Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - HC2 HOLDINGS, INC.Financial_Report.xls
EX-31 - EXHIBIT 31 - HC2 HOLDINGS, INC.dex31.htm
EX-32 - EXHIBIT 32 - HC2 HOLDINGS, INC.dex32.htm
EX-10.3 - EXHIBIT 10.3 - HC2 HOLDINGS, INC.dex103.htm
Table of Contents

 

 

UNITED STATES

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, 2011

OR

 

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

Commission File No. 001-35210

 

 

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  x    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 “large accelerated filer,” “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 August 1, 2011

Common Stock $0.001 par value    13,706,475

 

 

 


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

INDEX TO FORM 10-Q

 

                Page No.  
Part I. FINANCIAL INFORMATION  
    Item 1.     FINANCIAL STATEMENTS (UNAUDITED)  
    Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010     1   
    Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010     2   
    Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2011 and 2010     3   
    Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2011 and 2010     4   
    Notes to Condensed Consolidated Financial Statements     5   
    Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     28   
    Item 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     43   
    Item 4.     CONTROLS AND PROCEDURES     44   
Part II. OTHER INFORMATION  
    Item 1.     LEGAL PROCEEDINGS     45   
    Item 1A.     RISK FACTORS     45   
    Item 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS     45   
    Item 3.     DEFAULTS UPON SENIOR SECURITIES     45   
    Item 4.     (REMOVED AND RESERVED)     45   
    Item 5.     OTHER INFORMATION     45   
    Item 6.     EXHIBITS     45   
SIGNATURES     46   
EXHIBIT INDEX     47   


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

    Three Months Ended
June 30, 2011
    Three Months Ended
June 30, 2010
    Six Months Ended
June 30, 2011
    Six Months Ended
June 30, 2010
 

NET REVENUE

  $ 282,502      $ 194,593      $ 506,225      $ 387,610   

OPERATING EXPENSES

       

Cost of revenue (exclusive of depreciation included below)

    205,522        123,960        357,778        245,951   

Selling, general and administrative

    59,361        47,854        113,313        97,972   

Depreciation and amortization

    17,093        18,194        32,214        36,063   

(Gain) loss on sale or disposal of assets

    (19     (189     34        (179

Goodwill impairment

    —          —          14,679        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    281,957        189,819        518,018        379,807   
 

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) FROM OPERATIONS

    545        4,774        (11,793     7,803   

INTEREST EXPENSE

    (7,912     (8,733     (16,605     (18,059

ACCRETION (AMORTIZATION) ON DEBT PREMIUM/DISCOUNT, net

    (53     (45     (103     (89

GAIN (LOSS) ON EARLY EXTINGUISHMENT OR RESTRUCTURING OF DEBT

    —          164        —          164   

GAIN (LOSS) FROM CONTINGENT VALUE RIGHTS VALUATION

    96        (382     (4,288     (2,425

INTEREST INCOME AND OTHER INCOME (EXPENSE), net

    174        153        119        363   

FOREIGN CURRENCY TRANSACTION GAIN (LOSS)

    2,365        (9,623     6,413        (3,794
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    (4,785     (13,692     (26,257     (16,037

REORGANIZATION ITEMS, net

    —          —          —          1   
 

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

    (4,785     (13,692     (26,257     (16,036

INCOME TAX BENEFIT (EXPENSE)

    (1,378     1,883        (548     4,053   
 

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

    (6,163     (11,809     (26,805     (11,983

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax

    (89     (1,528     (69     (2,217

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

    —          193        —          193   
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

    (6,252     (13,144     (26,874     (14,007

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

    (90     106        1,277        (30
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (6,342   $ (13,038   $ (25,597   $ (14,037
 

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:

       

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

    (0.47     (1.20     (2.08     (1.24

Income (loss) from discontinued operations

    (0.01     (0.16     (0.01     (0.23

Gain (loss) from sale of discontinued operations

    —          0.02        —          0.02   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    (0.48     (1.34     (2.09     (1.45
 

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

       

Basic and Diluted

    13,385        9,743        12,273        9,694   
 

 

 

   

 

 

   

 

 

   

 

 

 

AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS OF PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

       

Income (loss) from continuing operations, net of tax

  $ (6,253   $ (11,703   $ (25,528   $ (12,013

Income (loss) from discontinued operations

    (89     (1,528     (69     (2,217

Gain (loss) from sale of discontinued operations

    —          193        —          193   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (6,342   $ (13,038   $ (25,597   $ (14,037
 

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

1


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

(unaudited)

 

     June 30,
2011
    December 31,
2010
 

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 31,476      $ 41,534   

Accounts receivable (net of allowance for doubtful accounts receivable of $10,613 and $6,854 at June 30, 2011 and December 31, 2010, respectively)

     99,133        76,828   

Prepaid expenses and other current assets

     18,593        19,439   
  

 

 

   

 

 

 

Total current assets

     149,202        137,801   

RESTRICTED CASH

     12,523        12,117   

PROPERTY AND EQUIPMENT – Net

     154,346        138,488   

GOODWILL

     71,113        63,731   

OTHER INTANGIBLE ASSETS – Net

     144,431        147,749   

OTHER ASSETS

     17,887        14,573   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 549,502      $ 514,459   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 63,440      $ 36,942   

Accrued interconnection costs

     25,840        29,571   

Deferred revenue

     12,844        12,891   

Accrued expenses and other current liabilities

     51,247        46,491   

Accrued income taxes

     7,541        7,678   

Accrued interest

     1,857        2,152   

Current portion of long-term obligations

     910        1,143   
  

 

 

   

 

 

 

Total current liabilities

     163,679        136,868   

LONG-TERM OBLIGATIONS

     218,607        242,748   

DEFERRED TAX LIABILITY

     31,683        32,208   

CONTINGENT VALUE RIGHTS

     23,387        19,098   

OTHER LIABILITIES

     2,954        503   
  

 

 

   

 

 

 

Total liabilities

     440,310        431,425   

COMMITMENTS AND CONTINGENCIES (See Note 6.)

    

STOCKHOLDERS’ EQUITY (DEFICIT):

    

Preferred stock, $0.001 par value – 20,000,000 shares authorized; none issued and outstanding

     0        0   

Common stock, $0.001 par value – 80,000,000 shares authorized; 13,695,236 and 9,801,463 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively

     14        10   

Additional paid-in capital

     141,088        86,984   

Accumulated earnings (deficit)

     (37,952     (12,355

Accumulated other comprehensive income (loss)

     4,769        4,751   
  

 

 

   

 

 

 

Total stockholders’ equity before noncontrolling interest

     107,919        79,390   
  

 

 

   

 

 

 

Noncontrolling interest

     1,273        3,644   
  

 

 

   

 

 

 

Total stockholders’ equity

     109,192        83,034   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

   $ 549,502      $ 514,459   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

2


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Six Months Ended
June 30, 2011
    Six Months Ended
June 30, 2010
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income (loss)

   $ (26,874   $ (14,007

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

    

Reorganization items, net

     —          (1

Provision for doubtful accounts receivable

     4,436        3,449   

Share based compensation expense

     3,354        204   

Depreciation and amortization

     32,219        38,413   

(Gain) loss on sale or disposal of assets

     34        (372

Goodwill impairment

     14,679        —     

Accretion (amortization) of debt premium/discount, net

     103        89   

Change in fair value of Contingent Value Rights

     4,288        2,425   

Deferred income taxes

     1,299        (4,823

(Gain) loss on early extinguishment of debt

     —          (164

Unrealized foreign currency transaction gain on intercompany and foreign debt

     (6,458     4,148   

Changes in assets and liabilities, net of acquisitions:

    

(Increase) decrease in accounts receivable

     (8,615     (2,820

(Increase) decrease in prepaid expenses and other current assets

     2,841        (1,114

(Increase) decrease in other assets

     (2,323     342   

Increase (decrease) in accounts payable

     6,900        (2,513

Increase (decrease) in accrued interconnection costs

     (4,756     (3,489

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

     (5,288     (1,984

Increase (decrease) in accrued income taxes

     (336     (1,407

Increase (decrease) in accrued interest

     (511     218   
  

 

 

   

 

 

 

Net cash provided by operating activities before cash reorganization items

     14,992        16,594   

Cash effect of reorganization items

     —          (137
  

 

 

   

 

 

 

Net cash provided by operating activities

     14,992        16,457   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of property and equipment

     (13,880     (10,737

Sale of property and equipment and intangible assets

     —          530   

Cash acquired from business acquisitions, net of cash paid

     9,599        —     

Sales of marketable securities

     4,087        —     

Increase in restricted cash

     (123     (132
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (317     (10,339
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Principal payments on long-term obligations

     (24,462     (13,175

Payment to noncontrolling interest

     (1,205     —     

Proceeds from sale of common stock

     1,168        —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (24,499     (13,175
  

 

 

   

 

 

 

EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

     (234     (1,505
  

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     (10,058     (8,562

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     41,534        42,538   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 31,476      $ 33,976   
  

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

    

Cash paid for interest

   $ 17,008      $ 17,879   

Cash paid for taxes

     431        899   

Non-cash investing and financing activities:

    

Capital lease additions

   $ —        $ 51   

Acquisition purchase consideration recorded in working-capital and long-term liabilities

     2,507        —     

Business acquisition purchased with Company common stock

     50,609        —     

See notes to condensed consolidated financial statements.

 

3


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

    Three Months Ended
June 30, 2011
    Three Months Ended
June 30, 2010
    Six Months Ended
June 30, 2011
    Six Months Ended
June 30, 2010
 

NET INCOME (LOSS)

  $ (6,252   $ (13,144   $ (26,874   $ (14,007

OTHER COMPREHENSIVE INCOME (LOSS)

       

Foreign currency translation adjustment

    (1,057     (879     129        (1,077
 

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS)

    (7,309     (14,023     (26,745     (15,084

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

    (102     213        1,166        (33
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (7,411   $ (13,810   $ (25,579   $ (15,117
 

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

4


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated 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, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

The results for all periods presented in this Quarterly Report on 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.

On June 23, 2011, the Company began to trade its common stock on the New York Stock Exchange under the ticker symbol “PTGI.” At that time, trading of its common stock on the OTC Bulletin Board under the ticker symbol “PMUG” ceased.

2. ACQUISITIONS

Arbinet Corporation Acquisition

On February 28, 2011, the Company completed its previously announced acquisition of Arbinet Corporation, a Delaware corporation (“Arbinet”). Arbinet is a provider of wholesale telecom exchange services to carriers and the Company purchased Arbinet to supplement its existing International Carrier Services operations. Pursuant to the terms of the Agreement and Plan of Merger dated as of November 10, 2010, as amended by Amendment No. 1 dated December 14, 2010, by and among Primus, PTG Investments, Inc., a Delaware corporation and a wholly-owned subsidiary of Primus (“Merger Sub”), and Arbinet, Merger Sub merged with and into Arbinet with Arbinet surviving the merger as a wholly-owned subsidiary of Primus.

Upon the closing of the merger, each share of Arbinet common stock was cancelled and converted into the right to receive 0.5817 shares of Primus common stock. Arbinet stockholders received cash in lieu of any fractional shares of Primus common stock that they were otherwise entitled to receive in the merger. In connection with the merger, Primus issued 3,232,812 shares of its common stock to former Arbinet stockholders in exchange for their shares of Arbinet common stock, and reserved for issuance approximately 95,000 additional shares of its common stock in connection with its assumption of Arbinet’s outstanding options, warrants, stock appreciation rights and restricted stock units.

The components of the consideration transferred follow (in thousands):

 

Consideration attributable to stock issued (1)

   $ 50,432   

Consideration attributable to earned replaced equity awards (2)

     177   
  

 

 

 

Total consideration transferred

   $ 50,609   
  

 

 

 

 

(1) The fair value of the Company’s common stock on the acquisition date was $15.60 per share based on the closing value of its common stock traded on the over-the-counter bulletin board. The Company issued 3,232,812 shares of stock to effect this merger.
(2) The portion of the acquisition fair value of Arbinet converted stock-based awards attributable to pre-merger employee service was part of consideration. At the merger closing 50% of the unvested and outstanding Arbinet awards vested. The portion of the fair value-based measure of the replaced awards assigned to past services (including those for which vesting accelerated at the merger closing and those that were already vested at the date of the merger closing) was included in the consideration transferred.

 

5


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

Preliminary Recording of Assets Acquired and Liabilities Assumed

The transaction was accounted for using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date.

Estimates of fair value included in the financial statements, in conformity with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 820, “Fair Value Measurements and Disclosures,” (“ASC 820”), represent the Company’s best estimates and valuations developed with the assistance of independent appraisers and, where the following have not yet been completed or are not available, industry data and trends and by reference to relevant market rates and transactions. The following 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, “Business Combinations,” (“ASC 805”), the allocation of the consideration value is subject to additional adjustment until the Company has completed its analysis. The Company’s analysis and any additional adjustments are required to be made by February 28, 2012, the one year anniversary of the date of the acquisition, which was February 28, 2011, to provide the Company with the time to complete the valuation of its assets and liabilities.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed (in thousands):

 

Cash & cash equivalents

   $ 12,415   

Marketable securities

     4,044   

Accounts receivable

     16,205   

Other current assets

     1,309   

Property and equipment (1)

     20,233   

Intercompany receivable

     309   

Goodwill (3)

     19,360   

Customer list (2)

     900   

Other intangible assets

     700   

Other assets

     1,738   
  

 

 

 

Total assets acquired

   $ 77,213   
  

 

 

 

Trade payables

   $ 18,280   

Accrued interconnection costs

     143   

Accrued liabilities

     2,312   

Other current liabilities

     3,182   

Current portion of long-term obligations

     68   

Long-term obligations

     99   

Other long-term liabilities

     2,520   
  

 

 

 

Total liabilities assumed

   $ 26,604   
  

 

 

 

Net assets acquired

   $ 50,609   
  

 

 

 

 

(1) Property and equipment were measured primarily using an income approach. The fair value measurements of the assets were based, in part, on significant inputs not observable in the market and thus represent a Level 3 measurement. The significant inputs included Arbinet resources, assumed future revenue profiles, weighted average cost of capital of 13.0 percent, gross margin at 7.2 percent and assumptions on the timing and amount of future development and operating costs. The property and equipment additions were segmented as part of a new stand-alone reporting unit which will be aggregated with International Carrier Services when integration activities are substantially complete.

