XNYS:PTGI Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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 March 31, 2012

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   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

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 April 30, 2012

Common Stock, $0.001 par value   13,832,067

 

 

 


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 Months Ended March 31, 2012 and 2011

     3   
  

Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

     4   
  

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011

     5   
  

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March  31, 2012 and 2011

     6   
  

Notes to Condensed Consolidated Financial Statements

     7   

Item 2.

  

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

     24   

Item 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     33   

Item 4.

  

CONTROLS AND PROCEDURES

     34   

Part II. OTHER INFORMATION

  

Item 1.

  

LEGAL PROCEEDINGS

     35   

Item 1A.

  

RISK FACTORS

     35   

Item 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     35   

Item 3.

  

DEFAULTS UPON SENIOR SECURITIES

     36   

Item 4.

  

MINE SAFETY DISCLOSURES

     36   

Item 5.

  

OTHER INFORMATION

     36   

Item 6.

  

EXHIBITS

     36   

SIGNATURES

     37   

EXHIBIT INDEX

     38   

 

2


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

    Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 

NET REVENUE

  $ 234,692      $ 216,952   

OPERATING EXPENSES

   

Cost of revenue (exclusive of depreciation included below)

    162,496        146,847   

Selling, general and administrative

    53,868        53,095   

Depreciation and amortization

    14,519        14,940   

(Gain) loss on sale or disposal of assets

    864        53   

Goodwill impairment

    —          14,679   
 

 

 

   

 

 

 

Total operating expenses

    231,747        229,614   
 

 

 

   

 

 

 

INCOME (LOSS) FROM OPERATIONS

    2,945        (12,662

INTEREST EXPENSE

    (7,127     (8,679

ACCRETION (AMORTIZATION) ON DEBT PREMIUM/DISCOUNT, net

    (57     (50

GAIN (LOSS) FROM CONTINGENT VALUE RIGHTS VALUATION

    (7,190     (4,384

INTEREST INCOME AND OTHER INCOME (EXPENSE), net

    158        (87

FOREIGN CURRENCY TRANSACTION GAIN (LOSS)

    4,745        4,048   
 

 

 

   

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

    (6,526     (21,814

INCOME TAX BENEFIT (EXPENSE)

    (86     830   
 

 

 

   

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

    (6,612     (20,984

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax

    (140     362   
 

 

 

   

 

 

 

NET INCOME (LOSS)

    (6,752     (20,622

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

    (106     1,367   
 

 

 

   

 

 

 

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

  $ (6,858   $ (19,255
 

 

 

   

 

 

 

BASIC INCOME (LOSS) PER COMMON SHARE:

   

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

  $ (0.49   $ (1.76

Income (loss) from discontinued operations

    (0.01     0.03   
 

 

 

   

 

 

 

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

  $ (0.50   $ (1.73
 

 

 

   

 

 

 

DILUTED INCOME (LOSS) PER COMMON SHARE:

   

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

  $ (0.49   $ (1.76

Income (loss) from discontinued operations

    (0.01     0.03   
 

 

 

   

 

 

 

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

  $ (0.50   $ (1.73
 

 

 

   

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

   

Basic

    13,744        11,148   
 

 

 

   

 

 

 

Diluted

    13,744        11,148   
 

 

 

   

 

 

 

AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS OF PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

   

Income (loss) from continuing operations, net of tax

  $ (6,718   $ (19,617

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax

    (140     362   
 

 

 

   

 

 

 

Net income (loss)

  $ (6,858   $ (19,255
 

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

(unaudited)

 

     March 31,
2012
    December 31,
2011
 

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 46,181      $ 41,052   

Accounts receivable (net of allowance for doubtful accounts receivable of $7,397 and $7,552 at March 31, 2012 and December 31, 2011, respectively)

     71,880        81,609   

Prepaid expenses and other current assets

     17,566        15,539   
  

 

 

   

 

 

 

Total current assets

     135,627        138,200   

RESTRICTED CASH

     12,287        11,891   

PROPERTY AND EQUIPMENT – Net

     152,368        152,180   

GOODWILL

     71,479        71,902   

OTHER INTANGIBLE ASSETS – Net

     133,561        135,677   

OTHER ASSETS

     32,058        33,974   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 537,380      $ 543,824   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 40,724      $ 46,627   

Accrued interconnection costs

     23,824        24,103   

Deferred revenue

     12,055        12,258   

Accrued expenses and other current liabilities

     41,002        44,384   

Accrued income taxes

     7,876        10,617   

Accrued interest

     11,150        5,889   

Current portion of long-term obligations

     2,289        1,948   
  

 

 

   

 

 

 

Total current liabilities

     138,920        145,826   

LONG-TERM OBLIGATIONS

     243,786        245,814   

DEFERRED TAX LIABILITY

     31,843        31,311   

CONTINGENT VALUE RIGHTS

     23,386        16,196   

OTHER LIABILITIES

     2,502        2,971   
  

 

 

   

 

 

 

Total liabilities

     440,437        442,118   

COMMITMENTS AND CONTINGENCIES (See Note 6)

    

STOCKHOLDERS’ EQUITY (DEFICIT):

    

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

     —          —     

Common stock, $0.001 par value – 80,000,000 shares authorized; 13,846,433 and 13,772,646 shares issued and 13,814,807 and 13,741,020 shares outstanding at March 31, 2012 and December 31, 2011, respectively

     14        14   

Additional paid-in capital

     143,595        142,796   

Accumulated deficit

     (57,943     (51,085

Treasury stock, at cost – 31,626 and 31,626 shares at March 31, 2012 and December 31, 2011, respectively

     (378     (378

Accumulated other comprehensive income

     3,410        2,416   
  

 

 

   

 

 

 

Total stockholders’ equity before noncontrolling interest

     88,698        93,763   
  

 

 

   

 

 

 

Noncontrolling interest

     8,245        7,943   
  

 

 

   

 

 

 

Total stockholders’ equity

     96,943        101,706   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

   $ 537,380      $ 543,824   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

    Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 

CASH FLOWS FROM OPERATING ACTIVITIES:

   

Net income (loss)

  $ (6,752   $ (20,622

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

   

Provision for doubtful accounts receivable

    1,344        2,251   

Share based compensation expense

    1,702        1,082   

Depreciation and amortization

    14,521        15,124   

(Gain) loss on sale or disposal of assets

    864        53   

Impairment of goodwill and long-lived assets

    —          14,679   

Accretion (amortization) of debt premium/discount, net

    57        50   

Change in fair value of Contingent Value Rights

    7,190        4,384   

Deferred income taxes

    1,158        (406

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

    (4,831     (4,072

Changes in assets and liabilities, net of acquisitions:

   

(Increase) decrease in accounts receivable

    10,152        1,093   

(Increase) decrease in prepaid expenses and other current assets

    (1,575     437   

(Increase) decrease in other assets

    2,007        (2,068

Increase (decrease) in accounts payable

    (4,735     (1,554

Increase (decrease) in accrued interconnection costs

    (754     762   

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

    (4,528     (2,946

Increase (decrease) in accrued income taxes

    (3,033     (570

Increase (decrease) in accrued interest

    5,241        8,283   
 

 

 

   

 

 

 

Net cash provided by operating activities

    18,028        15,960   
 

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

   

Purchase of property and equipment

    (8,111     (6,373

Cash acquired from business acquisitions, net of cash paid

    (1,333     10,000   

Sales of marketable securities

    —          4,087   

Increase in restricted cash

    (85     (200
 

 

 

   

 

 

 

Net cash (used in) provided by investing activities

    (9,529     7,514   
 

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

   

Principal payments on long-term obligations

    (1,823     (276

Payment of fees on restructuring of debt

    (1,976     —     

Proceeds from sale of common stock, net

    30        242   

Taxes paid in lieu of shares issued for share-based compensation

    (92     —     
 

 

 

   

 

 

 

Net cash used in financing activities

    (3,861     (34
 

 

 

   

 

 

 

EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

    491        691   
 

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

    5,129        24,131   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

    41,052        41,534   
 

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

  $ 46,181      $ 65,665   
 

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

   

Cash paid for interest

  $ 1,000      $ 461   

Cash paid for taxes

  $ 2,225      $ 84   

Non-cash investing and financing activities:

   

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

  $ —        $ 2,804   

Business acquisition purchased with Company common stock

  $ —        $ 50,609   

See notes to condensed consolidated financial statements.

