INCOME (LOSS) FROM CONTINUING OPERATIONS

    (14,037     5,735        (8,782     1,047        3,129     (12,907

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax

    —          —          —          (1,293     —       (1,293

GAIN (LOSS) FROM SALE OF DISCONTINUED OPERATIONS, net of tax

    —          —          —          193        —       193   
                                             

NET INCOME (LOSS)

    (14,037     5,735        (8,782     (53     3,129     (14,007

Less: Net (income) loss attributable to the noncontrolling interest

    —          —          —          (30     —       (30
                                             

NET INCOME (LOSS) ATTRIBUTABLE TO PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

  $ (14,037   $ 5,735      $ (8,782   $ (83   $ 3,129   $ (14,037
                                             

AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS OF PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

           

Income (loss) from continuing operations, net of tax

  $ (14,037   $ 5,735      $ (8,782   $ 1,017      $ 3,129   $ (12,937

Income (loss) from discontinued operations

    —          —          —          (1,293     —       (1,293

Gain (loss) from sale of discontinued operations

    —          —          —          193        —       193   
                                             

Net income (loss)

  $ (14,037   $ 5,735      $ (8,782   $ (83   $ 3,129   $ (14,037
                                             

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

(in thousands)

 

    Predecessor  
    For the Six Month Ended June 30, 2009  
    PTGI     IHC     Guarantor
Subsidiaries
    Non  Guarantor
Subsidiaries
    Eliminations     Consolidated  

NET REVENUE

  $ —        $ —        $ 65,361      $ 323,479      $ —        $ 388,840   

OPERATING EXPENSES

           

Cost of revenue (exclusive of depreciation included below)

    —          —          52,058        201,772        —          253,830   

Selling, general and administrative

    4,638        23        12,587        77,408        —          94,656   

Depreciation and amortization

    —          —          1,317        10,990        —          12,307   

(Gain) loss on sale or disposal of assets

    —          —          (177 )     134        —          (43 )
                                               

Total operating expenses

    4,638