 

6


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

(2) Identifiable intangible assets and other assets were measured using a combination of an income approach and a market approach (Level 3). Identifiable intangible assets are subject to amortization and the customer list will be amortized over 15 years.
(3) Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits, primarily as a result of expected synergies expected from the combination, arising from other assets acquired that could not be individually identified and separately recognized. Goodwill was recognized as part of a new stand-alone reporting unit which will be aggregated with International Carrier Services when integration activities are substantially complete. Goodwill is not amortized and is not deductible for tax purposes.

Arbinet Results and Pro Forma Impact of Merger

The following table presents revenues for Arbinet for the periods presented (in thousands):

 

     Three months
ended
June 30, 2011
     Acquisition Date
through
June 30, 2011
 

Net revenue

   $ 73,134       $ 99,914   

The Company incurred a total of $1.7 million in transaction costs related to the merger. Transaction-related costs were expensed as incurred except for $1.0 million of costs incurred to issue common stock to effect the merger which were recorded as an offset to additional paid in capital. The transaction-related costs recognized in the line item “selling, general, and administrative expenses,” in the condensed consolidated statement of operations during the three and six months ended June 30, 2011 were zero and $0.2 million, respectively. The fair value of the total consideration paid for the assets acquired and liabilities assumed increased significantly from the date of the merger agreement, November 10, 2010, to the closing date February 28, 2011. This event triggered the Company to perform a Step 1 impairment test as related to the goodwill which arose from this acquisition. See Note 4 — “Goodwill and Other Intangible Assets,” for more details on the testing. The results of the Step 1 and Step 2 tests required the Company to recognize $14.7 million of impairment expense during the three months ended March 31, 2011. The following table presents pro forma information for the Company as if the merger of Arbinet had occurred at the beginning of each period presented (in thousands, except for per share amounts):

 

     Three months ended
June 30,
 
     2011     2010  

Net revenue

   $ 282,502      $ 271,944   

Net income (loss) attributable to continuing operations for Primus

     (6,253     (15,495

Net income (loss) attributable to discontinued operations for Primus

     (89     (1,528

Income (loss) per common share for continuing operations net of tax

   $ (0.47   $ (1.19

Income (loss) per common share for discontinued operations

     (0.01     (0.12

 

7


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

     Six months ended
June 30,
 
     2011     2010  

Net revenue

   $ 558,387      $ 549,814   

Net income (loss) attributable to continuing operations for Primus

     (24,265     (20,745

Net income (loss) attributable to discontinued operations for Primus

     (69     (2,217

Income (loss) per common share for continuing operations net of tax

   $ (1.98   $ (1.60

Income (loss) per common share for discontinued operations

     (0.01     (0.17

The historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the merger and factually supportable. The unaudited pro forma consolidated results are not necessarily indicative of what the consolidated results of operations actually would have been had the Company completed the merger on January 1, 2011 or January 1, 2010. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company.

Incentive Program

Under the terms of the merger agreement, outstanding Arbinet stock-based awards were converted into Primus stock-based awards based on the merger exchange ratio. The converted Arbinet awards, granted under Arbinet’s 1997 and 2004 Stock Incentive Plans, include restricted stock awards, stock options, stock appreciation rights and restricted stock units. The grant date for the converted Arbinet awards is considered to be the closing date of the merger for purposes of calculating fair value. The maximum term of the Arbinet awards is ten years. No additional awards will be issued under either Arbinet plan.

Unlimitel Inc. and HMNET Technologies, Inc. Acquisitions

During the first quarter of 2011 one of the Company’s Canadian subsidiaries completed the acquisitions of the customer base and fixed assets of Unlimitel Inc. (“Unlimitel”) and HMNet Technologies Inc. (“HMNet”), both commercial VoIP providers. The total consideration transferred to complete the acquisitions was approximately $3.1 million. The cash payments associated with the acquisitions are as follows: $1.0 million was paid upon closing, $0.3 million was paid during the second quarter of 2011, $1.4 million is payable upon the one-year anniversary of the closing date, and $0.4 million is payable upon the two-year anniversary of the closing date.

The table below sets forth the final Unlimitel and HMNet purchase price allocation (in thousands). The purchase price allocation resulted in goodwill of $1.8 million. The valuation of intangible assets was evaluated using Level 3 inputs.

 

     As of June 30,
2011
 

Cash and cash equivalents

   $ 331   

Property and equipment

     136   

Identifiable intangible asset:

  

Customer relationships

     1,229   

Goodwill

     1,842   

Other assets and liabilities, net

     (119

Deferred income tax

     (318
  

 

 

 

Allocation of purchase consideration

   $ 3,101   
  

 

 

 

 

8


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

The customer relationships above are subject to amortization and have a useful life of five years. The useful life of the customer relationships was estimated at the time of the acquisition based on the period of time from which the Company expects to derive benefits from the customer relationships. The identifiable intangible assets are amortized using the pattern of benefits method, which results in accelerated amortization in the early periods of the useful life.

Goodwill from the Company’s Unlimitel and HMNet acquisitions was the excess of the consideration transferred over the net assets recognized, which represents the value of acquired employees along with the expected synergies from the combination of Unlimitel Inc. and HMNet Technologies Inc. and the Company’s operations. Goodwill resulting from the acquisition of Unlimitel Inc. and HMNet Technologies Inc. is not deductible for tax purposes.

Hyperlink Australia Pty Ltd. Acquisition

During the first quarter of 2011 one of the Company’s Australian subsidiaries completed the acquisition of the customer relationships and fixed assets of Hyperlink Australia Pty Ltd. (“Hyperlink”), a managed data center services provider. The total consideration transferred to complete the acquisition of Hyperlink totaled $1.5 million which included cash paid of $0.8 million and routine working capital adjustments of $0.7 million.

The table below sets forth the final Hyperlink purchase price allocation (in thousands). The fair value of the property and equipment were determined based on Level 3 inputs. The valuation of intangible assets was evaluated using Level 3 inputs.

 

     As of June 30,
2011
 

Property and equipment

   $ 128   

Identifiable intangible asset:

  

Customer relationships

     1,467   

Other assets and liabilities, net

     (69
  

 

 

 

Allocation of purchase consideration

   $ 1,526   
  

 

 

 

The customer relationships above are subject to amortization and have a useful life of three years. The useful life of the customer relationships was estimated at the time of the acquisition based on the period of time from which the Company expects to derive benefits from the customer relationships. The identifiable intangible assets are amortized using the pattern of benefits method, which results in accelerated amortization in the early periods of the useful life.

3. 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 Corporation (GCC) through direct and indirect ownership structures. GCC paid a dividend in April 2011, of which $1.2 million was attributable to the noncontrolling interest shareholder. The results of GCC and its subsidiary are consolidated with the Company’s results based on guidance from ASC No. 810, “Consolidation,” (“ASC 810”). All intercompany profits, transactions and balances have been eliminated in consolidation.

 

9


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

ASC No. 810 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 the six months ended June 30, 2011 and six months ended June 30, 2010 are as follows (in thousands):

 

                For the Six Months Ended June 30, 2011        
                Primus Telecommunications Group, Incorporated Shareholders        
                Common Stock                 Accumulated
Other
Comprehensive
Income (Loss)
       
    Total     Comprehensive
Loss
    Shares     Amount     Additional
Paid-In
Capital
    Accumulated
Earnings (Deficit)
      Noncontrolling
Interest
 

Balance as of December 31, 2010

  $ 83,034          9,801      $ 10      $ 86,984      $ (12,355   $ 4,751      $ 3,644   

Share based compensation expense

    3,354              3,354         

Common shares issued in connection with the Management Compensation Plan, as Amended

    1,168          661        1        1,167         

Transaction costs of merger

    (1,023           (1,023      

Stock consideration issued for merger

    50,609          3,233        3        50,606         

Dividend to noncontrolling interest

    (1,205       —          —          —              (1,205

Comprehensive income (loss)

               

Net income (loss)

    (26,874     (26,874           (25,597       (1,277

Other comprehensive income (loss)

    129        129                18        111   
 

 

 

   

 

 

             

Comprehensive income (loss)

    (26,745     (26,745            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2011

  $ 109,192          13,695      $ 14      $ 141,088      $ (37,952   $ 4,769      $ 1,273   
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                For the Six Months Ended June 30, 2010        
                Primus Telecommunications Group, Incorporated Shareholders        
                Common Stock                 Accumulated
Other
Comprehensive
Income (Loss)
       
    Total     Comprehensive
Loss
    Shares     Amount     Additional
Paid-In
Capital
    Accumulated
Earnings (Deficit)
      Noncontrolling
Interest
 

Balance as of December 31, 2009

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

Share based compensation expense

    204              204         

Common shares issued in connection with the Management Compensation Plan, as Amended

    (344       143          (344      

Comprehensive income (loss)

               

Net income (loss)

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

Other comprehensive income (loss)

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

 

 

   

 

 

             

Comprehensive income (loss)

    (15,084   $ (15,084            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2010

  $ 84,685          9,743      $ 10      $ 85,393      $ (7,305   $ 2,984      $ 3,603   
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued Operations — During 2010 the Company classified its European retail operations as discontinued operations. The Company has applied retrospective adjustments to the three months and six months ended June 30, 2010 to reflect the effects of the discontinued operations that occurred subsequent to June 30, 2010. Accordingly, revenue, costs, and expenses of the discontinued operations have been excluded from the respective captions in the consolidated statements of operations. See Note 11 —“Discontinued Operations,” for further information.

 

10


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

Property and Equipment — Property and equipment are recorded at cost less accumulated depreciation, which is provided on the straight-line method over the estimated useful lives of the assets. Cost includes 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 are expensed as incurred. The estimated useful lives of property and equipment are as follows: network equipment — 5 to 8 years, fiber optic and submarine cable — 8 to 25 years, furniture and equipment — 5 years, and leasehold improvements and leased equipment — shorter of lease or useful life. Costs for internal use software that are incurred in the preliminary project stage and in the post-implementation stage are expensed as incurred. Costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software.

Business Combinations — The Company is required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. This valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain of the intangible assets and subsequently assessing the realizability of such assets include, but are not limited to, future expected cash flows from the revenues, customer contracts and discount rates. Management’s estimates of fair value are based on assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate and unanticipated events and circumstances may occur.

Other estimates associated with the accounting for these acquisitions and subsequent assessment of impairment of the assets may change as additional information becomes available regarding the assets acquired and liabilities assumed.

Goodwill and Other Intangible Assets — Under ASC No. 350, “Intangibles — Goodwill and Other,” (“ASC 350”), goodwill and indefinite lived intangible assets are not amortized but are reviewed annually for impairment, or more frequently, if impairment indicators arise. Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to the provisions of ASC No. 360, “Property, Plant and Equipment,” (“ASC 360”).

Goodwill impairment is tested at least annually (October 1 for the Company) or when factors indicate potential impairment using a two-step process that begins with an estimation of the fair value of each reporting unit. Step 1 is a screen for potential impairment by comparing the fair value of a reporting unit with its carrying amount. The estimated fair value of each reporting unit is compared to its carrying value. The Company estimates the fair values of each reporting unit by a combination of (i) estimation of the discounted cash flows of each of the reporting units based on projected earnings in the future (the income approach) and (ii) a comparative analysis of revenue and EBITDA multiples of public companies in similar markets (the market approach). If there is a deficiency (the estimated fair value of a reporting unit is less than its carrying value), a Step 2 test is required.

Step 2 measures the amount of impairment loss, if any, by comparing the implied fair value of the reporting unit goodwill with its carrying amount. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined; through an allocation of the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

The Company’s reporting units are the same as its operating segments, except as discussed in Note 4 related to Arbinet, as each segment’s components have been aggregated and deemed a single reporting unit because they have similar economic characteristics. Each component is similar in that they each provide telecommunications services for which all of the resources and costs are drawn from the same pool, and are evaluated using the same business factors by management.

Estimating the fair value of a reporting unit requires various assumptions including projections of future cash flows, perpetual growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the Company’s assessment of a number of factors, including the reporting unit’s recent performance against budget, performance in the market that the reporting unit serves, as well as industry and general economic data from third party sources. Discount rate assumptions are based on an assessment of the risk inherent in those future cash flows. Changes to the underlying businesses could affect the future cash flows, which in turn could affect the fair value of the reporting unit.

Intangible assets not subject to amortization consist of trade names. Such indefinite lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test shall consist of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value an impairment loss shall be recognized in an amount equal to the excess.

 

11


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

Intangible assets subject to amortization consist of certain trade names and customer relationships. These finite lived intangible assets are amortized based on their estimated useful lives. Such assets are subject to the impairment provisions of ASC 360, wherein impairment is recognized and measured only if there are events and circumstances that indicate that the carrying amount may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset group. An impairment loss is recorded if after determining that it is not recoverable, the carrying amount exceeds the fair value of the asset.

Derivative Instruments — Pursuant to the terms of the Company’s 2009 bankruptcy reorganization (the “Reorganization Plan”), the Company issued to holders of the Company’s common stock prior to the effectiveness of the Reorganization Plan contingent value rights (“CVRs”) to receive up to an aggregate of 2,665,000 shares (the “CVR Shares”) of the Company’s common stock. In connection with the issuance of the CVRs, the Company entered into a Contingent Value Rights Distribution Agreement (the “CVR Agreement”), in favor of holders of CVRs thereunder, dated as of July 1, 2009.

Due to the nature of the CVRs, the Company accounted for the instrument in accordance with ASC No. 815, “Derivatives and Hedging,” as well as related interpretations of this standard. The Company determined the 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 estimated the fair value of its CVRs using a Black-Scholes pricing model and consequently recorded a liability of $2.6 million in the balance sheet caption “other liabilities” as part of fresh-start accounting. The change in value is reflected in the condensed consolidated statements of operations as gain (loss) from contingent value rights valuation. The Company’s estimates of fair value of its CVRs are correlated to and reflective of the Company’s common stock price trends; in general, as the value of the Company’s common stock increases, the estimated fair value of the CVRs also increases and, as a result, the Company recognizes a change in value of its CVRs as loss from contingent value rights valuation. Conversely and also in general, as the value of the Company’s common stock decreases, the estimated fair value of the CVRs also decreases and as a result the Company would recognize a change in value of the CVRs as gain from contingent value rights valuation. See Note 9 — “Fair Value of Financial Instruments and Derivatives”.

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 condensed 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 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, “Stock Compensation”, income taxes and various tax contingencies.

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, as related to business combinations, may impact the amount of recorded goodwill.

Reclassification — Certain previous year amounts have been reclassified to conform with current year presentations, as related to the reporting of the Company’s discontinued operations.