 

5


Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

     Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 

NET INCOME (LOSS)

   $ (6,752   $ (20,622

OTHER COMPREHENSIVE INCOME (LOSS)

    

Foreign currency translation adjustment

     1,190        1,186   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS)

     (5,562     (19,436

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

     (302     1,268   
  

 

 

   

 

 

 

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

   $ (5,864   $ (18,168
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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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 (“Primus” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States 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 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 ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

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 12—“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 Annual Report on 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The condensed 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 (“Globility”) through direct and indirect ownership structures. The results of Globility and its subsidiary are consolidated with the Company’s results based on guidance from the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 810, “Consolidation” (“ASC 810”). All intercompany profits, transactions and balances have been eliminated in consolidation.

 

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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 three months ended March 31, 2012 and three months ended March 31, 2011 are as follows (in thousands):

 

    For the Three Months Ended March 31, 2012  
    Primus Telecommunications Group, Incorporated Shareholders  
          Common Stock                                
    Total     Shares     Amount     Additional
Paid-In
Capital
    Treasury
Stock
    Accumulated
Earnings
(Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interest
 

Balance as of December 31, 2011

  $ 101,706        13,741      $ 14      $ 142,796      $ (378   $ (51,085   $ 2,416      $ 7,943   

Share based compensation expense

    1,702        —          —          1,702        —          —          —          —     

Proceeds from sale of common stock, net

    30        74        —          30        —          —          —          —     

Shares withheld to satisfy tax withholdings

    (933     —          —          (933     —          —          —          —     

Comprehensive income (loss):

               

Net income (loss)

    (6,752     —          —          —          —          (6,858     —          106   

Foreign currency translation adjustment

    1,190        —          —          —          —          —          994        196   
 

 

 

               

Comprehensive income (loss)

    (5,562     —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

  $ 96,943        13,815      $ 14      $ 143,595      $ (378   $ (57,943   $ 3,410      $ 8,245   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    For the Three Months Ended March 31, 2011  
    Primus Telecommunications Group, Incorporated Shareholders  
          Common Stock                                
    Total     Shares     Amount     Additional
Paid-In
Capital
    Treasury
Stock
    Accumulated
Earnings
(Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    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

    1,082        —          —          1,082        —          —          —          —     

Proceeds from sale of common stock, net

    222        322        —          222        —          —          —          —     

Transaction costs of merger

    (925     —          —          (925     —          —          —          —     

Stock consideration issued for merger

    50,609        3,233        3        50,606        —          —          —          —     

Purchase of treasury stock

    —          —          —          —          —          —          —          —     

Dividend to noncontrolling interest

    —          —          —          —          —          —          —          —     

Comprehensive income (loss):

               

Net income (loss)

    (20,622     —          —          —          —          (19,255     —          (1,367

Foreign currency translation adjustment

    1,186        —          —          —          —          —          1,087        99   
 

 

 

               

Comprehensive income (loss)

    (19,436     —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2011

  $ 114,586        13,356      $ 13      $ 137,969      $ —        $ (31,610   $ 5,838      $ 2,376   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued Operations—During 2011, the Company sold its Brazilian segment. The Company has applied retrospective adjustments for the three months ended March 31, 2011 to reflect the effects of the discontinued operations that occurred during 2011. Accordingly, revenue, costs, and expenses of the discontinued operations have been excluded from the respective captions in the condensed consolidated statements of operations. See Note 12, “Discontinued Operations,” for further information.

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 associated with such 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.

 

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Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

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 pursuant to which 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 each provides 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, and 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 certain 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.

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, pursuant to which 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 pre-Reorganization Plan common stock 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. Post-issuance change in value

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

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 10—“Fair Value of Financial Instruments and Derivatives.”

Use of Estimates—The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States 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, “Compensation—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 May 2011, an update was issued to the Fair Value Measurement Topic ASC 820, ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which provides guidance on how to measure fair value and on what disclosures to provide about fair value measurements. It seeks to develop a single, converged fair value framework between the FASB and the International Financial Reporting Standards (“IFRS”) Board. On January 1, 2012, the Company adopted this update, which did not have a material impact on the condensed consolidated financial statements.

In June 2011, an update was issued to the Comprehensive Income Topic ASC 220, ASU 2011-05, “Presentation of Comprehensive Income,” which provides guidance to all entities that report items of other comprehensive income, in any period presented. Under the amendments in this update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. ASU 2011-05 also contains a provision that requires the entity to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. In December 2011, an update was issued to the Comprehensive Income Topic ASC 220, ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which indefinitely deferred the requirement to present the reclassification adjustments out of other comprehensive income. On January 1, 2012, the Company adopted these updates, which did not have a material impact on the condensed consolidated financial statements.

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

In September 2011, an update was issued to the Intangibles—Goodwill and Other Topic ASC 350, ASU 2011-08, “Testing Goodwill for Impairment,” which provides guidance to all entities, both public and nonpublic, that have goodwill reported in their financial statements. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss. An entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. On January 1, 2012, the Company adopted this update, which did not have a material impact on the condensed consolidated financial statements.

3. 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 (“ICS”) 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.

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 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. 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,

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

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 was completed on February 28, 2012, the one year anniversary of the date of the acquisition.

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

 

Cash and cash equivalents

   $ 12,415   

Marketable securities

     4,044   

Accounts receivable

     16,205   

Other current assets

     884   

Property and equipment (1)

     17,336   

Intercompany receivable

     309   

Goodwill (2)

     20,585   

Customer list (3)

     900   

Exchange license (3)

     2,800   

Other intangible assets (3)

     700   

Other assets

     1,738   
  

 

 

 

Total assets acquired

   $ 77,916   
  

 

 

 

Trade payables

   $ 18,311   

Accrued interconnection costs

     105   

Accrued liabilities

     3,122   

Other current liabilities

     3,082   

Current portion of long-term obligations

     68   

Long-term obligations

     99   

Other long-term liabilities

     2,520   
  

 

 

 

Total liabilities assumed

   $ 27,307   
  

 

 

 

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%, gross margin of 7.2% 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 ICS when integration activities are substantially complete.
(2) 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 ICS when integration activities are substantially complete. Goodwill is not amortized and is not deductible for tax purposes.
(3) 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 and exchange license are being amortized over 15 years and 10 years, respectively.

4. GOODWILL AND OTHER INTANGIBLE ASSETS

On February 28, 2011, the Company acquired Arbinet for stock consideration of $50.6 million in a stock for stock transaction. See Note 3—“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 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” on the Company’s condensed consolidated statements of operations. Post acquisition, Arbinet was integrated into the Company’s ICS segment; see Note 11 “Operating Segment and Related Information.”