Newly Adopted Accounting Principles

In January 2010, an update was issued to the Fair Value Measurements and Disclosures Topic, ASC 820, ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” which requires new disclosures for fair value measurements and provides clarification for existing disclosures requirements. More specifically, this update requires (a) an entity to disclose

 

12


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e., present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. This update was effective for the Company on January 1, 2010, except for Level 3 reconciliation disclosures which went into effect on January 1, 2011. On January 1, 2011 the Company adopted this update and did not have a material impact on the disclosures to the condensed consolidated financial statements.

In December 2010, an update was made to the Intangibles — Goodwill and Other Topic, ASC 350, ASU 2010-28, “Goodwill Impairment Testing in Reporting Units with a Zero or Negative Carrying Amount,” which provides guidance for all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The update modifies Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This update became effective for us on January 1, 2011. We do not foresee this accounting update having a material effect on our consolidated financial statements in future periods, although that could change.

On February 28, 2011, the Company adopted changes to the disclosure of pro forma information for business combinations ASU 2010-29, “Business Combinations — Disclosure of Supplementary Pro-Forma Information”, issued by the FASB. These changes clarify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination, that occurred during the current year, had occurred as of the beginning of the comparable prior annual reporting period only. For the Company, this would be as of January 1, 2010, see Note 2 — “Acquisitions.” Also, the existing supplemental pro forma disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings, if any. The adoption of these changes had no impact on our consolidated financial statements.

New Accounting Pronouncements

On January 1, 2011, the Company prospectively adopted the FASB update to revenue recognition for multiple-deliverable arrangements. The update requires the establishment of a selling price hierarchy for determining the selling price of a deliverable. The hierarchy is: vendor specific objective evidence if available, third party evidence if vendor-specific objective evidence is not available or estimated selling price if neither of the aforementioned is available. The residual method of revenue allocation is no longer permissible. We believe that this accounting standard update will not change our units of accounting for bundled arrangements, or the allocation of our products and services. We do not foresee this accounting update having a material effect on our consolidated financials in future periods, although that could change.

4. GOODWILL AND OTHER INTANGIBLE ASSETS

Generally accepted accounting principles in the United States require the Company to perform a goodwill impairment test, a two-step test, annually and more frequently when negative conditions or triggering events arise.

On February 28, 2011 the Company acquired Arbinet for stock consideration of $50.6 million in a stock for stock transaction. See Note 2 — “Acquisitions.” Because the Company’s stock price rose significantly between the signing of the merger agreement on November 10, 2010 and the close of the merger on February 28, 2011 from a closing price of $9.57 per share to $15.60 per share, the fixed-share consideration fair value also rose. Because Arbinet’s enterprise value may not have increased within similar levels over that time period, the Company determined that a goodwill impairment assessment was immediately necessary post-merger. On the day of the merger, Arbinet was a stand-alone business with its own cash flows and management structure, and the Company evaluated it as a separate reporting unit. The Company determined the preliminary enterprise value of Arbinet to be $36.2 million, which was less than the carrying value of $50.6 million. For Step 2 of the testing, the fair value of the assets acquired

 

13


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

and liabilities assumed was deemed to be equal to that which was used for the purchase price allocation. Based on an enterprise value of $36.2 million and the fair value of the assets acquired and liabilities assumed at purchase, the company calculated $4.7 million of implied goodwill. Because the carrying value of goodwill was greater than the implied goodwill, $14.7 million was recorded as goodwill impairment expense in the three months ended March 31, 2011.

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

 

     June 30,
2011
     December 31,
2010
 

Trade names

   $ 76,900       $ 76,200   

Goodwill

   $ 71,113       $ 63,731   

The changes in the carrying amount of trade names and goodwill by reporting unit for the six months ended June 30, 2011 are as follows (in thousands):

Goodwill

 

     United States     Canada      Australia      Brazil      Total  

Balance as of December 31, 2010

   $ 29,960      $ 31,775       $ 1,950       $ 46       $ 63,731   

Effect of change in foreign currency exchange rates

     —          772         84         3         859   

Acquisition of business

     19,360        1,842         —           —           21,202   

Accumulated impairment loss

     (14,679     —           —           —           (14,679
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2011

   $ 34,641      $ 34,389       $ 2,034       $ 49       $ 71,113   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Trade Names

 

     United States      Canada      Australia      Europe      Brazil      Total  

Balance as of December 31, 2010

   $ 76,200       $ —         $ —         $ —         $ —         $ 76,200   

Acquisition of business

     700         —           —           —           —           700   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2011

   $ 76,900       $ —         $ —         $ —         $ —         $ 76,900   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

Intangible assets subject to amortization consisted of the following (in thousands):

 

     June 30, 2011      December 31, 2010  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Book
Value
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Book
Value
 

Trade names

   $ 4,122       $ (719   $ 3,403       $ 4,083       $ (593   $ 3,490   

Customer relationships

     110,979         (46,851     64,128         104,553         (36,494     68,059   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 115,101       $ (47,570   $ 67,531       $ 108,636       $ (37,087   $ 71,549   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense for trade names and customer relationships for the three months and six months ended June 30, 2011 was $4.9 million and $9.6 million, respectively, compared to $5.7 million and $11.1 million, respectively for the three and six months ended June 30, 2010.

The Company expects amortization expense for trade names and customer relationships for the remainder of 2011, the years ending December 31, 2012, 2013, 2014, 2015, and thereafter to be approximately $10.4 million, $13.7 million, $10.1 million, $7.2 million, $5.5 million and $20.6 million, respectively.

5. LONG-TERM OBLIGATIONS

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

 

     June 30,
2011
    December 31,
2010
 

Obligations under capital leases and other

   $ 1,252      $ 1,667   

13% Senior Secured Notes due 2016

     129,968        130,000   

14 1/4% Senior Subordinated Secured Notes due 2013

     90,000        114,015   
  

 

 

   

 

 

 

Subtotal

   $ 221,220      $ 245,682   

Original issue discount on Senior Secured Notes

     (1,703     (1,791
  

 

 

   

 

 

 

Subtotal

   $ 219,517      $ 243,891   

Less: Current portion of long-term obligations

     (910     (1,143
  

 

 

   

 

 

 

Total long-term obligations

   $ 218,607      $ 242,748   
  

 

 

   

 

 

 

 

15


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

The following table reflects the contractual payments of principal and interest for the Company’s long-term obligations as of June 30, 2011:

 

Year Ending December 31,

   Capital Leases
and Other
    13% Senior
Secured  Notes
due 2016
    14 1/4% Senior
Subordinated Secured
Notes due 2013
    Total  

2011 (as of June 30, 2011)

   $ 645      $ 8,448      $ 6,413      $ 15,506   

2012

     423        16,896        12,825        30,144   

2013

     207        16,896        96,413        113,516   

2014

     31        16,896        —          16,927   

2015

     —          16,896        —          16,896   

Thereafter

     —          146,420        —          146,420   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total minimum principal & interest payments

     1,306        222,452        115,651        339,409   

Less: Amount representing interest

     (54     (92,484     (25,651     (118,189
  

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term obligations

   $ 1,252      $ 129,968      $ 90,000      $ 221,220   
  

 

 

   

 

 

   

 

 

   

 

 

 

13% Senior Secured Notes due 2016

On April 19, 2011, Primus Telecommunications Holding Inc. (“Holding”) and Primus Telecommunications Canada Inc. (“Primus Canada”), both wholly-owned subsidiaries of the Company commenced an offer to purchase (the “Offer to Purchase”) up to 5,200 Units, each such Unit consisting of $1,000 principal amount of 13% Senior Secured Notes due 2016 (the “13% Notes”) issued by Holding and Primus Canada, at a purchase price in cash equal to 100% of the principal amount of 13% Notes validly tendered (and not validly withdrawn) prior to the expiration time, plus accrued but unpaid interest thereon to the settlement date for the Offer to Purchase. The Offer to Purchase was made pursuant to the excess cash flow covenant in the terms of the indenture governing the 13% Notes. The Offer to Purchase expired on May 17, 2011 and $32,000 principal amount of 13% Notes were tendered and repurchased pursuant to the Offer to Purchase.

14  1/4% Senior Subordinated Secured Notes due 2013

On April 15, 2011, the Company redeemed $24.0 million principal amount of 14 1/4% Senior Subordinated Secured Notes due 2013 (the “14 1/4% Notes”) issued by Primus Telecommunications IHC, Inc. (“IHC”). Accrued interest to, but excluding the redemption date, of $1.3 million on the redeemed portion of the 14 1/4% Notes was also paid on the redemption date. There was $90.0 million principal amount of the 14 1/4% Notes remaining outstanding after this redemption.

Exchange Offer

On June 6, 2011, the Company announced the commencement of private offers to exchange new 10.00% Senior Secured Notes due 2017 issued by Holding for outstanding Units of the 13% Notes and 14 1/4% Notes and the commencement of consent solicitations by Holding and Primus Canada to amend the indenture governing the 13% Notes to eliminate most restrictive covenants and certain events of default and to release the collateral securing the 13% Notes. On July 7, 2011, Holding and Primus Canada consummated the exchange offers and consent solicitation. See Note 13 — “Subsequent Events,” for further information.

 

16


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

6. COMMITMENTS AND CONTINGENCIES

Future minimum lease payments under capital leases and other purchase obligations and non-cancellable operating leases as of June 30, 2011 are as follows (in thousands):

 

Year Ending December 31,

   Capital Leases
and Other
    Purchase
Obligations
     Operating
Leases
 

2011 (as of June 30, 2011)

   $ 645      $ 17,897       $ 9,800   

2012

     423        8,073         17,791   

2013

     207        3,162         14,475   

2014

     31        1,162         10,211   

2015

     —          54         8,136   

Thereafter

     —          —           20,003   
  

 

 

   

 

 

    

 

 

 

Total minimum principal & interest payments

     1,306        30,348         80,416   

Less: Amount representing interest

     (54     —           —     
  

 

 

   

 

 

    

 

 

 

Total long-term obligations

   $ 1,252      $ 30,348       $ 80,416   
  

 

 

   

 

 

    

 

 

 

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. The Company made payments under purchase commitments of $17.6 million and $15.3 million for the six months ended June 30, 2011 and 2010, respectively.

The Company’s rent expense under operating leases was $4.6 million and $8.8 million for the three and six months ended June 30, 2011, respectively, and $3.7 million and $7.5 million for the three and six months ended June 30, 2010, respectively.

Litigation

Legal Proceedings

The Company and its subsidiaries are subject to claims and legal proceedings that arise in the ordinary course of business. Each of these matters is inherently uncertain, and there can be no guarantee that the outcome of any such matter will be decided favorably to the Company or its subsidiaries or that the resolution of any such matter will not have a material adverse effect upon the Company’s business, consolidated financial position, results of operations or cash flow. The Company does not believe that any of these pending claims and legal proceedings will have a material adverse effect on its business, consolidated financial position, results of operations or cash flow.

7. SHARE BASED COMPENSATION

The Company follows guidance which addresses the accounting for stock-based payment transactions whereby an entity receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The guidance generally requires that such transactions be accounted for using a fair-value based method and share based compensation expense be recorded, based on the grant date fair value, estimated in accordance with the guidance, for all new and unvested stock awards that are ultimately expected to vest as the requisite service is rendered.

The Company typically issues new shares of common stock upon the exercise of stock options, as opposed to using treasury shares.

The Company uses a Black-Scholes option valuation model to determine the fair value of share-based compensation under the accounting guidance. The Black-Scholes model incorporates various assumptions including the expected option life, expected volatility, risk-free interest rates and dividend yield. The expected option life is no less than the award’s vesting period and is based on the Company’s historical experience. Expected volatility is based on historical realized volatility of the stock of the Company and guideline companies. The risk-free interest rate is approximated using rates available on U.S. Treasury securities in effect at the time of grant with a remaining term similar to the award’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.

 

17


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

No options were granted during the six months ended June 30, 2010, while 2.5 thousand options were granted during the six months ended June 30, 2011. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions shown as a weighted average for the year:

 

     Six Months Ended
June 30,
 
     2011     2010  

Expected option life

     6 Years        N/A   

Risk-free interest rate

     1.43     N/A   

Expected volatility

     43     N/A   

Dividend yield

     0.00     N/A   

Total share-based compensation expense recognized by the Company in the three months ended June 30, 2011 and 2010 was $2.3 million and $0.1 million, respectively, compared to $3.4 million and $0.2 million, respectively, for the six months ended June 30, 2011 and 2010. Most of the Company’s stock options vest ratably during the vesting period. The Company recognizes compensation expense for options using the straight-line basis, reduced by estimated forfeitures.

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

At the closing of the acquisition of Arbinet on February 28, 2011, the Company reserved approximately 95,000 additional shares of its common stock for issuance in connection with its assumption of Arbinet’s outstanding options, warrants, stock appreciation rights and restricted stock units. As of June 30, 2011, 208 shares of common stock were reserved for warrants to purchase common stock. These warrants are exercisable at $34.32 per share and will expire in 2012.

Restricted Stock Units (RSUs)

A summary of the Company’s restricted stock units activity during the six months ended June 30, 2011 is as follows:

 

     Six Months Ended
June 30, 2011
 
     Shares     Weighted
Average
Grant Date
Fair Value
 

Unvested – December 31, 2010

     474,851      $ 8.14   

Granted

     143,390      $ 14.27   

Vested

     (377,629   $ 9.36   

Forfeitures

     (6,319   $ 10.25   
  

 

 

   

 

 

 

Unvested – June 30, 2011

     234,293      $ 9.87   
  

 

 

   

 

 

 

As of June 30, 2011, the Company had 0.2 million unvested RSU’s outstanding of which $2.0 million of compensation expense is expected to be recognized over the weighted average remaining period of 1.5 years. The number of unvested RSU’s expected to vest is 0.2 million.

 

18


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

Stock Options and Stock Appreciation Rights

A summary of the Company’s stock option and stock appreciation rights activity during the six months ended June 30, 2011 is as follows:

 

     Six Months Ended
June 30, 2011
 
     Shares     Weighted
Average
Exercise Price
 

Outstanding – December 31, 2010

     185,300      $ 11.34   

Granted

     2,500      $ 13.75   

Exercised

     (106,779   $ 12.49   

Forfeitures

     (3,804   $ 14.77   

Arbinet merger

     87,195      $ 14.99   
  

 

 

   

 

 

 

Outstanding – June 30, 2011

     164,412      $ 12.49   
  

 

 

   

 

 

 

Eligible for exercise

     110,381      $ 13.42   
  

 

 

   

 

 

 

The following table summarizes the intrinsic values and remaining contractual terms of the Company’s stock options and stock appreciation rights:

 

     Intrinsic
Value
     Weighted
Average
Remaining
Life in Years
 

Options outstanding – June 30, 2011

   $ 648,676         7.86   

Options exercisable – June 30, 2011

     375,180         7.44   

As of June 30, 2011, the Company had 0.1 million unvested stock options and stock appreciation rights outstanding of which $0.2 million of compensation expense is expected to be recognized over the weighted average remaining period of 2.0 years. The number of unvested stock options and stock appreciation rights expected to vest is 0.1 million shares, with a weighted average remaining life of 7.8 years, a weighted average exercise price of $12.52, and an intrinsic value of $0.2 million.

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 the Company is 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

     2002 – 2010   

Australia

     2002 – 2010   

Canada

     2004 – 2010   

United Kingdom

     2004 – 2010   

Netherlands

     2007 – 2010   

 

19


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

The Company is currently under examination in Canada and certain other foreign tax jurisdictions, which, in the aggregate, are individually not material.

The Company adopted the 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 and six months ended June 30, 2011, penalties and interest were immaterial. As of June 30, 2011, the gross unrecognized tax benefit on the balance sheet was $88.4 million.

Pursuant to Section 382 of the Internal Revenue Code (“IRC Sec. 382”), the Company believes that it underwent an ownership change for tax purposes on February 28, 2011, the Arbinet acquisition date. This conclusion is based on the Schedule 13D and Schedule 13G filings concerning Company securities, as filed with the United States Securities and Exchange Commission. A previous ownership change took place on July 1, 2009, as a result of the emergence from bankruptcy under the Reorganization Plan. As a result, the use of the Company’s net operating losses will be subject to an annual limitation under IRC Sec. 382 of approximately $1.6 million.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVES

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 Company’s 13% Senior Secured Notes and 14 1/4% Senior Subordinated Secured Notes, based on quoted market prices, was $224.9 million and $247.8 million at June 30, 2011 and December 31, 2010, respectively. The aggregate carrying value of the Company’s 13% Senior Secured Notes and 14 1/4% Senior Subordinated Secured Notes was $218.3 million and $242.2 million at June 30, 2011 and December 31, 2010, respectively.

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

 

            Fair Value as of June 30, 2011, using:  
     June 30, 2011      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 (CVRs)

   $ 23,387         —         $ 23,387         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,387         —         $ 23,387         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
            Fair Value as of December 31, 2010, using:  
     December 31, 2010      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 (CVRs)

   $ 19,098         —         $ 19,098         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,098         —         $ 19,098         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

The CVRs are marked to fair value at each balance sheet date. The change in value is reflected in our condensed consolidated statements of operations. Estimates of fair value represent the Company’s best estimates based on a Black-Scholes pricing model. During the three months ended June 30, 2011 and 2010, ($0.1) million and $0.4 million, respectively, of (income) expense was recognized as a result of marking the CVRs to their fair value, and $4.3 million and $2.4 million, respectively, of expense during the six months ended June 30, 2011 and 2010.

10. OPERATING SEGMENT AND RELATED INFORMATION

The Company has six reportable operating segments based on management’s organization of the enterprise — United States, Canada, Europe, Australia, the International Carrier Services (“ICS”) business from the United States and Europe, which is managed as a separate global segment, into which Arbinet will be integrated, and Other. 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. Net revenue by geographic segment is reported on the basis of where services are provided. The Company has no single customer representing greater than 10% of its revenues. Corporate assets, capital expenditures and property and equipment are included in the United States segment, while corporate expenses are presented separately in income (loss) from operations. The assets of the ICS business are indistinguishable from the respective geographic segments. Therefore, any reporting related to the ICS business for assets, capital expenditures or other balance sheet items is impractical.

 

21


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

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

 

     Three Months Ended
June 30, 2011
    Three Months Ended
June 30, 2010
    Six Months Ended
June 30, 2011
    Six Months Ended
June 30, 2010
 

Net Revenue by Geographic Region

        

United States

   $ 59,758      $ 29,224      $ 99,307      $ 56,604   

Canada

     64,060        58,024        124,896        115,500   

Asia-Pacific

     73,908        67,487        145,834        137,385   

Europe

     77,478        32,808        122,119        65,801   

Brazil

     7,298        7,050        14,069        12,320   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 282,502      $ 194,593      $ 506,225      $ 387,610   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Revenue by Segment

        

United States

   $ 10,736      $ 12,840      $ 21,919      $ 26,706   

Canada

     64,060        58,024        124,896        115,500   

Australia

     73,681        67,487        145,413        137,385   

International Carrier Services

     126,529        49,192        199,551        95,699   

Other

     7,496        7,050        14,446        12,320   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 282,502      $ 194,593      $ 506,225      $ 387,610   
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for Doubtful Accounts Receivable

        

United States

   $ 230      $ 583      $ 716      $ 1,114   

Canada

     885        624        1,698        1,469   

Australia

     622        625        1,319        1,362   

International Carrier Services

     289        (499     455        (989

Other

     129        110        236        193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,155      $ 1,443      $ 4,424      $ 3,149   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) from Operations

        

United States

   $ 131      $ 881      $ 546      $ 90   

Canada

     4,970        3,041        9,497        5,983   

Australia

     2,793        1,744        6,538        5,880   

International Carrier Services

     (1,445     1,794        (18,023     2,645   

Other

     (19     (163     281        (181
  

 

 

   

 

 

   

 

 

   

 

 

 

Total From Operating Segments

     6,430        7,297        (1,161     14,417   

Corporate

     (5,885     (2,523     (10,632     (6,614
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 545      $ 4,774      $ (11,793   $ 7,803   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital Expenditures

        

United States

   $ 296      $ 427      $ 528      $ 618   

Canada

     2,719        2,723        5,308        4,948   

Europe

     —          201        —          284   

Australia

     3,792        2,037        6,844        4,311   

International Carrier Services

     561        —          837        —     

Other

     139        436        363        576   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 7,507      $ 5,824      $ 13,880      $ 10,737   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

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

 

     June 30,
2011
     December 31,
2010
 

Property and Equipment – Net

     

United States

   $ 23,138       $ 8,039   

Canada

     54,849         56,476   

Europe

     3,363         1,650   

Australia

     70,044         70,261   

Brazil

     2,952         2,062   
  

 

 

    

 

 

 

Total

   $ 154,346       $ 138,488   
  

 

 

    

 

 

 
     June 30,
2011
     December 31,
2010
 

Assets

     

United States

   $ 142,116       $ 107,298   

Canada

     199,774         206,310   

Europe

     56,564         52,278   

Australia

     138,826         137,225   

Brazil

     12,222         11,348   
  

 

 

    

 

 

 

Total

   $ 549,502       $ 514,459   
  

 

 

    

 

 

 

The Company offers four main products — retail voice, ICS, Data/Internet and retail VoIP. Net revenue information with respect to the Company’s products is as follows (in thousands):

 

     Three Months Ended
June 30, 2011
     Three Months Ended
June 30, 2010
     Six Months Ended
June 30, 2011
     Six Months Ended
June 30, 2010
 

Retail voice

   $ 94,581       $ 88,922       $ 186,291       $ 179,855   

International carrier services

     126,529         49,192         199,551         95,699   

Data/Internet

     53,012         48,291         103,914         95,154   

Retail VoIP

     8,380         8,188         16,469         16,902   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 282,502       $ 194,593       $ 506,225       $ 387,610   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

During the third quarter 2010, the Company committed to dispose of and began actively soliciting the disposition of its Europe segment, also known as the Company’s remaining European retail operations. The Company sold its Belgian operations, to Webcetra BVBA, for a sale price of approximately $1.3 million during the third quarter and as a result, recorded a $40 thousand gain from the sale. In October 2010 the Company completed the sale of its United Kingdom retail operations customer base and certain of its assets to NewCall Telecom Ltd., for a sale price of approximately $6.8 million, including a note receivable of $2.1 million, and completed the sale of its Italian retail operations customer base for approximately $0.2 million; as a result the Company recorded a gain of $2.4 million and a loss of $0.3 million, respectively, from the sale of these assets. The Company sold its operations located in France, to AFone, during December 2010 for a sale price of approximately $4.0 million. In addition,

 

23


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

AFone assumed all of the existing liabilities of the France operations. Consequently the Company recognized a gain from the sale of these operations of approximately $0.9 million. Consideration received from the sale of the France operations included a note receivable of $1.3 million.

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

 

     Three Months Ended
June 30, 2011
    Three Months Ended
June 30, 2010
 

Net revenue

   $ (30   $ 11,638   

Operating expenses

     174        13,146   
  

 

 

   

 

 

 

Income (loss) from operations

     (204     (1,508

Interest expense

     —          (14

Interest income and other income

     30        234   

Foreign currency transaction gain (loss)

     86        (350
  

 

 

   

 

 

 

Income (loss) before income tax

     (88     (1,638

Income tax (expense) benefit

     (1     110   
  

 

 

   

 

 

 

Income (loss) from discontinued operations

   $ (89   $ (1,528
  

 

 

   

 

 

 
     Six Months Ended
June 30, 2011
    Six Months Ended
June 30, 2010
 

Net revenue

   $ (12   $ 24,402   

Operating expenses

     497        26,570   
  

 

 

   

 

 

 

Income (loss) from operations

     (509     (2,168

Interest expense

     —          (25

Interest income and other income

     365        236   

Foreign currency transaction gain (loss)

     76        (198
  

 

 

   

 

 

 

Income (loss) before income tax

     (68     (2,155

Income tax expense

     (1     (62
  

 

 

   

 

 

 

Income (loss) from discontinued operations

   $ (69   $ (2,217
  

 

 

   

 

 

 

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.

Potentially dilutive common shares for the Company include the dilutive effects of common shares issuable under our Management Compensation Plan, as amended, including stock options and RSUs, using the treasury stock method, as well as stock warrants and CVRs.

 

24


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

The Company had no dilutive common share equivalents during the three months and six months ended June 30, 2011, due to the results of operations being a net loss. For the three months and six months ended June 30, 2011, the following were potentially dilutive but were excluded from the calculation of diluted loss per common share due to their antidilutive effect:

 

   

0.4 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.

For the 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 loss per common share due to their 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.

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

 

     Three Months
Ended

June 30, 2011
    Three Months
Ended

June 30, 2010
    Six Months
Ended

June  30, 2011
    Six Months
Ended
June 30, 2010
 

Income (loss) from continuing operations

   $ (6,253   $ (11,703   $ (25,528   $ (12,013

Income (loss) from discontinued operations, net of tax

     (89     (1,528     (69     (2,217

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

     —          193        —          193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders – basic and diluted

     (6,342     (13,038     (25,597     (14,037
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding – basic and diluted

     13,385        9,743        12,273        9,694   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted income (loss) per common share:

        

Income (loss) from continuing operations attributable to common stockholders

   $ (0.47   $ (1.20   $ (2.08   $ (1.24

Income (loss) from discontinued operations

     (0.01     (0.16     (0.01     (0.23

Gain (loss) from sale of discontinued operations

     —          0.02        —          0.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $ (0.48   $ (1.34   $ (2.09   $ (1.45
  

 

 

   

 

 

   

 

 

   

 

 

 

13. SUBSEQUENT EVENTS

Exchange Offer and Consent Solicitation

On July 7, 2011, Holding in connection with the consummation of the private (i) exchange offers (the “Exchange Offers”) for any and all outstanding Units representing the 13% Notes issued by Holding and Primus Canada, and the 14.25% Notes issued by IHC, and (ii) consent solicitation (the “Consent Solicitation”) to amend the indenture governing the 13% Notes and release the collateral securing the 13% Notes, issued $240.2 million aggregate principal amount of 10.00% Senior Secured Notes due 2017 (the “New Notes”). The New Notes were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), only (i) to “qualified institutional buyers” (as defined in Rule 144A under the Securities Act), (ii) outside the United States, to persons who are not “U.S. persons” (as defined in Regulation S under the Securities Act), and (iii) to “institutional accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act).

 

25


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

The New Notes are governed by an indenture, dated as of July 7, 2011 (the “New Notes Indenture”), by and among Holding, the guarantors of the New Notes named therein, including the Company (the “Guarantors”), and U.S. Bank National Association, as trustee and collateral trustee. The New Notes bear interest at a rate of 10.00% per annum, payable semi-annually in arrears in cash on April 15 and October 15 of each year, commencing October 15, 2011. The New Notes will mature on April 15, 2017.

The New Notes and related guarantees are secured by a pledge of and first lien security interest in (subject to certain exceptions) substantially all of the assets of Holding and the Guarantors, including a first-priority pledge of all of the capital stock held by Holding, the Guarantors and each subsidiary of the Company that is a foreign subsidiary holding company (which pledge, in the case of the capital stock of each non-U.S. subsidiary and each subsidiary of the Company that is a foreign subsidiary holding company is limited to 65% of the capital stock of such subsidiary).

The New Notes rank senior in right of payment to existing and future subordinated indebtedness of Holding and the Guarantors. The New Notes rank equal in right of payment with all existing and future senior indebtedness of Holding and the Guarantors. The New Notes rank junior to any priority lien obligations entered into by Holding or the Guarantors in accordance with the New Notes Indenture.

Prior to March 15, 2013, Holding may redeem up to 35% of the aggregate principal amount of the New Notes at the redemption premium of 110.00% of the principal amount of the New Notes redeemed, plus accrued and unpaid interest, with the net cash proceeds of certain equity offerings. Prior to March 15, 2013, Holding may redeem some or all of the New Notes at a make-whole premium as set forth in the New Notes Indenture. On or after March 15, 2013, Holding may redeem some or all of the New Notes at a premium that will decrease over time as set forth in the New Notes Indenture, plus accrued and unpaid interest.

Upon the occurrence of certain Changes of Control (as defined in the New Notes Indenture) with respect to the Company, Holding must give holders of the New Notes an opportunity to sell their New Notes to Holding at a purchase price of 101% of the principal amount of such New Notes, plus accrued and unpaid interest, if any, to the date of purchase. If the Company or any of its restricted subsidiaries sells certain assets and does not use all of the net proceeds of such sale for specified purposes, Holding may be required to use the remaining net proceeds from such sale to offer to repurchase some of the New Notes at 100% of their principal amount, plus accrued and unpaid interest.