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

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

 

     March 31,
2012
     December 31,
2011
 

Goodwill

   $ 71,479       $ 71,902   

Trade names

   $ 76,900       $ 76,900   

The changes in the carrying amount of goodwill and trade names by reporting unit for the three months ended March 31, 2012 are as follows (in thousands):

Goodwill

 

     United States     Canada      Australia      Total  

Balance as of December 31, 2011

   $ 37,146      $ 32,819       $ 1,937       $ 71,902   

Effect of change in foreign currency exchange rates

     —          805         52         857   

Acquisition (disposition) of business

     (1,280     —           —           (1,280
  

 

 

   

 

 

    

 

 

    

 

 

 

Balance as of March 31, 2012

   $ 35,866      $ 33,624       $ 1,989       $ 71,479   
  

 

 

   

 

 

    

 

 

    

 

 

 

Trade Names

 

     United States      Canada      Australia      Total  

Balance as of December 31, 2011

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

Effect of change in foreign currency exchange rates

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of March 31, 2012

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

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     March 31, 2012      December 31, 2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Book
Value
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Book
Value
 

Trade names

   $ 3,500       $ (877   $ 2,623       $ 3,500       $ (790   $ 2,710   

License

     2,800         (303     2,497         2,800         (233     2,567   

Customer relationships

     108,718         (57,177     51,541         106,199         (52,699     53,500   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 115,018       $ (58,357   $ 56,661       $ 112,499       $ (53,722   $ 58,777   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense for trade names and customer relationships for the three months ended March 31, 2012 and 2011 was $3.4 million and $4.6 million, respectively.

The Company expects amortization expense for trade names and customer relationships for the remainder of 2012, the years ending December 31, 2013, 2014, 2015, 2016, and thereafter to be approximately $11.9 million, $10.4 million, $7.3 million, $5.6 million, $4.4 million and $17.1 million, respectively.

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

5. LONG-TERM OBLIGATIONS

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

 

     March 31,
2012
    December 31,
2011
 

Obligations under capital leases and other

   $ 9,953      $ 11,696   

13% Senior Secured Notes due 2016

     2,403        2,403   

10% Senior Secured Notes due 2017

     235,231        235,231   
  

 

 

   

 

 

 

Subtotal

   $ 247,587      $ 249,330   

Original issue discount on Senior Secured Notes

     (1,512     (1,568
  

 

 

   

 

 

 

Subtotal

   $ 246,075      $ 247,762   

Less: Current portion of long-term obligations

     (2,289     (1,948
  

 

 

   

 

 

 

Total long-term obligations

   $ 243,786      $ 245,814   
  

 

 

   

 

 

 

The following table reflects the contractual payments of principal and interest for the Company’s long-term obligations as of March 31, 2012:

 

Year Ending December 31,

   Capital Leases
and Other
    10% Senior
Secured Notes
due 2017
    13% Senior
Secured Notes
due 2016
    Total  

2012 (as of March 31, 2012)

   $ 235      $ 23,523      $ 312      $ 24,070   

2013

     3,217        23,523        312        27,052   

2014

     3,021        23,523        312        26,856   

2015

     3,000        23,523        312        26,835   

2016

     3,000        23,523        2,716        29,239   

Thereafter

     —          242,092        —          242,092   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total minimum principal & interest payments

     12,473        359,707        3,964        376,144   

Less: Amount representing interest

     (2,520     (124,476     (1,561     (128,557
  

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term obligations

   $ 9,953      $ 235,231      $ 2,403      $ 247,587   
  

 

 

   

 

 

   

 

 

   

 

 

 

Exchange Offers

On July 7, 2011, in connection with the consummation of the private (i) exchange offers (the “Exchange Offers”) for any and all outstanding Units representing the 13% Senior Secured Notes due 2016 (the “13% Notes”) issued by Primus Telecommunications Holding, Inc. (“Holding”) and Primus Telecommunications Canada Inc. (“Primus Canada”), and the 14 1/4% Senior Subordinated Secured Notes due 2013 (the “14 1/4% Notes”) issued by Primus Telecommunications IHC, Inc. (“IHC”), (ii) consent solicitation (the “Consent Solicitation”) to amend the indenture governing the 13% Notes and release the collateral securing the 13% Notes, and (iii) related transactions, Holding issued $240.2 million aggregate principal amount of 10% Senior Secured Notes due 2017 (the “10% Notes”). An aggregate of $228.6 million principal amount of 10% Notes was issued pursuant to the Exchange Offers, and Holding issued an additional $11.6 million aggregate principal amount of 10% Notes for cash, the proceeds of which were used to redeem all 14 1/4% Notes that were not exchanged pursuant to the Exchange Offers and thereby discharge all of the Company’s obligations with respect to the 14 1/4% Notes. In connection with the Exchange Offers, the Company also incurred $6.9 million of third party costs which are included in gain (loss) on early extinguishment or restructuring of debt on the condensed consolidated statement of operations in the third quarter of 2011.

10% Senior Secured Notes due 2017

As of March 31, 2012, there was $235.2 million principal amount of the 10% Notes outstanding. The 10% 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 10% Notes will mature on April 15, 2017. In December 2011, the Company repurchased $5.0 million in aggregate principal amount of the 10% Notes at 99% of face value.

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

13% Senior Secured Notes due 2016

As of March 31, 2012, there was $2.4 million principal amount of the 13% Notes outstanding. The 13% Notes bear interest at a rate of 13.00% per annum, payable semi-annually in arrears in cash on June 15 and December 15 of each year. The 13% Notes will mature on December 16, 2016.

6. COMMITMENTS AND CONTINGENCIES

Future minimum lease payments under capital leases and other purchase obligations and non-cancellable operating leases as of March 31, 2012 are as follows (in thousands):

 

Year Ending December 31,

   Capital Leases
and Other
    Purchase
Obligations
     Operating
Leases
 

2012 (as of March 31, 2012)

   $ 235      $ 5,853       $ 15,260   

2013

     3,217        3,946         17,019   

2014

     3,021        3,389         12,379   

2015

     3,000        41         9,985   

2016

     3,000        —           6,843   

Thereafter

     —          —           23,265   
  

 

 

   

 

 

    

 

 

 

Total minimum principal & interest payments

     12,473        13,229         84,751   

Less: Amount representing interest

     (2,520     —           —     
  

 

 

   

 

 

    

 

 

 

Total long-term obligations

   $ 9,953      $ 13,229       $ 84,751   
  

 

 

   

 

 

    

 

 

 

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 $2.7 million and $8.1 million for the three months ended March 31, 2012 and 2011, respectively.

The Company’s rent expense under operating leases was $4.1 million and $4.1 million for the three months ended March 31, 2012 and 2011, respectively.

Litigation

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, condensed 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, condensed consolidated financial position, results of operations or cash flow.

7. SHARE-BASED COMPENSATION

The Compensation Committee (the “Committee”) of the Board of Directors of the Company administers the Management Compensation Plan. The Committee has broad authority to administer, construe and interpret the Management Compensation Plan; however, it may not take any action with respect to an award that would be treated, for accounting purposes, as a “repricing” of an award unless the action is approved by the shareholders of the Company.

The Management Compensation Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, and other stock-based or cash-based performance awards (collectively, “awards”). The Company typically issues new shares of common stock upon the exercise of stock options, as opposed to using treasury shares.

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.

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

No options were granted during the three months ended March 31, 2012 and 2011.

Total share-based compensation expense recognized by the Company in the three months ended March 31, 2012 and 2011 was $1.7 million and $1.1 million, respectively. Most of the Company’s stock awards vest ratably during the vesting period. The Company recognizes compensation expense for equity awards, reduced by estimated forfeitures, using the straight-line basis.

Restricted Stock Units (RSUs)

A summary of the Company’s restricted stock units activity during the three months ended March 31, 2012 is as follows:

 

     Three Months Ended
March 31, 2012
 
     Shares     Weighted
Average
Grant Date
Fair Value
 

Unvested – December 31, 2011

     651,394      $ 13.01   

Granted

     —        $ —     

Vested

     (205,674   $ 12.52   

Forfeitures

     —        $ —     
  

 

 

   

 

 

 

Unvested – March 31, 2012

     445,720      $ 13.23   
  

 

 

   

 

 

 

As of March 31, 2012, the Company had 0.4 million unvested RSUs outstanding with respect to $3.3 million of compensation expense that is expected to be recognized over the weighted average remaining vesting period of 1.7 years. The number of unvested RSUs expected to vest is 0.4 million.

 

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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 three months ended March 31, 2012 is as follows:

 

     Three Months Ended
March 31, 2012
 
     Shares      Weighted
Average
Exercise Price
 

Outstanding – December 31, 2011

     129,080       $ 11.34   

Granted

     —         $ —     

Exercised

     —         $ —     

Forfeitures

     —         $ —     
  

 

 

    

 

 

 

Outstanding – March 31, 2012

     129,080       $ 11.34   
  

 

 

    

 

 

 

Eligible for exercise

     90,838       $ 11.49   
  

 

 

    

 

 

 

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 – March 31, 2012

   $ 629,446         8.1   

Options exercisable – March 31, 2012

     434,048         7.7   

As of March 31, 2012, the Company had approximately 38,000 unvested stock options and stock appreciation rights outstanding of which $0.1 million of compensation expense is expected to be recognized over the weighted average remaining period of 1.2 years. The number of unvested stock options and stock appreciation rights expected to vest is approximately 35,000 shares, with a weighted average remaining life of 8.1 years, a weighted average exercise price of $11.34, and an intrinsic value of approximately $0.2 million.

8. STOCKHOLDERS’ EQUITY (DEFICIT)

As of March 31, 2012, there are 13,814,807 shares of common stock outstanding.

On August 8, 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, the Company may repurchase common stock from time to time in the open-market, privately negotiated transactions or block trades. There is no guarantee as to the exact number of shares, if any, that the Company will repurchase. The stock 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. During the year ended December 31, 2011, the Company repurchased 31,626 shares at a weighted average price of $11.92 per share under the stock repurchase plan.

9. 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.

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

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

 

Jurisdiction

   Open Tax Years  

United States Federal

     2002 – 2011   

Australia

     2002 – 2011   

Canada

     2004 – 2011   

United Kingdom

     2004 – 2011   

Netherlands

     2007 – 2011   

The Company is currently under examination in Canada and certain other foreign tax jurisdictions, which, individually and in the aggregate, are 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 months ended March 31, 2012, penalties and interest were immaterial. As of March 31, 2012, the gross unrecognized tax benefit on the balance sheet was $84.7 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 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. The annual limitation under Section 382 of Arbinet’s pre-February 28, 2011, net operating losses is approximately $2.2 million.

10. FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVES

The carrying amounts reported in the condensed 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 debt, based on quoted market prices, was $253.0 million and $235.4 million at March 31, 2012 and December 31, 2011, respectively. The aggregate carrying value of the Company’s debt was $236.1 million and $236.1 million at March 31, 2012 and December 31, 2011, respectively.

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

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

 

0000000000000000 0000000000000000 0000000000000000 0000000000000000
            Fair Value as of March 31, 2012, using:  
     March 31,
2012
     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)

   $ 23,386         —           23,386         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,386         —           23,386         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

000000000000 000000000000 000000000000 000000000000
            Fair Value as of December 31, 2011, using:  
     December 31,
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)

   $ 16,196         —           16,196         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,196         —           16,196         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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 using the following assumptions: (1) expected life of 7.25 years; (2) risk-free rate of 1.66%; (3) expected volatility of 47.93%; (4) dividend yield of 0%; (5) exercise price of $35.95; (6) stock price of $16.08. During the three months ended March 31, 2012 and 2011, $7.2 million and $4.4 million, respectively, of expense was recognized as a result of marking the CVRs to their fair value.

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

11. OPERATING SEGMENT AND RELATED INFORMATION

The Company has four reportable geographic segments—United States, Canada, Asia-Pacific and Europe. The Company has five reportable operating segments based on management’s organization of the enterprise—United States, Canada, Australia, the ICS business from the United States and Europe, which is managed as a separate global segment, into which Arbinet is 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. All inter-segment revenues are eliminated. 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 or other balance sheet items is impractical.

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

 

     Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 

Net Revenue by Geographic Region

    

United States

   $ 43,297      $ 39,550   

Canada

     57,906        60,836   

Asia-Pacific

     70,158        71,926   

Europe

     63,331        44,640   
  

 

 

   

 

 

 

Total

   $ 234,692      $ 216,952   
  

 

 

   

 

 

 

Net Revenue by Segment

    

United States

   $ 10,096      $ 11,183   

Canada

     57,906        60,836   

Australia

     70,129        71,732   

International Carrier Services

     96,561        73,023   

Other

     —          178   
  

 

 

   

 

 

 

Total

   $ 234,692      $ 216,952   
  

 

 

   

 

 

 

Provision for Doubtful Accounts Receivable

    

United States

   $ 92      $ 486   

Canada

     335        813   

Australia

     656        697   

International Carrier Services

     261        166   

Other

     —          —     
  

 

 

   

 

 

 

Total

   $ 1,344      $ 2,162   
  

 

 

   

 

 

 

Income (Loss) from Operations

    

United States

   $ 847      $ 415   

Canada

     5,688        4,527   

Australia

     5,682        3,746   

International Carrier Services

     (2,438     (16,577

Other

     —          (26
  

 

 

   

 

 

 

Total From Operating Segments

     9,779        (7,915

Corporate

     (6,834     (4,747
  

 

 

   

 

 

 

Total

   $ 2,945      $ (12,662
  

 

 

   

 

 

 

Capital Expenditures

    

United States

   $ 535      $ 232   

Canada

     4,605        2,589   

Australia

     2,379        3,079   

International Carrier Services

     592        276   

Other

     —          197   
  

 

 

   

 

 

 

Total

   $ 8,111      $ 6,373   
  

 

 

   

 

 

 

 

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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.

 

     March 31,
2012
     December 31,
2011
 

Property and Equipment – Net

     

United States

   $ 16,449       $ 17,139   

Canada

     56,469         54,674   

Europe

     2,889         3,074   

Asia-Pacific

     76,561         77,293   

Other

     —           —     
  

 

 

    

 

 

 

Total

   $ 152,368       $ 152,180   
  

 

 

    

 

 

 

 

     March 31,
2012
     December 31,
2011
 

Assets

     

United States

   $ 136,076       $ 133,364   

Canada

     192,388         194,531   

Europe

     48,656         54,998   

Asia-Pacific

     160,260         160,931   

Other

     —           —     
  

 

 

    

 

 

 

Total

   $ 537,380       $ 543,824   
  

 

 

    

 

 

 

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
March 31, 2012
     Three Months Ended
March 31, 2011
 

Retail voice

   $ 83,539       $ 90,364   

International carrier services

     96,561         73,023   

Data/Internet

     46,574         45,687   

Retail VoIP

     8,018         7,878   
  

 

 

    

 

 

 

Total

   $ 234,692       $ 216,952   
  

 

 

    

 

 

 

12. DISCONTINUED OPERATIONS

Discontinued Operations – year ended December 31, 2011

As discussed in Note 2, during the fourth quarter of 2011, the Company sold its Brazilian segment for $4.3 million. The Company recorded a $4.8 million loss from the sale of this segment during the fourth quarter of 2011.