The New Notes Indenture contains covenants that, subject to certain exceptions, limit the ability of each of the Company and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends on, repurchase or make distributions in respect of the Company’s capital stock or make other restricted payments; (iii) make certain investments; (iv) sell, transfer or otherwise convey certain assets; (v) create certain liens; (vi) designate future subsidiaries as unrestricted subsidiaries; (vii) consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; and (viii) enter into certain transactions with affiliates. The New Notes Indenture contains other customary terms, including, but not limited to, events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest, if any, on all of the then outstanding New Notes to be due and payable immediately.

Under the New Notes Indenture, either Holding or any Guarantor may incur additional senior secured debt, equal in right of payment to the New Notes, in the future that is subject to security interests in the same collateral as the New Notes and the related guarantees, in an aggregate principal amount outstanding (including the aggregate principal amount outstanding under the New Notes) equal to 2.25 times consolidated EBITDA of the Company for the prior four fiscal quarters.

Holding has no obligation or intention to register the New Notes for resale under the Securities Act or the securities laws of any other jurisdiction or to offer to exchange the New Notes for securities registered under the Securities Act or the securities laws of any other jurisdiction.

Following the completion of the Exchange Offers and Consent Solicitation, Units representing $2.4 million aggregate principal amount of 13% Notes remain outstanding, and the indenture governing the 13% Notes has been amended to eliminate most restrictive covenants and certain events of default and to release the collateral securing the 13% Notes.

Following the completion of the Exchange Offers and Consent Solicitation, $11.6 million aggregate principal of 14 1/4% Notes continued to be outstanding. Holding issued $11.6 million aggregate principal amount of New Notes for cash to certain former holders of 13% Notes. The proceeds of such issuance were used to redeem the remaining 14 1/4% Notes, and as a result IHC has discharged all of its obligations with respect to the 14 1/4% Notes.

 

26


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

Stock Repurchase Program

On August 9, 2011, the Company’s board of directors authorized a stock repurchase program of up to $15 million of its common stock through August 8, 2013.

Under the stock repurchase program, stock will be repurchased from time to time in open-market and privately negotiated transactions and block trades. There is no guarantee as to the exact number of shares, if any, that the Company will repurchase. The share repurchase program may be modified, terminated or extended at any time without prior notice. The Company has established a committee consisting of its lead director, chief executive officer and chief financial officer to oversee the administration of the stock repurchase program.

Globility’s Agreement to Sell Canadian Wireless Spectrum Assets

On August 10, 2011, Globility Communications Corporation (“Globility”), a Canadian local exchange carrier in which the Company indirectly owns a 45.6% interest in compliance with Canadian telecommunication laws, entered into a definitive agreement to sell its fixed wireless spectrum licenses in 29 rural and urban markets across Canada for CAD$15 million (approximately USD$15 million). The license transfer is subject to Industry Canada approval and therefore the closing of the sale is expected to occur following receipt of such approval.

 

27


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the notes thereto included herein, as well as our audited condensed consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2010. You should review the “Risk Factors” section (Part II, Item 1A) for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Introduction and Overview of Operations

We are an integrated facilities-based communications services provider offering a portfolio of international and domestic voice, wireless, Internet, VoIP, data and data center services to customers located primarily in Australia, Canada, the United States and Brazil. Our primary markets are Australia and Canada where we have deployed significant network infrastructure. We classify our services into three categories: Growth Services, Traditional Services and International Carrier Services. Our focus is on expanding our Growth Services, which includes our broadband, IP-based voice, local, wireless, data and data center services, to fulfill the demand for high quality, competitively priced communications services. This demand is being driven, in part, by the globalization of the world’s economies, the global trend toward telecommunications deregulation and the migration of communication traffic to the Internet. We manage our Traditional Services, which includes our domestic and international long-distance voice, prepaid cards, dial-up Internet services and Australian off-network local services for cash flow generation that we reinvest to develop and market our Growth Services, particularly in our primary markets of Australia and Canada. We provide our International Carrier Services voice termination services to other telecommunications carriers and resellers requiring IP or time-division multiplexing access.

Generally, we price our services competitively with the major carriers and service providers operating in our principal service regions. We seek to generate net revenue through sales and marketing efforts focused on customers with significant communications needs, including small and medium enterprises (“SMEs”), multinational corporations, residential customers, and other telecommunications carriers and resellers.

Industry trends have shown that the overall market for domestic and international long-distance voice, prepaid cards and dial-up internet services has declined in favor of Internet-based, wireless and broadband communications. Our challenge concerning net revenue in recent years has been to overcome declines in long-distance voice minutes of use per customer as more customers are using wireless devices and the Internet as alternatives to the use of wireline phones. Also, product substitution (e.g., wireless/Internet for fixed line voice) has resulted in revenue declines in our long-distance voice services. Additionally, we believe that because deregulatory influences have begun to affect telecommunications markets outside the United States, the deregulatory trend is resulting in greater competition from the existing wireline and wireless competitors and from more recent entrants, such as cable companies and VoIP companies, which could continue to affect adversely our net revenue per minute, as well as minutes of use. More recently, adverse global economic conditions have resulted in a contraction of spending by business and residential customers generally which, we believe, has had an adverse effect on our net revenues.

In order to manage our network transmission costs, we pursue a flexible approach with respect to the management of our network capacity. In most instances, we (1) optimize the cost of traffic by using the least expensive cost routing, (2) negotiate lower variable usage based costs with domestic and foreign service providers, (3) negotiate additional and lower cost foreign carrier agreements with the foreign incumbent carriers and others, and (4) continue to expand/reduce the capacity of our network when traffic volumes justify such actions.

Our overall margin may fluctuate based on the relative volumes of international versus domestic long-distance services; international carrier services versus business and residential long-distance services; prepaid services versus traditional post-paid voice services; Internet, VoIP and data services versus fixed line voice services; the amount of services that are resold; and the proportion of traffic carried on our network versus resale of other carriers’ services. Our margin is also affected by customer transfer and migration fees. We generally pay a charge to install and transfer a new customer onto our network and to migrate broadband and local customers. However, installing and migrating customers to our network infrastructure enables us to increase our margin on such services as compared to resale of services using other carriers’ networks.

Selling, general and administrative expenses are comprised primarily of salaries and benefits, commissions, occupancy costs, sales and marketing expenses, advertising, professional fees, and other administrative costs. All selling, general and administrative expenses are expensed when incurred. Emphasis on cost containment and the shift of expenditures from non-revenue producing expenses to sales and marketing expenses has been heightened since growth in net revenue has been under pressure.

 

28


Table of Contents

Recent Developments

Acquisition of Arbinet Corporation

On February 28, 2011, the Company completed the merger of PTG Investments, Inc. (“Merger Sub”), a Delaware corporation and a wholly-owned subsidiary of the Company with and into Arbinet Corporation (“Arbinet”), pursuant to the Agreement and Plan of Merger dated November 10, 2010, as amended by Amendment No. 1 dated December 14, 2010 (collectively, the “Merger Agreement”) by and among the Company, Merger Sub and Arbinet. As a result of the merger, Arbinet became a wholly-owned subsidiary of the Company.

In connection with the merger, each share of Arbinet’s common stock, par value $0.001 per share, issued and outstanding immediately prior to the effective time of the merger was canceled and converted into the right to receive 0.5817 of a share of Company common stock.

The value of Primus shares issued as merger consideration is based upon the closing price of Primus common stock as of February 25, 2011 of $15.60 per share. The exchange of 5,557,525 eligible Arbinet shares for 3,232,812 Primus common stock equivalents equated to a purchase value of approximately $50.6 million. This includes the issued and outstanding shares of Arbinet and Arbinet’s outstanding warrants, options, stock appreciation rights and other equity awards that were exercised prior to the effective date of the merger or subject to accelerated vesting features due to a change in control.

The Company is in the process of integrating Arbinet’s operations into its International Carrier Services segment. The combined company is expected to be well positioned to capitalize on its long established experience in carrier telecom operations and to expand its global voice and data operations to meet the evolving demands of telecom operators worldwide. With its enhanced scale and market position, the combined company is expected to enable international carrier services customers to access additional networks and termination routes at competitive rates. The combined company is expected to have a diversified product portfolio of international voice and data services across all international carrier services customer segments. The combined company would become the only major global provider to offer international carrier services customers options to either acquire direct international connections through traditional interconnect arrangements or manage their access needs through The Exchange.

The Arbinet acquisition is accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations”. Under the acquisition method of accounting, assets acquired and liabilities assumed are measured at fair value as of February 28, 2011. The fair value of the consideration transferred and the assets acquired and liabilities assumed were determined by the Company and in doing so management relied in part upon a third-party valuation report to measure the identifiable intangible assets, property and equipment acquired. The third-party valuation reports are not final at the time of filing this quarterly report. This means that the assets and liabilities of Arbinet are recorded at their preliminary fair values and added to those of the Company, including an amount for goodwill representing the difference between the purchase price and fair value of the identifiable net assets. The condensed consolidated financial statements of the Company issued after the merger will reflect only the operations of the combined business after the merger and will not be restated retroactively to reflect the historical financial position or results of operations of Arbinet.

The Company’s acquisition of Arbinet was an all stock transaction and the Merger Agreement was based upon a Primus common stock per share price of $9.57. The initial purchase price valuation of Arbinet was based in part upon consultation with a third-party. The Merger Agreement provided that increases in the market price of Primus’s common stock would have the effect of increasing the total fair value of the consideration and therefore would increase the amount of the purchase price allocable to goodwill. The base-exchange formula provided by the Merger Agreement established the number of common shares required to consummate the merger. The number of common shares established by the Merger Agreement remained constant from the execution of the Merger Agreement through the closing date, February 28, 2011, and was not affected by the increase in the value of Primus’s stock which occurred after the Merger Agreement was executed. On February 28, 2011, the final consideration to be allocated to Arbinet’s net assets under ASC No. 805 was valued at approximately $50.6 million and was based upon a Primus common stock per share price of $15.60.

The significant increase in the fair value of the consideration to be allocated to Arbinet’s net assets as compared to the Company’s initial valuation of Arbinet triggered the requirement for the Company to perform a goodwill impairment test upon completion of its acquisition accounting. The Company recorded the preliminary purchase accounting during the first quarter of 2011, see Note 2 — “Acquisitions” and Note 4 — “Goodwill and Other Intangible Assets”.

 

29


Table of Contents

Given the above, the Company had goodwill arising from the acquisition of Arbinet that was considered impaired upon implementing the purchase accounting of Arbinet’s net assets. The Company performed Step 1 and Step 2 testing for goodwill impairment during the first quarter 2011 and, as a result, recognized an impairment expense $14.7 million during the first quarter 2011.

Recent Developments Involving Existing Notes That May Impact Future Results and Liquidity

On July 7, 2011, Holding in connection with the consummation of the Exchange Offers and the Consent Solicitation, issued $240.2 million aggregate principal amount of New Notes. The New Notes bear interest at a rate of 10.00% per annum, payable semi-annually in arrears in cash on April 15 and October 15 of each year, commencing October 15, 2011. The New Notes will mature on April 15, 2017.

The New Notes and related guarantees are secured by a pledge of and first lien security interest in (subject to certain exceptions) substantially all of the assets of Holding and the Guarantors, including a first-priority pledge of all of the capital stock held by Holding, the Guarantors and each subsidiary of the Company that is a foreign subsidiary holding company (which pledge, in the case of the capital stock of each non-U.S. subsidiary and each subsidiary of the Company that is a foreign subsidiary holding company is limited to 65% of the capital stock of such subsidiary).

The New Notes rank senior in right of payment to existing and future subordinated indebtedness of Holding and the Guarantors. The New Notes rank equal in right of payment with all existing and future senior indebtedness of Holding and the Guarantors. The New Notes rank junior to any priority lien obligations entered into by Holding or the Guarantors in accordance with the New Notes Indenture.

Prior to March 15, 2013, Holding may redeem up to 35% of the aggregate principal amount of the New Notes at the redemption premium of 110.00% of the principal amount of the New Notes redeemed, plus accrued and unpaid interest, with the net cash proceeds of certain equity offerings. Prior to March 15, 2013, Holding may redeem some or all of the New Notes at a make-whole premium as set forth in the New Notes Indenture. On or after March 15, 2013, Holding may redeem some or all of the New Notes at a premium that will decrease over time as set forth in the New Notes Indenture, plus accrued and unpaid interest.

Upon the occurrence of certain Changes of Control (as defined in the New Notes Indenture) with respect to the Company, Holding must give holders of the New Notes an opportunity to sell their New Notes to Holding at a purchase price of 101% of the principal amount of such New Notes, plus accrued and unpaid interest, if any, to the date of purchase. If the Company or any of its restricted subsidiaries sells certain assets and does not use all of the net proceeds of such sale for specified purposes, Holding may be required to use the remaining net proceeds from such sale to offer to repurchase some of the New Notes at 100% of their principal amount, plus accrued and unpaid interest.

The New Notes Indenture contains covenants that, subject to certain exceptions, limit the ability of each of the Company and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends on, repurchase or make distributions in respect of the Company’s capital stock or make other restricted payments; (iii) make certain investments; (iv) sell, transfer or otherwise convey certain assets; (v) create certain liens; (vi) designate future subsidiaries as unrestricted subsidiaries; (vii) consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; and (viii) enter into certain transactions with affiliates. The New Notes Indenture contains other customary terms, including, but not limited to, events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest, if any, on all of the then outstanding New Notes to be due and payable immediately.

Under the New Notes Indenture, either Holding or any Guarantor may incur additional senior secured debt, equal in right of payment to the New Notes, in the future that is subject to security interests in the same collateral as the New Notes and the related guarantees, in an aggregate principal amount outstanding (including the aggregate principal amount outstanding under the New Notes) equal to 2.25 times consolidated EBITDA of the Company for the prior four fiscal quarters.

Following the completion of the Exchange Offers and Consent Solicitation, Units representing $2.4 million aggregate principal amount of 13% Notes remain outstanding, and the indenture governing the 13% Notes has been amended to eliminate most restrictive covenants and certain events of default and to release the collateral securing the 13% Notes.

Following the completion of the Exchange Offers and Consent Solicitation, $11.6 million aggregate principal of 14 1/4% Notes continued to be outstanding. Holding issued $11.6 million aggregate principal amount of New Notes for cash to certain former holders of 13% Notes. The proceeds of such issuance were used to redeem the remaining 14 1/4% Notes, and as a result IHC has discharged all of its obligations with respect to the 14 1/4% Notes.

 

30


Table of Contents

New York Stock Exchange Listing

On June 23, 2011, we began to list our common stock on the New York Stock Exchange under the ticker symbol, “PTGI.” At that time, trading of our common stock on the OTC Bulletin Board under the ticker symbol “PMUG” ceased.