 

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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

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

 

    Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 

Net revenue

  $ —        $ 6,789   

Operating expenses

    140        6,769   
 

 

 

   

 

 

 

Income (loss) from operations

    (140     20   

Interest expense

    —          (15

Interest income and other income (expense)

    —          367   

Foreign currency transaction gain (loss)

    5        (10
 

 

 

   

 

 

 

Income (loss) before income tax

    (135     362   

Income tax (expense) benefit

    (5     —     
 

 

 

   

 

 

 

Income (loss) from discontinued operations

  $ (140   $ 362   
 

 

 

   

 

 

 

13. 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 include the dilutive effects of common shares issuable under the Management Compensation Plan, including stock options, stock warrants and restricted stock units (RSUs), using the treasury stock method, as well as contingent value rights (CVRs).

The Company had no dilutive common share equivalents during the three months ended March 31, 2012, due to the results of operations being a net loss. For the three months ended March 31, 2012, the following were potentially dilutive but were 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 under the Management Compensation Plan;

 

   

4.5 million shares issuable upon exercise of stock warrants; and

 

   

2.7 million shares issuable upon exercise of CVRs.

The Company had no dilutive common share equivalents during the three months ended March 31, 2011, due to the results of operations being a net loss. For the three months ended March 31, 2011, the following were potentially dilutive but were excluded from the calculation of diluted loss per common share due to their antidilutive effect:

 

   

0.7 million shares issuable upon exercise of stock options and RSUs under the Management Compensation Plan;

 

   

4.5 million shares issuable upon exercise of stock warrants; and

 

   

2.7 million shares issuable upon exercise of CVRs.

 

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Table of Contents

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(UNAUDITED)

 

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

 

    Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 

Income (loss) from continuing operations, net of tax

  $ (6,718   $ (19,617

Income (loss) from discontinued operations, net of tax

    (140     362   
 

 

 

   

 

 

 

Net income (loss) attributable to common stockholders-basic

  $ (6,858   $ (19,255
 

 

 

   

 

 

 

Net income (loss) attributable to common stockholders-diluted

  $ (6,858   $ (19,255
 

 

 

   

 

 

 

Weighted average common shares outstanding-basic

    13,744        11,148   
 

 

 

   

 

 

 

Weighted average common shares outstanding-diluted

    13,744        11,148   
 

 

 

   

 

 

 

Basic income (loss) per common share:

   

Income (loss) from continuing operations attributable to common stockholders

  $ (0.49   $ (1.76

Income (loss) from discontinued operations

    (0.01     0.03   
 

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

  $ (0.50   $ (1.73
 

 

 

   

 

 

 

Diluted income (loss) per common share:

   

Income (loss) from continuing operations attributable to common stockholders

  $ (0.49   $ (1.76

Income (loss) from discontinued operations

    (0.01     0.03   
 

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

  $ (0.50   $ (1.73
 

 

 

   

 

 

 

14. SUBSEQUENT EVENTS

Pending Divestiture of Primus Australia

On April 16, 2012, the Company announced that the Company and Primus Telecommunications International, Inc. (“PTII”), an indirect wholly owned subsidiary of the Company, have entered into a definitive Equity Purchase Agreement, dated April 15, 2012 (the “Purchase Agreement”), with M2 Telecommunications Group Ltd. (“M2”), an Australian telecommunications company. Subject to the terms and conditions of the Purchase Agreement, PTII has agreed to sell to M2 100% of the outstanding equity of Primus Telecom Holdings Pty Ltd. (“Primus Australia”), a direct wholly owned subsidiary of PTII, for approximately $AUD 192.4 million (or approximately $US 200.0 million, assuming FX spot rate as of April 13, 2012 of $AUD/$US 1.0396). The purchase price is subject to a customary post-closing net working capital adjustment.

The transaction has been approved by the Company’s Board of Directors and the special committee of the Board of Directors previously established to explore and evaluate strategic alternatives to enhance shareholder value. The transaction does not require stockholder approval, but is subject to the satisfaction or waiver of customary closing conditions for a transaction of this nature. The transaction is not subject to any financing condition. The transaction is currently expected to close in the second quarter of 2012.

In connection with the closing of the transaction, $AUD 10 million (the “Retention Amount”) will be retained from the purchase price and placed in escrow for a period of twelve months following the closing date of the transaction for purposes of satisfying potential indemnification claims asserted by M2 for breaches of PTII’s warranties in the Purchase Agreement. Subject to limited exceptions, PTII’s liability to M2 for indemnification for breaches of PTII’s warranties is subject to a survival period of twelve months after the closing date and is limited to the Retention Amount. The Purchase Agreement contains customary warranties and covenants for a transaction of this nature. The Company has also provided M2 with a guarantee of the performance of PTII’s obligations under the Purchase Agreement.

 

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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 consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2011. You should review the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2011 and in Part II, Item 1A of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Introduction and Overview of Operations

We are an integrated facilities-based communications services provider offering a portfolio of international and domestic voice, wireless, Internet, VoIP, data, colocation and data center services to customers located primarily in Australia, Canada, and the United States. 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, SME VoIP, Australian on-network local services, data, and data center services, to fulfill the demand for high quality, competitively priced communications services. This demand is being driven, in part, by the globalization of the world’s economies, the global trend toward telecommunications deregulation and the migration of communications traffic to the Internet. We manage our Traditional Services, which includes our domestic and international long-distance voice, local landline services, including Australia off-network local services, wireless, residential VoIP services, prepaid cards, and dial-up Internet services, for cash flow generation that we reinvest to develop and market our Growth Services, particularly in our primary markets of Australia and Canada. We also 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

 

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administrative expenses are expensed when incurred. Emphasis on cost containment and the shift of expenditures from non-revenue producing expenses to sales and marketing expenses has been heightened since growth in net revenue has been under pressure.

Recent Developments

Pending Divestiture of Primus Australia

On April 16, 2012, the Company announced that the Company and Primus Telecommunications International, Inc. (“PTII”), an indirect wholly owned subsidiary of the Company, have entered into a definitive Equity Purchase Agreement, dated April 15, 2012 (the “Purchase Agreement”), with M2 Telecommunications Group Ltd. (“M2”), an Australian telecommunications company. Subject to the terms and conditions of the Purchase Agreement, PTII has agreed to sell to M2 100% of the outstanding equity of Primus Telecom Holdings Pty Ltd. (“Primus Australia”), a direct wholly owned subsidiary of PTII, for approximately $AUD 192.4 million (or approximately $US 200.0 million, assuming FX spot rate as of April 13, 2012 of $AUD/$US 1.0396). The purchase price is subject to a customary post-closing net working capital adjustment.

The transaction has been approved by the Company’s Board of Directors and the special committee of the Board of Directors previously established to explore and evaluate strategic alternatives to enhance shareholder value. The transaction does not require stockholder approval, but is subject to the satisfaction or waiver of customary closing conditions for a transaction of this nature. The transaction is not subject to any financing condition. The transaction is currently expected to close in the second quarter of 2012.

In connection with the closing of the transaction, $AUD 10 million (the “Retention Amount”) will be retained from the purchase price and placed in escrow for a period of twelve months following the closing date of the transaction for purposes of satisfying potential indemnification claims asserted by M2 for breaches of PTII’s warranties in the Purchase Agreement. Subject to limited exceptions, PTII’s liability to M2 for indemnification for breaches of PTII’s warranties is subject to a survival period of twelve months after the closing date and is limited to the Retention Amount. The Purchase Agreement contains customary warranties and covenants for a transaction of this nature. The Company has also provided M2 with a guarantee of the performance of PTII’s obligations under the Purchase Agreement.

Foreign Currency

Foreign currency can have a major impact on our financial results. During the three months ended March 31, 2012, approximately 82% of our net revenue was derived from sales and operations outside the U.S. The reporting currency for our condensed consolidated financial statements is the United States dollar. The local currency of each country is the functional currency for each of our respective entities operating in that country. In the future, we expect to continue to derive the majority of our net revenue and incur a significant portion of our operating costs from outside the U.S., and therefore changes in exchange rates have had and may continue to have a significant, and potentially adverse, effect on our results of operations. Our primary risk of loss regarding foreign currency exchange rate risk is caused primarily by fluctuations in the following exchange rates: USD/Canadian dollar (“CAD”), USD/Australian dollar (“AUD”), USD/British pound sterling (“GBP”), and USD/Euro (“EUR”). Due to the large percentage of our revenue derived outside of the U.S., changes in the USD relative to one or more of the foregoing currencies could have an adverse impact on our future results of operations. We have agreements with certain subsidiaries for repayment of a portion of the investments and advances made to these subsidiaries. As we anticipate repayment in the foreseeable future, we recognize the unrealized gains and losses in foreign currency transaction gain (loss) on the condensed consolidated statements of operations. The exposure of our income from operations to fluctuations in foreign currency exchange rates is reduced in part because a majority of the costs that we incur in connection with our foreign operations are also denominated in local currencies.

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

 

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Table of Contents

In the three months ended March 31, 2012, as compared to the three months ended March 31, 2011, the USD was stronger on average as compared to the CAD, GBP, and EUR but weaker as compared to the AUD. The following tables demonstrate the impact of currency fluctuations on our net revenue for the three months ended March 31, 2012 and 2011:

Net Revenue by Location, including Discontinued Operations—in USD (in thousands)

 

     For the Three Months Ended March 31,  
     2012      2011      Variance     Variance%  

Canada

     57,906         60,836         (2,930     -4.8

Australia

     70,129         71,732         (1,603     -2.2

United Kingdom

     63,331         44,640         18,691        41.9

Europe (1) , (2)

     —           18         (18     -100.0

Brazil (2)

     —           6,771         (6,771     -100.0

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

 

     For the Three Months Ended March 31,  
     2012      2011      Variance     Variance%  

Canada (in CAD)

     58,010         59,990         (1,980     -3.3

Australia (in AUD)

     66,453         71,340         (4,887     -6.9

United Kingdom (in GBP)

     40,384         27,732         12,652        45.6

Europe (1) , (2) (in EUR)

     —           14         (14     -100.0

Brazil (2) (in BRL)

     —           11,287         (11,287     -100.0

 

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

Critical Accounting Policies

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K for the year ended December 31, 2011 for a detailed discussion of our critical accounting policies. These policies include revenue recognition, determining our allowance for doubtful accounts receivable, accounting for cost of revenue, valuation of long-lived assets, goodwill and other intangible assets, and accounting for income taxes.

No significant changes in our critical accounting policies have occurred since December 31, 2011.

Financial Presentation Background

In the following presentations and narratives within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we compare, pursuant to accounting principles generally accepted in the United States of America (“US GAAP”) and Securities and Exchange Commission disclosure rules, the Company’s results of operations for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011.

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 USD to applicable local currency exchange rates that were used for purposes of calculating corresponding preceding period US GAAP presentations.

Discontinued Operations

2011 Developments—During the fourth quarter of 2011, the Company sold its Brazilian segment. As a result, the Company has applied retrospective adjustments for the three months ended March 31, 2011 to reflect the effects of the discontinued operations that occurred during 2011. Accordingly, revenue, costs, and expenses of the discontinued operations have been excluded from the respective captions in the condensed consolidated statements of operations. The net operating results of the discontinued operations have been reported, net of applicable income taxes as income, or loss, as applicable, from discontinued operations.

 

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

 

    Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 

Net revenue

  $ —        $ 6,789   

Operating expenses

    140        6,769   
 

 

 

   

 

 

 

Income (loss) from operations

    (140     20   

Interest expense

    —          (15

Interest income and other income (expense)

    —          367   

Foreign currency transaction gain (loss)

    5        (10
 

 

 

   

 

 

 

Income (loss) before income tax

    (135     362   

Income tax (expense) benefit

    (5     —     
 

 

 

   

 

 

 

Income (loss) from discontinued operations

  $ (140   $ 362   
 

 

 

   

 

 

 

Results of Operations

Results of operations for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011

Net revenue: Net revenue, exclusive of the currency effect, increased $16.5 million, or 7.6%, to $233.5 million for the three months ended March 31, 2012 from $217.0 million for the three months ended March 31, 2011. Inclusive of the currency effect which accounted for an increase of $1.2 million, net revenue increased $17.7 million to $234.7 million for the three months ended March 31, 2012 from $217.0 million for the three months ended March 31, 2011.

 

     Exclusive of Currency Effect     Currency
Effect
    Inclusive of
Currency Effect
 
     Quarter Ended     Quarter-over-Quarter           Quarter Ended  
     March 31, 2012     March 31, 2011                       March 31, 2012  

(in thousands)

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

Canada

     58,825         25.2     60,836         28.0     (2,011     -3.3     (919     57,906         24.7

Australia

     66,808         28.6     71,732         33.0     (4,924     -6.9     3,321        70,129         29.9

International Carrier Services

     97,786         41.9     73,023         33.7     24,763        33.9     (1,225     96,561         41.1

United States

     10,096         4.3     11,183         5.2     (1,087     -9.7     —          10,096         4.3

Other

     —           0.0     178         0.1     (178     -100.0     —          —           0.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

     

 

 

   

 

 

    

 

 

 

Total Revenue

     233,515         100.0     216,952         100.0     16,563        7.6     1,177        234,692         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

     

 

 

   

 

 

    

 

 

 

Canada: Canada net revenue, exclusive of the currency effect, decreased $2.0 million, or 3.3%, to $58.8 million for the three months ended March 31, 2012 from $60.8 million for the three months ended March 31, 2011. The net revenue decrease is primarily attributable to a decrease of $1.8 million in retail voice services, a decrease of $1.4 million in prepaid voice services, a decrease of $0.3 million in local services and a decrease of $0.2 million in wireless offset, in part, by an increase of $0.8 million in data and hosting services, an increase of $0.5 million in VoIP services, and an increase of $0.4 million in Internet services. Inclusive of the currency effect which accounted for a $0.9 million decrease, net revenue decreased $2.9 million to $57.9 million for the three months ended March 31, 2012 from $60.8 million for the three months ended March 31, 2011.