Globility’s Agreement to Sell Canadian Wireless Spectrum Assets

On August 10, 2011, Globility Communications Corporation (“Globility”), a Canadian local exchange carrier in which Primus indirectly owns a 45.6% interest in compliance with Canadian telecommunication laws, entered into a definitive agreement to sell its fixed wireless spectrum licenses in 29 rural and urban markets across Canada for CAD$15 million (approximately USD$15 million). The license transfer is subject to Industry Canada approval and therefore the closing of the sale is expected to occur following receipt of such approval.

Foreign Currency

Foreign currency can have a major impact on our financial results. During 2011, approximately 80% of our net revenue was derived from sales and operations outside the U.S. The reporting currency for our consolidated financial statements is the United States dollar (“USD”). The local currency of each country is the functional currency for each of our respective entities operating in that country. Although the European dispositions and the Arbinet merger should reduce the percentage of our net revenue derived outside the U.S., in the future, we expect to continue to derive the majority of our net revenue and incur a significant portion of our operating costs from outside the U.S. Therefore, changes in exchange rates have had and may continue to have a significant, and potentially adverse, effect on our results of operations. Our primary risk of loss regarding foreign currency exchange rate risk is caused primarily by fluctuations in the following exchange rates: USD/Canadian dollar (“CAD”), USD/Australian dollar (“AUD”), USD/British pound (“GBP”), USD/Brazilian Real (“BRL”) and USD/Euro (“EUR”). Due to the large percentage of our revenue derived outside of the U.S., changes in the USD relative to one or more of the foregoing currencies could have an adverse impact on our future results of operations. We have agreements with certain subsidiaries for repayment of a portion of the investments and advances made to these subsidiaries. As we anticipate repayment in the foreseeable future, we recognize the unrealized gains and losses in foreign currency transaction gain (loss) on the consolidated statements of operations. The exposure of our income from operations to fluctuations in foreign currency exchange rates is reduced in part because a majority of the costs that we incur in connection with our foreign operations are also denominated in local currencies.

We are exposed to financial statement gains and losses as a result of translating the operating results and financial position of our international subsidiaries. We translate the local currency statements of operations of our foreign subsidiaries into USD using the average exchange rate during the reporting period. Changes in foreign exchange rates affect the reported profits and losses and cash flows and may distort comparisons from year to year. By way of example, when the USD strengthens compared to the CAD, there could be a negative or positive effect on the reported results for Canada, depending upon whether Canada is operating profitably or at a loss. It takes more profits in CAD to generate the same amount of profits in USD and a greater loss in CAD to generate the same amount of loss in USD. The opposite is also true. For instance, when the USD weakens there is a positive effect on reported profits and a negative effect on the reported losses for Canada.

In the three and six months ended June 30, 2011, as compared to the three and six months ended June 30, 2010, the USD was weaker on average as compared to the CAD, AUD, GBP, BRL and EUR. The following tables demonstrate the impact of currency fluctuations on our net revenue for the three and six months ended June 30, 2011 and 2010 (in thousands, except percentages):

Net Revenue by Location, including Discontinued Operations — in USD

 

     For the Three Months Ended June 30,     For the Six Months Ended June 30,  
     2011     2010      Variance     Variance%     2011     2010      Variance     Variance%  

Canada

     64,060        58,024         6,036        10.4     124,896        115,500         9,396        8.1

Australia

     73,681        67,487         6,194        9.2     145,413        137,385         8,028        5.8

United Kingdom

     77,478        24,907         52,571        211.1     122,119        45,754         76,365        166.9

Europe (1), (2)

     (30     19,461         (19,491     -100.2     (12     44,284         (44,296     -100.0

Brazil

     7,298        7,050         248        3.5     14,069        12,320         1,749        14.2

 

31


Table of Contents

Net Revenue by Location, including Discontinued Operations — in Local Currencies

 

     For the Three Months Ended June 30,     For the Six Months Ended June 30,  
     2011     2010      Variance     Variance%     2011     2010      Variance     Variance%  

Canada (in CAD)

     61,983        59,630         2,353        3.9     121,973        119,475         2,498        2.1

Australia (in AUD)

     69,375        76,401         (7,026     -9.2     140,716        153,744         (13,028     -8.5

United Kingdom (in GBP)

     47,496        16,699         30,797        184.4     75,228        30,124         45,104        149.7

Europe (1) , (2) (in EUR)

     (21     14,367         (14,388     -100.1     (7     30,882         (30,889     -100.0

Brazil (in BRL)

     11,622        12,709         (1,087     -8.6     22,909        22,205         704        3.2

 

(1) Europe includes only subsidiaries whose functional currency is the Euro.
(2) Includes revenues from discontinued operations which are subject to currency risk.

Critical Accounting Policies

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K for the year ended December 31, 2010 for a detailed discussion of our critical accounting policies. These policies include revenue recognition, determining our allowance for doubtful accounts receivable, accounting for cost of revenue, valuation of long-lived assets, goodwill and other intangible assets, and accounting for income taxes.

No significant changes in our critical accounting policies have occurred since December 31, 2010.

Financial Presentation Background

In the following presentations and narratives within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we compare, pursuant to accounting principles generally accepted in the United States of America (“US GAAP”) and Securities and Exchange Commission disclosure rules, the Company’s results of operations for the three months and six months ended June 30, 2011 as compared to the three months and six months ended June 30, 2010.

We also present detailed changes in results, excluding currency impacts, since a large portion of our revenues are derived outside of the U.S., and currency changes can influence or mask underlying changes in foreign operating unit performance. For purposes of calculating constant currency rates between periods in connection with presentations that describe changes in values “excluding currency effects” herein, we have taken results from foreign operations for a given year (that were computed in accordance with US GAAP using local currency) and converted such amounts utilizing the same U.S. dollar to applicable local currency exchange rates that were used for purposes of calculating corresponding preceding period US GAAP presentations.

Discontinued Operations

2010 Developments — During 2010 the Company classified its Europe segment, which is also known as European retail operations, as discontinued operations. As a result, the Company has applied retrospective adjustments to reflect the effects of the discontinued operations during 2010. Accordingly, revenue, costs, and expenses of the discontinued operations have been excluded from the respective captions in the condensed consolidated statements of operations. The Company did not retrospectively adjust its condensed consolidated balance sheet as held for sale criteria was not met until the third quarter of 2010, as such, financial information for the Europe segment will appear, as applicable, where certain balance sheet information is presented, see Note 11 —“Discontinued Operations,” for further information.

 

32


Table of Contents

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

 

     Three Months  Ended
June 30, 2011
    Three Months  Ended
June 30, 2010
 

Net revenue

   $ (30   $ 11,638   

Operating expenses

     174        13,146   
  

 

 

   

 

 

 

Income (loss) from operations

     (204     (1,508

Interest expense

     —          (14

Interest income and other income

     30        234   

Foreign currency transaction gain (loss)

     86        (350
  

 

 

   

 

 

 

Income (loss) before income tax

     (88     (1,638

Income tax (expense) benefit

     (1     110   
  

 

 

   

 

 

 

Income (loss) from discontinued operations

   $ (89   $ (1,528
  

 

 

   

 

 

 
     Six Months Ended
June 30, 2011
    Six Months Ended
June 30, 2010
 

Net revenue

   $ (12   $ 24,402   

Operating expenses

     497        26,570   
  

 

 

   

 

 

 

Income (loss) from operations

     (509     (2,168

Interest expense

     —          (25

Interest income and other income

     365        236   

Foreign currency transaction gain (loss)

     76        (198
  

 

 

   

 

 

 

Income (loss) before income tax

     (68     (2,155

Income tax expense

     (1     (62
  

 

 

   

 

 

 

Income (loss) from discontinued operations

   $ (69   $ (2,217
  

 

 

   

 

 

 

Results of Operations

Results of operations for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010

Net revenue: Net revenue, exclusive of the currency effect, increased $64.3 million, or 33.0%, to $258.9 million for the three months ended June 30, 2011 from $194.6 million for the three months ended June 30, 2010. This increase is primarily attributable to the inclusion of Arbinet revenue within ICS, following the merger, offset in part principally by revenue declines in Australia, exclusive of currency effect, and U.S. retail voice and VoIP. Inclusive of the currency effect, which accounted for an increase of $23.6 million, net revenue increased $87.9 million to $282.5 million for the three months ended June 30, 2011 from $194.6 million for the three months ended June 30, 2010.

 

33


Table of Contents
     Exclusive of Currency Effect     Currency
Effect
     Inclusive of
Currency Effect
 
     Quarter Ended     Quarter-over-Quarter            Quarter Ended  
     June 30, 2011     June 30, 2010                        June 30, 2011  

(in thousands)

   Net
Revenue
     % of
Total
    Net
Revenue
     % of
Total
    Variance     Variance %            Net
Revenue
     % of
Total
 

Canada

     60,308         23.3     58,024         29.8     2,284        3.9     3,752         64,060         22.7

Australia

     61,268         23.7     67,486         34.7     (6,218     -9.2     12,413         73,681         26.1

International Carrier Services

     119,905         46.3     49,192         25.3     70,713        143.7     6,624         126,529         44.8

United States

     10,736         4.1     12,841         6.6     (2,105     -16.4     —           10,736         3.8

Other

     6,660         2.6     7,050         3.6     (390     -5.5     836         7,496         2.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

     

 

 

    

 

 

    

 

 

 

Total Revenue

     258,877         100.0     194,593         100.0     64,284        33.0     23,625         282,502         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

     

 

 

    

 

 

    

 

 

 

Canada: Canada net revenue, exclusive of the currency effect, increased $2.3 million, or 3.9%, to $60.3 million for the three months ended June 30, 2011 from $58.0 million for the three months ended June 30, 2010. The net revenue increase is primarily attributable to an increase of $5.8 million in local services, and an increase of $1.5 million in Internet, VoIP, data and hosting services offset, in part, by a decrease of $2.6 million in retail long distance, a decrease of $2.2 million in prepaid voice services and a decrease of $0.2 million in wireless services. Inclusive of the currency effect, which accounted for a $3.8 million increase, net revenue increased $6.1 million to $64.1 million for the three months ended June 30, 2011 from $58.0 million for the three months ended June 30, 2010.

Australia: Australia net revenue, exclusive of the currency effect, decreased $6.2 million, or 9.2%, to $61.3 million for the three months ended June 30, 2011 from $67.5 million for the three months ended June 30, 2010. The net revenue decrease is primarily attributable to a decrease of $2.7 million in business voice services, a decrease of $1.8 million in residential voice, a decrease of $1.6 million in Internet services, a decrease of $0.3 million in DSL services, and a decrease of $0.1 million in other services offset, in part, by an increase of $0.3 million in data center, wireless and VoIP services. Inclusive of the currency effect, which accounted for a $12.4 million increase, net revenue increased $6.2 million to $73.7 million for the three months ended June 30, 2011 from $67.5 million for the three months ended June 30, 2010.

International Carrier Services: ICS net revenue, exclusive of the currency effect, increased $70.7 million, or 143.7%, to $119.9 million for the three months ended June 30, 2011 from $49.2 million for the three months ended June 30, 2010. The net revenue increase is primarily due to the acquisition of Arbinet, which provided net revenue of $69.1 million, and an increase of $6.6 million in US carrier services offset, in part, by a decrease of $5.0 million in Europe carrier services. Inclusive of the currency effect, which accounted for a $6.6 million increase, net revenue increased $77.3 million to $126.5 million for the three months ended June 30, 2011, from $49.2 million for the three months ended June 30, 2010.

United States: United States net revenue decreased $2.1 million, or 16.4%, to $10.7 million for the three months ended June 30, 2011 from $12.8 million for the three months ended June 30, 2010. The decrease is primarily attributable to a decrease of $1.2 million in retail voice services, a decrease of $0.8 million in VoIP services and a decrease of $0.1 million in Internet services.

Other: Other net revenue, exclusive of the currency effect, decreased $0.4 million, or 5.5%, to $6.7 million for the three months ended June 30, 2011 from $7.1 million for the three months ended June 30, 2010. The revenue decrease is primarily due to a decrease in carrier voice services. Inclusive of the currency effect, which accounted for a $0.8 million increase, net revenue increased $0.4 million to $7.5 million for the three months ended June 30, 2011 from $7.1 million for the three months ended June 30, 2010.

Cost of revenue: Cost of revenue, exclusive of the currency effect, increased $65.2 million to $189.2 million, or 73.1% of net revenue, for the three months ended June 30, 2011 from $124.0 million, or 63.7% of net revenue, for the three months ended June 30, 2010 primarily due to a shift to higher volume lower margin products resulting from the acquisition of Arbinet. Inclusive of the currency effect, which accounted for a $16.3 million increase, cost of revenue increased $81.5 million to $205.5 million for the three months ended June 30, 2011 from $124.0 million for the three months ended June 30, 2010.

 

34


Table of Contents
     Exclusive of Currency Effect     Currency
Effect
     Inclusive of
Currency Effect
 
     Quarter Ended     Quarter-over-Quarter            Quarter Ended  
     June 30, 2011     June 30, 2010                        June 30, 2011  

(in thousands)

   Cost of
Revenue
     % of  Net
Revenue
    Cost of
Revenue
     % of  Net
Revenue
    Variance     Variance %            Cost of
Revenue
     % of Net
Revenue
 

Canada

     28,799         47.8     25,939         44.7     2,860        11.0     1,788         30,587         47.7

Australia

     36,942         60.3     41,303         61.2     (4,361     -10.6     7,415         44,357         60.2

International Carrier Services

     113,422         94.6     45,784         93.1     67,638        147.7     6,429         119,851         94.7

United States

     4,865         45.3     5,137         40.0     (272     -5.3     —           4,865         45.3

Other

     5,194         78.0     5,797         82.2     (603     -10.4     668         5,862         78.2
  

 

 

      

 

 

      

 

 

     

 

 

    

 

 

    

Total Cost of Revenue

     189,222         73.1     123,960         63.7     65,262        52.6     16,300         205,522         72.8
  

 

 

      

 

 

      

 

 

     

 

 

    

 

 

    

Canada: Canada cost of revenue, exclusive of the currency effect, increased $2.9 million to $28.8 million, or 47.8% of net revenue, for the three months ended June 30, 2011 from $25.9 million, or 44.7% of net revenue, for the three months ended June 30, 2010. The increase is primarily attributable to an increase of $3.8 million in the costs of local services, an increase of $0.5 million in the costs of Internet and VoIP services offset, in part, by a decrease of $1.2 million in costs of prepaid services and a decrease of $0.2 million in costs of voice services. Inclusive of the currency effect, which accounted for a $1.8 million increase, cost of revenue increased $4.7 million to $30.6 million for the three months ended June 30, 2011 from $25.9 million for the three months ended June 30, 2010.