Australia: Australia net revenue, exclusive of the currency effect, decreased $4.9 million, or 6.9%, to $66.8 million for the three months ended March 31, 2012 from $71.7 million for the three months ended March 31, 2011. The net revenue decrease is primarily attributable to a decrease of $2.6 million in business voice services, a decrease of $2.3 million in residential voice, a decrease of $0.7 million in Internet services and a decrease of $0.5 million in DSL and other services offset, in part, by an increase of $0.7 million in wireless services and an increase of $0.5 million in prepaid services. Inclusive of the currency effect which accounted for a $3.3 million increase, net revenue decreased $1.6 million to $70.1 million for the three months ended March 31, 2012 from $71.7 million for the three months ended March 31, 2011.

 

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International Carrier Services: International Carrier Services net revenue, exclusive of the currency effect, increased $24.8 million, or 33.9%, to $97.8 million for the three months ended March 31, 2012 from $73.0 million for the three months ended March 31, 2011. The net revenue increase is primarily attributable to the acquisition of Arbinet, which provided a net revenue increase of $28.4 million, and an increase of $2.8 million in U.S. carrier services offset, in part, by a decrease of $6.4 million in Europe carrier services. Inclusive of the currency effect which accounted for a $1.2 million decrease, net revenue increased $23.6 million to $96.6 million for the three months ended March 31, 2012, from $73.0 million for the three months ended March 31, 2011.

United States: United States net revenue decreased $1.1 million, or 9.7%, to $10.1 million for the three months ended March 31, 2012 from $11.2 million for the three months ended March 31, 2011. The decrease is primarily attributable to a decrease of $0.6 million in retail voice services (for residential and small businesses), a decrease of $0.4 million in VoIP services and a decrease of $0.1 million in Internet services.

Cost of revenue: Cost of revenue, exclusive of the currency effect, increased $15.4 million to $162.2 million, or 69.5% of net revenue, for the three months ended March 31, 2012 from $146.8 million, or 67.7% of net revenue, for the three months ended March 31, 2011. Inclusive of the currency effect, which accounted for a $0.3 million increase, cost of revenue increased $15.7 million to $162.5 million for the three months ended March 31, 2012 from $146.8 million for the three months ended March 31, 2011.

 

     Exclusive of Currency Effect     Currency
Effect
    Inclusive of
Currency Effect
 
     Quarter Ended     Quarter-over-Quarter           Quarter Ended  
     March 31, 2012     March 31, 2011                       March 31, 2012  

(in thousands)

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

Canada

     27,149         46.2     29,029         47.7     (1,880     -6.5     (427     26,722         46.1

Australia

     37,560         56.2     43,475         60.6     (5,915     -13.6     1,870        39,430         56.2

International Carrier Services

     92,658         94.8     69,304         94.9     23,354        33.7     (1,188     91,470         94.7

United States

     4,874         48.3     5,039         45.1     (165     -3.3     —          4,874         48.3

Other

     —           0.0     —           0.0     —          0.0     —          —           0.0
  

 

 

      

 

 

      

 

 

     

 

 

   

 

 

    

Total Cost of Revenue

     162,241         69.5     146,847         67.7     15,394        10.5     255        162,496         69.2
  

 

 

      

 

 

      

 

 

     

 

 

   

 

 

    

Canada: Canada cost of revenue, exclusive of the currency effect, decreased $1.9 million to $27.1 million, or 46.2% of net revenue, for the three months ended March 31, 2012 from $29.0 million, or 47.7% of net revenue, for the three months ended March 31, 2011. The decrease is primarily attributable to a decrease in net revenue of $2.0 million. Inclusive of the currency effect, which accounted for a $0.4 million decrease, cost of revenue decreased $2.3 million to $26.7 million for the three months ended March 31, 2012 from $29.0 million for the three months ended March 31, 2011.

Australia: Australia cost of revenue, exclusive of the currency effect, decreased $5.9 million to $37.6 million, or 56.2% of net revenue, for the three months ended March 31, 2012 from $43.5 million, or 60.6% of net revenue, for the three months ended March 31, 2011. The decrease is primarily attributable to a $4.9 million decrease in net revenue. Inclusive of the currency effect, which accounted for a $1.8 million increase, cost of revenue decreased $4.1 million to $39.4 million for the three months ended March 31, 2012 from $43.5 million for the three months ended March 31, 2011.

International Carrier Services: International Carrier Services cost of revenue, exclusive of the currency effect, increased $23.4 million to $92.7 million, or 94.8% of net revenue, for the three months ended March 31, 2012 from $69.3 million, or 94.9% of net revenue, for the three months ended March 31, 2011. The increase is primarily attributable to the acquisition of Arbinet, which provided net revenue of $28.4 million offset, in part, by a net decrease of $3.6 million in U.S. and Europe carrier services revenue. Inclusive of the currency effect, which accounted for a $1.2 million decrease, cost of revenues increased $22.2 million to $91.5 million for the three months ended March 31, 2012 from $69.3 million for the three months ended March 31, 2011.

United States: United States cost of revenue decreased $0.2 million to $4.9 million, or 48.3% of net revenue, for the three months ended March 31, 2012 from $5.0 million, or 45.1% of net revenue, for the three months ended March 31, 2011. The decrease is attributable to a decrease in net revenue of $1.1 million.

 

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Selling, general and administrative expenses: Selling, general and administrative expenses (“SG&A”), exclusive of the currency effect, increased $0.2 million to $53.3 million, or 22.8% of net revenue, for the three months ended March 31, 2012 from $53.1 million, or 24.5% of net revenue, for the three months ended March 31, 2011. Inclusive of the currency effect, which accounted for a $0.6 million increase, selling, general and administrative expenses increased $0.8 million to $53.9 million for the three months ended March 31, 2012 from $53.1 million for the three months ended March 31, 2011.

 

     Exclusive of Currency Effect     Currency
Effect
    Inclusive of
Currency Effect
 
     Quarter Ended     Quarter-over-Quarter           Quarter Ended  
     March 31, 2012     March 31, 2011                       March 31, 2012  

(in thousands)

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

Canada

     19,035         32.4     19,579         32.2     (544     -2.8     (296     18,739         32.4

Australia

     18,433         27.6     19,192         26.8     (759     -4.0     910        19,343         27.6

International Carrier Services

     5,486         5.6     4,824         6.6     662        13.7     (26     5,460         5.7

United States

     3,536         35.0     4,554         40.7     (1,018     -22.4     —          3,536         35.0

Other

     —           0.0     199         111.8     (199     -100.0     —          —           0.0

Corporate

     6,790         0.0     4,747         0.0     2,043        43.0     —          6,790         0.0
  

 

 

      

 

 

      

 

 

     

 

 

   

 

 

    

Total SG&A

     53,280         22.8     53,095         24.5     185        0.3     588        53,868         23.0
  

 

 

      

 

 

      

 

 

     

 

 

   

 

 

    

Canada: Canada selling, general and administrative expense, exclusive of the currency effect, decreased $0.6 million to $19.0 million, or 32.4% of net revenue, for the three months ended March 31, 2012 from $19.6 million, or 32.2% of net revenue, for the three months ended March 31, 2011. The decrease is attributable to a decrease of $0.5 million in sales and marketing expenses, a decrease of $0.3 million in advertising expenses and a decrease of $0.3 million in professional fees offset, in part, by, an increase of $0.3 million in salaries and benefits and an increase of $0.2 million in occupancy expenses. Inclusive of the currency effect, which accounted for a $0.3 million decrease, selling, general and administrative expenses decreased $0.9 million to $18.7 million for the three months ended March 31, 2012 from $19.6 million for the three months ended March 31, 2011.