Australia: Australia cost of revenue, exclusive of the currency effect, decreased $4.4 million to $36.9 million, or 60.3% of net revenue, for the three months ended June 30, 2011 from $41.3 million, or 61.2% of net revenue, for the three months ended June 30, 2010. The decrease is primarily attributable to a $6.2 million decrease in net revenue. Inclusive of the currency effect, which accounted for a $7.4 million increase, cost of revenue increased $3.0 million to $44.3 million for the three months ended June 30, 2011 from $41.3 million for the three months ended June 30, 2010.

International Carrier Services: ICS cost of revenue, exclusive of the currency effect, increased $67.6 million to $113.4 million, or 94.6% of net revenue, for the three months ended June 30, 2011 from $45.8 million, or 93.1% of net revenue, for the three months ended June 30, 2010. The increase is primarily due to the acquisition of Arbinet, which provided cost of revenue of $64.8 million, and an increase of $7.6 million in US carrier services offset, in part, by a decrease of $4.8 million in Europe carrier services. Inclusive of the currency effect, which accounted for a $6.4 million increase, cost of revenues increased $74.0 million to $119.8 million for the three months ended June 30, 2011 from $45.8 million for the three months ended June 30, 2010.

United States: United States cost of revenue decreased $0.3 million to $4.9 million, or 45.3% of net revenue, for the three months ended June 30, 2011 from $5.1 million, or 40.0% of net revenue, for the three months ended June 30, 2010. The decrease is primarily attributable to a $2.1 million decrease in net revenue.

Other: Other cost of revenue, exclusive of the currency effect, decreased $0.6 million to $5.2 million, or 78.0% of net revenue, for the three months ended June 30, 2011 from $5.8 million, or 82.2% of net revenue, for the three months ended June 30, 2010. The decrease is primarily attributable to a decrease in net revenue of $0.4 million. Inclusive of the currency effect, which accounted for a $0.7 million increase, cost of revenue increased $0.1 million to $5.9 million for the three months ended June 30, 2011 from $5.8 million for the three months ended June 30, 2010.

Selling, general and administrative expenses: Selling, general and administrative expenses, exclusive of the currency effect, increased $6.6 million to $54.4 million, or 21.0% of net revenue, for the three months ended June 30, 2011 from $47.8 million, or 24.6% of net revenue, for the three months ended June 30, 2010. Inclusive of the currency effect, which accounted for a $5.0 million increase, selling, general and administrative expenses increased $11.6 million to $59.4 million for the three months ended June 30, 2011 from $47.8 million for the three months ended June 30, 2010.

 

35


Table of Contents
     Exclusive of Currency Effect     Currency
Effect
     Inclusive of
Currency Effect
 
     Quarter Ended     Quarter-over-Quarter            Quarter Ended  
     June 30, 2011     June 30, 2010                        June 30, 2011  

(in thousands)

   SG&A      % of  Net
Revenue
    SG&A      % of  Net
Revenue
    Variance     Variance %            SG&A      % of  Net
Revenue
 

Canada

     19,099         31.7     20,183         34.8     (1,084     -5.4     1,189         20,288         31.7

Australia

     17,336         28.3     17,035         25.2     301        1.8     3,520         20,856         28.3

International Carrier Services

     6,202         5.2     1,605         3.3     4,597        286.4     107         6,309         5.0

United States

     4,567         42.5     5,367         41.8     (800     -14.9     —           4,567         42.5

Other

     1,327         19.9     1,141         16.2     186        16.3     129         1,456         19.4

Corporate

     5,885         —          2,523         —          3,362        133.3     —           5,885         —     
  

 

 

      

 

 

      

 

 

     

 

 

    

 

 

    

Total SG&A

     54,416         21.0     47,854         24.6     6,562        13.7     4,945         59,361         21.0
  

 

 

      

 

 

      

 

 

     

 

 

    

 

 

    

Canada: Canada selling, general and administrative expenses, exclusive of the currency effect, decreased $1.1 million to $19.1 million, or 31.7% of net revenue, for the three months ended June 30, 2011 from $20.2 million, or 34.8% of net revenue, for the three months ended June 30, 2010. The decrease is attributable to a decrease of $0.8 million in sales and marketing expenses, a decrease of $0.2 million in salaries and benefits, a decrease of $0.2 million in professional fees and a decrease of $0.1 million in general and administrative expense offset, in part, by an increase of $0.2 million in advertising expenses. Inclusive of the currency effect, which accounted for a $1.2 million increase, selling, general and administrative expenses increased $0.1 million to $20.3 million for the three months ended June 30, 2011 from $20.2 million for the three months ended June 30, 2010.

Australia: Australia selling, general and administrative expense, exclusive of the currency effect, increased $0.3 million to $17.3 million, or 28.3% of net revenue, for the three months ended June 30, 2011 from $17.0 million, or 25.2% of net revenue, for the three months ended June 30, 2010. The increase is primarily attributable to an increase of $0.5 million in salaries and benefits, an increase of $0.3 million in advertising expenses offset, in part, by a decrease of $0.3 million in general and administrative expense and a decrease of $0.2 million in sales and marketing expenses. Inclusive of the currency effect, which accounted for a $3.5 million increase, selling, general and administrative expense increased $3.8 million to $20.8 million for the three months ended June 30, 2011 from $17.0 million for the three months ended June 30, 2010.

International Carrier Services: ICS selling, general and administrative expenses, exclusive of the currency effect, increased $4.6 million to $6.2 million, or 5.2% of net revenue, for the three months ended June 30, 2011 from $1.6 million, or 3.3% of net revenue, for the three months ended June 30, 2010. The increase is primarily due to the acquisition of Arbinet, which provided selling, general and administrative expense of $4.0 million, and an increase of $0.6 million in US carrier services. Inclusive of the currency effect, which accounted for a $0.1 million increase, selling, general and administrative expense increased $4.7 million to $6.3 million for the three months ended June 30, 2011 from $1.6 million for the three months ended June 30, 2010. Inclusive within the acquisition of Arbinet has been $0.3 million of integration expenses and $28 thousand in severance expense.

United States: United States selling, general and administrative expenses decreased $0.8 million to $4.6 million, or 42.5% of net revenue, for the three months ended June 30, 2011 from $5.4 million, or 41.8% of net revenue, for the three months ended June 30, 2010. The decrease is attributable to a decrease of $0.5 million in salaries and benefits, a decrease of $0.5 million in general and administrative expenses, a decrease of $0.1 million in professional fees offset, in part, by an increase of $0.3 million in advertising expense.

Other: Other selling, general and administrative expenses, exclusive of the currency effect, increased $0.2 million to $1.3 million, or 19.9% of net revenue, for the three months ended June 30, 2011 from $1.1 million, or 16.2% of net revenue, for the three months ended June 30, 2010. The increase is attributable to an increase of $0.1 million in sales and marketing expenses and an increase of $0.1 million in all other expenses. Inclusive of the currency effect, which accounted for a $0.1 million increase, selling, general and administrative expenses increased $0.3 million to $1.4 million for the three months ended June 30, 2011 from $1.1 million for the three months ended June 30, 2010.

Corporate: Corporate selling, general and administrative expense increased $3.4 million to $5.9 million for the three months ended June 30, 2011 from $2.5 million for the three months ended June 30, 2010. The increase is attributable to an increase of $2.7 million in salaries and benefits, an increase of $0.6 million in professional fees, and an increase of $0.1 million in travel and entertainment expense.

 

36


Table of Contents

Depreciation and amortization expense: Depreciation and amortization expense decreased $1.1 million to $17.1 million for the three months ended June 30, 2011 from $18.2 million for the three months ended June 30, 2010. The decrease was primarily the result of certain assets revalued at the time of fresh start accounting and depreciated over a one year life which ended on June 30, 2010, offset in part, by additional depreciation and amortization from Arbinet.

Interest expense and accretion (amortization) on debt discount/premium, net: Interest expense and accretion (amortization) on debt discount/premium, net decreased $0.8 million to $7.9 million for the three months ended June 30, 2011 from $8.7 million for the three months ended June 30, 2010. The decrease was due to the $24.0 million principal payment of the 14 1/4% Senior Secured Notes in April 2011.

Gain (loss) from contingent value rights valuation: The change in value of the contingent value rights increased $0.5 million to a gain of $0.1 million for the three months ended June 30, 2011 from a loss of $0.4 million for the three months ended June 30, 2010. This increase is attributable to the change of the fair market value. The Company determined these contingent value rights to be derivative instruments to be accounted for as liabilities and marked to fair value at each balance sheet date. Estimates of fair value represent the Company’s best estimates based on a Black-Scholes pricing model.

Foreign currency transaction gain (loss): Foreign currency transaction gain increased $12.0 million to a gain of $2.4 million for the three months ended June 30, 2011 from a loss of $9.6 million for the three months ended June 30, 2010. The gains are attributable to the impact of foreign currency exchange rate changes on intercompany debt balances and on receivables and payables denominated in a currency other than the subsidiaries’ functional currency.

Income tax benefit (expense): Income tax expense was $1.4 million for the three months ended June 30, 2011 compared to a $1.9 million benefit for the three months ended June 30, 2010. The expense includes withholding tax related to cross-border payments and state income tax expense expected in states without net operating loss coverage.

Results of operations for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010

Net revenue: Net revenue, exclusive of the currency effect, increased $81.9 million, or 21.1%, to $469.5 million for the six months ended June 30, 2011 from $387.6 million for the six months ended June 30, 2010. This increase was due primarily to the inclusion of Arbinet revenue within ICS, following the merger, offset in part principally by revenue declines in Australia, exclusive of currency effect, and U.S. retail voice and VoIP. Inclusive of the currency effect, which accounted for an increase of $36.7 million, net revenue increased $118.6 million to $506.2 million for the six months ended June 30, 2011 from $387.6 million for the six months ended June 30, 2010.

 

     Exclusive of Currency Effect     Currency
Effect
     Inclusive of
Currency Effect
 
     Six Months Ended     Year-over-Year            Six Months Ended  
     June 30, 2011     June 30, 2010                        June 30, 2011  

(in thousands)

   Net
Revenue
     % of
Total
    Net
Revenue
     % of
Total
    Variance     Variance %            Net
Revenue
     % of
Total
 

Canada

     117,924         25.1     115,500         29.8     2,424        2.1     6,972         124,896         24.7

Australia

     125,737         26.8     137,386         35.4     (11,649     -8.5     19,676         145,413         28.7

International Carrier Services

     190,866         40.7     95,699         24.7     95,167        99.4     8,685         199,551         39.4

United States

     21,919         4.6     26,706         6.9     (4,787     -17.9     —           21,919         4.3

Other

     13,085         2.8     12,319         3.2     766        6.2     1,361         14,446         2.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

     

 

 

    

 

 

    

 

 

 

Total Revenue

     469,531         100.0     387,610         100.0     81,921        21.1     36,694         506,225         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

     

 

 

    

 

 

    

 

 

 

Canada: Canada net revenue, exclusive of the currency effect, increased $2.4 million, or 2.1%, to $117.9 million for the six months ended June 30, 2011 from $115.5 million for the six months ended June 30, 2010. The net revenue increase is primarily attributable to an increase of $4.3 million in retail voice services, an increase of $2.7 million in Internet, VoIP, data and hosting services offset, in part, by a decrease of $3.8 million in prepaid voice services, a decrease of $0.4 million in wireless services and a decrease of $0.4 million in local services. Inclusive of the currency effect, which accounted for a $7.0 million increase, net revenue increased $9.4 million to $124.9 million for the six months ended June 30, 2011 from $115.5 million for the six months ended June 30, 2010.

 

37


Table of Contents

Australia: Australia net revenue, exclusive of the currency effect, decreased $11.7 million, or 8.5%, to $125.7 million for the six months ended June 30, 2011 from $137.4 million for the six months ended June 30, 2010. The net revenue decrease is primarily attributable to a decrease of $4.2 million in business voice services, a decrease of $3.6 million in residential voice, a decrease of $3.4 million in Internet services, a decrease of $0.4 million in DSL services, and a decrease of $1.0 million in other services offset, in part, by an increase of $0.7 million in wireless services and an increase of $0.2 million in VoIP services. Inclusive of the currency effect, which accounted for a $19.7 million increase, net revenue increased $8.0 million to $145.4 million for the six months ended June 30, 2011 from $137.4 million for the six months ended June 30, 2010.

International Carrier Services: ICS net revenue, exclusive of the currency effect, increased $95.2 million, or 99.4%, to $190.9 million for the six months ended June 30, 2011 from $95.7 million for the six months ended June 30, 2010. The net revenue increase is primarily due to the acquisition of Arbinet, which provided net revenue of $94.7 million, and an increase of $11.8 million in US carrier services offset, in part, by a decrease of $11.3 million in Europe carrier services. Inclusive of the currency effect, which accounted for an $8.7 million increase, net revenue increased $103.9 million to $199.6 million for the six months ended June 30, 2011, from $95.7 million for the six months ended June 30, 2010.

United States: United States net revenue decreased $4.8 million, or 17.9%, to $21.9 million for the six months ended June 30, 2011 from $26.7 million for the six months ended June 30, 2010. The decrease is primarily attributable to a decrease of $2.7 million due to customer attrition in retail voice services, a decrease of $1.9 million in VoIP services and a decrease of $0.2 million in Internet services.

Other: Other net revenue, exclusive of the currency effect, increased $0.8 million, or 6.2% to $13.1 million for the six months ended June 30, 2011 from $12.3 million for the six months ended June 30, 2010. The revenue increase is primarily due to an increase in wireless services. Inclusive of the currency effect, which accounted for a $1.4 million increase, net revenue increased $2.2 million to $14.5 million for the six months ended June 30, 2011 from $12.3 million for the six months ended June 30, 2010.

Cost of revenue: Cost of revenue, exclusive of the currency effect, increased $87.1 million to $333.1 million, or 71.0% of net revenue, for the six months ended June 30, 2011 from $246.0 million, or 63.5% of net revenue, for the six months ended June 30, 2010 primarily due to a shift to higher volume lower margin products resulting from the acquisition of Arbinet. Inclusive of the currency effect, which accounted for a $24.7 million increase, cost of revenue increased $111.8 million to $357.8 million for the six months ended June 30, 2011 from $246.0 million for the six months ended June 30, 2010.

 

     Exclusive of Currency Effect     Currency
Effect
     Inclusive of
Currency Effect
 
     Six Months Ended     Year-over-Year            Six Months Ended  
     June 30, 2011     June 30, 2010                        June 30, 2011  

(in thousands)

   Cost of
Revenue
     % of  Net
Revenue
    Cost of
Revenue
     % of  Net
Revenue
    Variance     Variance %            Cost of
Revenue
     % of  Net
Revenue
 

Canada

     56,289         47.7     52,206         45.2     4,083        7.8     3,327         59,616         47.7

Australia

     76,020         60.5     82,903         60.3     (6,883     -8.3     11,811         87,831         60.4

International Carrier Services

     180,740         94.7     89,772         93.8     90,968        101.3     8,416         189,156         94.8

United States

     9,904         45.2     11,164         41.8     (1,260     -11.3     —           9,904         45.2

Other

     10,185         77.8     9,906         80.4     279        2.8     1,086         11,271         78.0
  

 

 

      

 

 

      

 

 

     

 

 

    

 

 

    

Total Cost of Revenue

     333,138         71.0     245,951         63.5     87,187        35.4     24,640         357,778         70.7
  

 

 

      

 

 

      

 

 

     

 

 

    

 

 

    

Canada: Canada cost of revenue, exclusive of the currency effect, increased $4.1 million to $56.3 million, or 47.7% of net revenue, for the six months ended June 30, 2011 from $52.2 million, or 45.2% of net revenue, for the six months ended June 30, 2010. The increase is primarily attributable to an increase of $7.0 million in the costs of voice services, an increase of $0.7 million in the costs of Internet services, and an increase of $0.3 million in the costs of VoIP services offset, in part, by a decrease of $2.6 million in costs of prepaid services and a decrease of $1.3 million in the costs of local services. Inclusive of the currency effect, which accounted for a $3.3 million increase, cost of revenue increased $7.4 million to $59.6 million for the six months ended June 30, 2011 from $52.2 million for the six months ended June 30, 2010.

Australia: Australia cost of revenue, exclusive of the currency effect, decreased $6.9 million to $76.0 million, or 60.5% of net revenue, for the six months ended June 30, 2011 from $82.9 million, or 60.3% of net revenue, for the six months ended June 30, 2010. The decrease is primarily attributable to an $11.7 million decrease in net revenue. Inclusive of the currency effect, which accounted for an $11.8 million increase, cost of revenue increased $4.9 million to $87.8 million for the six months ended June 30, 2011 from $82.9 million for the six months ended June 30, 2010.

 

38


Table of Contents

International Carrier Services: ICS cost of revenue, exclusive of the currency effect, increased $90.9 million to $180.7 million, or 94.7% of net revenue, for the six months ended June 30, 2011 from $89.8 million, or 93.8% of net revenue, for the six months ended June 30, 2010. The increase is primarily due to the acquisition of Arbinet, which provided cost of revenue of $88.8 million, and an increase of $12.9 million in US carrier services offset, in part, by a decrease of $10.8 million in Europe carrier services. Inclusive of the currency effect, which accounted for an $8.4 million increase, cost of revenues increased $99.3 million to $189.1 million for the six months ended June 30, 2011 from $89.8 million for the six months ended June 30, 2010.

United States: United States cost of revenue decreased $1.3 million to $9.9 million, or 45.2% of net revenue, for the six months ended June 30, 2011 from $11.2 million, or 41.8% of net revenue, for the six months ended June 30, 2010. The decrease is primarily attributable to a $4.8 million decrease in net revenue.

Other: Other cost of revenue, exclusive of the currency effect, increased $0.3 million to $10.2 million, or 77.8% of net revenue, for the six months ended June 30, 2011 from $9.9 million, or 80.4% of net revenue, for the six months ended June 30, 2010. The increase is primarily attributable to an increase in net revenue of $0.8 million. Inclusive of the currency effect, which accounted for a $1.1 million increase, cost of revenue increased $1.4 million to $11.3 million for the six months ended June 30, 2011 from $9.9 million for the six months ended June 30, 2010.

Selling, general and administrative expenses: Selling, general and administrative expenses, exclusive of the currency effect, increased $7.3 million to $105.3 million, or 22.4% of net revenue, for the six months ended June 30, 2011 from $98.0 million, or 25.3% of net revenue, for the six months ended June 30, 2010. Inclusive of the currency effect, which accounted for an $8.0 million increase, selling, general and administrative expenses increased $15.3 million to $113.3 million for the six months ended June 30, 2011 from $98.0 million for the six months ended June 30, 2010.

 

     Exclusive of Currency Effect     Currency
Effect
     Inclusive of
Currency Effect
 
     Six Months Ended     Year-over-Year            Six Months Ended  
     June 30, 2011     June 30, 2010                        June 30, 2011  

(in thousands)

   SG&A      % of  Net
Revenue
    SG&A      % of  Net
Revenue
    Variance     Variance %            SG&A      % of Net
Revenue
 

Canada

     37,643         31.9     39,795         34.5     (2,152     -5.4     2,225         39,868         31.9

Australia

     34,584         27.5     33,718         24.5     866        2.6     5,463         40,047         27.5

International Carrier Services

     10,991         5.8     3,264         3.4     7,727        236.7     142         11,133         5.6

United States

     9,121         41.6     12,333         46.2     (3,212     -26.0     —           9,121         41.6

Other

     2,315         17.7     2,249         18.3     66        2.9     197         2,512         17.4

Corporate

     10,632         —          6,613         —          4,019        60.8     —           10,632         —     
  

 

 

      

 

 

      

 

 

     

 

 

    

 

 

    

Total SG&A

     105,286         22.4     97,972         25.3     7,314        7.5     8,027         113,313         22.4
  

 

 

      

 

 

      

 

 

     

 

 

    

 

 

    

Canada: Canada selling, general and administrative expenses, exclusive of the currency effect, decreased $2.2 million to $37.6 million, or 31.9% of net revenue, for the six months ended June 30, 2011 from $39.8 million, or 34.5% of net revenue, for the six months ended June 30, 2010. The decrease is attributable to a decrease of $1.6 million in sales and marketing expenses, a decrease of $0.5 million in advertising expenses, a decrease of $0.3 million in professional fees, a decrease of $0.1 million in occupancy expenses and a decrease of $0.1 million in other expenses offset, in part, by an increase of $0.4 million in salaries and benefits. Inclusive of the currency effect, which accounted for a $2.3 million increase, selling, general and administrative expense increased $0.1 million to $39.9 million for the six months ended June 30, 2011 from $39.8 million for the six months ended June 30, 2010.

Australia: Australia selling, general and administrative expense, exclusive of the currency effect, increased $0.9 million to $34.6 million, or 27.5% of net revenue, for the six months ended June 30, 2011 from $33.7 million, or 24.5% of net revenue, for the six months ended June 30, 2010. The increase is attributable to an increase of $1.0 million in salaries and benefits, an increase of $0.4 million in advertising expenses and an increase of $0.2 million in occupancy expenses offset, in part, by a decrease of $0.3 million in sales and marketing expenses, a decrease of $0.3 million in general and administrative expenses and a decrease of $0.1 million in professional fees. Inclusive of the currency effect, which accounted for a $5.4 million increase, selling, general and administrative expense increased $6.3 million to $40.0 million for the six months ended June 30, 2011 from $33.7 million for the six months ended June 30, 2010.

 

39


Table of Contents

International Carrier Services: ICS selling, general and administrative expenses, exclusive of the currency effect, increased $7.7 million to $11.0 million, or 5.8% of net revenue, for the six months ended June 30, 2011 from $3.3 million, or 3.4% of net revenue, for the six months ended June 30, 2010. The increase is primarily due to the acquisition of Arbinet, which provided selling, general and administrative expense of $7.1 million, and an increase of $0.7 million in US carrier services offset, in part, by a decrease of $0.1 million in Europe carrier services. Inclusive of the currency effect, which accounted for a $0.1 million increase, selling, general and administrative expense increased $7.8 million to $11.1 million for the six months ended June 30, 2011 from $3.3 million for the six months ended June 30, 2010. Inclusive within the acquisition of Arbinet has been $0.6 million of integration expenses and $1.1 million in severance expense.

United States: United States selling, general and administrative expenses decreased $3.2 million to $9.1 million, or 41.6% of net revenue, for the six months ended June 30, 2011 from $12.3 million, or 46.2% of net revenue, for the six months ended June 30, 2010. The decrease is attributable to a decrease of $2.0 million in general and administrative expenses, a decrease of $1.1 million in salaries and benefits, a decrease of $0.4 million in occupancy expenses, a decrease of $0.1 million in professional fees and a decrease of $0.1 million in sales and marketing expenses offset, in part, by an increase of $0.5 million in advertising expenses.

Other: Other selling, general and administrative expense, exclusive of the currency effect, increased $0.1 million to $2.3 million, or 17.7% of net revenue, for the six months ended June 30, 2011 from $2.2 million, or 18.3% of net revenue, for the six months ended June 30, 2010. The increase is primarily attributable to an increase of $0.1 million in sales and marketing expenses. Inclusive of the currency effect, which accounted for a $0.2 million increase, selling, general and administrative expense increased $0.3 million to $2.5 million for the six months ended June 30, 2011 from $2.2 million for the six months ended June 30, 2010.

Corporate: Corporate selling, general and administrative expense increased $4.0 million to $10.6 million for the six months ended June 30, 2011 from $6.6 million for the six months ended June 30, 2010. The increase is attributable to an increase of $1.9 million in salaries and benefits, an increase of $0.9 million in professional fees, an increase of $0.7 million in general and administrative expenses, an increase of $0.3 million in occupancy expenses and an increase of $0.2 million in travel and entertainment expense.

Depreciation and amortization expense: Depreciation and amortization expense decreased $3.8 million to $32.2 million for the six months ended June 30, 2011 from $36.0 million for the six months ended June 30, 2010. The decrease was primarily the result of certain assets revalued at the time of fresh start accounting and depreciated over a one year life which ended on June 30, 2010, offset in part, by additional depreciation and amortization from Arbinet.

Goodwill impairment expense: The Company expensed $14.7 million of goodwill in the first quarter of 2011 due to the acquisition price of Arbinet Corporation. See Note 2 — “Acquisitions” and Note 4 —“Goodwill and Other Intangible Assets,” for further information.

Interest expense and accretion (amortization) on debt discount/premium, net: Interest expense and accretion (amortization) on debt discount/premium, net decreased $1.4 million to $16.7 million for the six months ended June 30, 2011 from $18.1 million for the six months ended June 30, 2010. The decrease was due to the $24.0 million principal payment of the 14 1/4% Senior Secured Notes in April 2011.

Gain (loss) from contingent value rights valuation: The change in value of the contingent value rights decreased $1.9 million to a loss of $4.3 million for the six months ended June 30, 2011 from a loss of $2.4 million for the six months ended June 30, 2010. This decrease is attributable to the change of the fair market value. The Company determined these contingent value rights to be derivative instruments to be accounted for as liabilities and marked to fair value at each balance sheet date. Estimates of fair value represent the Company’s best estimates based on a Black-Scholes pricing model.

Foreign currency transaction gain (loss): Foreign currency transaction gain increased $10.2 million to a gain of $6.4 million for the six months ended June 30, 2011 from a loss of $3.8 million for the six months ended June 30, 2010. The gains are attributable to the impact of foreign currency exchange rate changes on intercompany debt balances and on receivables and payables denominated in a currency other than the subsidiaries’ functional currency.

Income tax benefit (expense): Income tax expense was $0.5 million for the six months ended June 30, 2011 compared to a $4.1 million benefit for the six months ended June 30, 2010. The expense includes withholding tax related to cross-border payments and state income tax expense expected in states without net operating loss coverage.

 

40


Table of Contents

Liquidity and Capital Resources

Changes in Cash Flows

Our principal liquidity requirements arise from cash used in operating activities, purchases of network equipment including switches, related transmission equipment and capacity, development of back-office systems, expansion of data center facilities, interest and principal payments on outstanding debt and other obligations and income taxes. We have financed our growth and operations to date through public offerings and private placements of debt and equity securities, vendor financing, capital lease financing and other financing arrangements.

Net cash provided by operating activities was $15.0 million for the six months ended June 30, 2011. For the six months ended June 30, 2011, net income, net of non-cash operating activity, provided $27.1 million of cash. In addition, cash was increased by an increase in accounts payable of $6.9 million. For the six months ended June 30, 2011, we used $8.6 million to increase accounts receivable, $5.3 million to reduce our accrued expenses, deferred revenue, other current liabilities and other liabilities, net, and $4.8 million to reduce our accrued interconnection costs.

Net cash provided by investing activities was $0.3 million for the six months ended June 30, 2011, which included $13.9 million used for capital expenditures, offset by $9.6 million provided by cash acquired from acquisition of businesses and $4.1 million from sale of marketable securities.

Short- and Long-Term Liquidity Considerations and Risks

As of June 30, 2011, we had $31.5 million of unrestricted cash and cash equivalents. We believe that our existing cash and cash equivalents will be sufficient to fund our debt service requirements, other fixed obligations (such as capital leases), and other cash needs for our operations for at least the next twelve months. The Company and/or its subsidiaries will evaluate and determine on a continuing basis the most efficient use of the Company’s capital and resources, including efforts to invest in the Company’s network, systems and product initiatives and to strengthen its balance sheet through debt repurchase or other means.

As of June 30, 2011, we have $30.3 million in future minimum purchase obligations, $80.4 million in future operating lease payments and $221.2 million of indebtedness. At June 30, 2011, approximately $88 million of unrecognized tax benefits have been recorded as liabilities in accordance with ASC No. 740; however, we are uncertain as to if or when such amounts may be settled, so we have not included these amounts in the table below. Included in the unrecognized tax benefits not included in the table below, we have recorded a liability for potential penalties and interest of $0.2 million for the six months ended June 30, 2011.

Contractual Obligations

The obligations reflected in the table below reflect the contractual payments of principal and interest that existed as of June 30, 2011:

 

Year Ending December 31,

   Capital Leases
and Other
    13% Senior
Secured  Notes
due 2016
    14  1/4% Senior
Subordinated Secured
Notes due 2013
    Purchase
Obligations
     Operating
Leases
     Total  

2011 (as of June 30, 2011)

   $ 645      $ 8,448      $ 6,413      $ 17,897       $ 9,800       $ 43,203   

2012

     423        16,896        12,825        8,073         17,791         56,008   

2013

     207        16,896        96,413        3,162         14,475         131,153   

2014

     31        16,896        —          1,162         10,211         28,300   

2015

     —          16,896        —          54