Australia: Australia selling, general and administrative expense, exclusive of the currency effect, decreased $0.8 million to $18.4 million, or 27.6% of net revenue, for the three months ended March 31, 2012 from $19.2 million, or 26.8% of net revenue, for the three months ended March 31, 2011. The decrease is attributable to a decrease of $0.8 million in advertising expenses, a decrease of $0.7 million in salaries and benefits and a decrease of $0.1 million in general and administrative expenses offset, in part, by, an increase of $0.4 million in sales and marketing expenses and an increase of $0.4 million in professional fees. Inclusive of the currency effect, which accounted for a $0.9 million increase, selling, general and administrative expense increased $0.1 million to $19.3 million for the three months ended March 31, 2012 from $19.2 million for the three months ended March 31, 2011.

International Carrier Services: International Carrier Services selling, general and administrative expense increased $0.7 million to $5.5 million, or 5.6% of net revenue, for the three months ended March 31, 2012 from $4.8 million, or 6.6% of net revenue, for the three months ended March 31, 2011. The increase is attributable to an increase of $0.4 million in occupancy expense, an increase of $0.2 million in general and administrative expenses and an increase of $0.1 million in travel and entertainment expense. Inclusive of the currency effect, which accounted for a minimal change, selling, general and administrative expense increased $0.7 million to $5.5 million for the three months ended March 31, 2012 from $4.8 million for the three months ended March 31, 2011.

United States: United States selling, general and administrative expense decreased $1.0 million to $3.5 million, or 35.0% of net revenue, for the three months ended March 31, 2012 from $4.5 million, or 40.7% of net revenue, for the three months ended March 31, 2011. The decrease is attributable to a decrease of $0.5 million in general and administrative expenses, a decrease of $0.4 million in salaries and benefits, a decrease of $0.3 million in advertising expenses and a decrease of $0.1 million in travel and entertainment offset, in part, by an increase of $0.2 million in occupancy expense and an increase of $0.1 million in professional fees.

Corporate: Corporate selling, general and administrative expense increased $2.0 million to $6.8 million for the three months ended March 31, 2012 from $4.8 million for the three months ended March 31, 2011. The increase is attributable to an increase of $1.2 million in salaries and benefits, an increase of $0.7 million in professional fees and an increase of $0.5 million in general and administrative expenses offset, in part, by a decrease of $0.4 million in occupancy expense.

 

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Gain (loss) on sale or disposal of assets: Gain on sale or disposal of assets increased $0.8 million to $0.9 million for the three months ended March 31, 2012 from $0.1 million for the three months ended March 31, 2011.

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 3—“Acquisitions” and Note 4—“Goodwill and Other Intangible Assets” to the notes to our condensed consolidated financial statements included elsewhere in this report.

Interest expense and accretion (amortization) on debt premium/discount, net: Interest expense and accretion (amortization) on debt premium/discount, net decreased $1.5 million to $7.2 million for the three months ended March 31, 2012 from $8.7 million for the three months ended March 31, 2011. The decrease was due to exchanging the prior higher rate debt for the 10% Senior Secured Notes.

Gain (loss) from contingent value rights valuation: The loss from the change in fair value of the contingent value rights increased $2.8 million to $7.2 million for the three months ended March 31, 2012 from $4.4 million for the three months ended March 31, 2011. The Company determined these contingent value rights to be derivative instruments to be accounted for as liabilities and were marked to fair value (and in future periods will be marked to fair value) at each balance sheet date. Upon issuance of the contingent value rights, the Company recorded a liability of $2.6 million in other liabilities as part of fresh-start accounting, and we will adjust this liability quarterly to its then estimated fair value. The change in fair value of the liability is reflected in our condensed consolidated statements of operations as other income (expense). Estimates of fair value represent the Company’s best estimates based on a Black-Scholes pricing model.

Foreign currency transaction gain (loss): Foreign currency transaction gain increased $0.7 million to $4.7 million for the three months ended March 31, 2012 from $4.0 million for the three months ended March 31, 2011. The gains and losses are attributable to the impact of foreign currency exchange rate changes on intercompany debt balances and on receivables and payables denominated in a currency other than the subsidiaries’ functional currency.

Income tax benefit (expense): Income tax benefit (expense) is a ($0.1) million expense for the three months ended March 31, 2012 compared to a $0.8 million benefit for the three months ended March 31, 2011. The expense includes expenses consisting of a provision for foreign income taxes and foreign withholding tax on intercompany interest, partially offset by a benefit from the release of certain “ASC 740” liabilities as a result of the expiration of the statute of limitations.

Liquidity and Capital Resources

Important Long-Term Liquidity and Capital Structure Developments:

Pending Divestiture of Primus Australia. As summarized above, on April 16, 2012, the Company announced that the Company and PTI entered into the Purchase Agreement with M2, pursuant to which, and subject to the terms and conditions of which, PTI has agreed to sell to M2 100% of the outstanding equity of Primus Australia for a purchase price of approximately $AUD 192.4 million (or approximately $US 200.0 million, assuming FX spot rate as of April 13, 2012 of $AUD/$US 1.0396). The purchase price is subject to a customary post-closing net working capital adjustment. The transaction is currently expected to close in the second quarter of 2012.

If the divestiture is consummated, our 10% Notes Indenture generally permits us to use the proceeds from the transaction to discharge indebtedness or reinvest in our business. Proceeds not used to reinvest in our business within 365 days of the closing may be used to conduct a tender offer for the 10% Notes on the terms and conditions contemplated by the 10% Notes Indenture. The offer price would be equal to 100% of the principal amount of the 10% Notes plus accrued and unpaid interest. Following any such tender offer, any remaining funds would become available for general corporate purposes.

Our Board of Directors has until 365 days after the closing to make specific determinations regarding the use of proceeds. We expect to make further announcements regarding the use of proceeds as our Board makes those determinations.

In connection with the pending divestiture of Primus Australia, the Company entered into a cash flow hedging agreement to mitigate the movements in the Australia dollar versus the U.S. dollar between the announcement date of the sale to the closing date of the sale.

Exchange Offers. On July 7, 2011, in connection with the consummation of the private (i) exchange offers (the “Exchange Offers”) for any and all outstanding Units representing the 13% Senior Secured Notes due 2016 (the “13% Notes”) issued by Primus Telecommunications Holding, Inc. (“Holding”) and Primus Telecommunications Canada Inc. (“Primus Canada”), and the 14 1/4% Senior Subordinated Secured Notes due 2013 (the “14 1/4% Notes”) issued by Primus Telecommunications IHC, Inc. (“IHC”), (ii) consent solicitation (the “Consent Solicitation”) to amend the indenture governing the 13% Notes and release the collateral securing the 13% Notes, and (iii) related transactions, Holding issued $240.2 million aggregate principal amount of 10% Senior Secured Notes due 2017 (the “10% Notes”). An aggregate of $228.6 million principal amount of 10% Notes was issued pursuant to the Exchange Offers, and Holding issued an additional $11.6 million aggregate principal amount of 10% Notes for cash, the proceeds of which were used to redeem all 14 1/4% Notes that were not exchanged pursuant to the Exchange Offers and thereby discharge all of our obligations with respect to

 

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the 14 1/4% Notes. In connection with the Exchange Offers, the Company also incurred $6.9 million of third party costs which are included in gain (loss) on early extinguishment or restructuring of debt on the condensed consolidated statement of operations in the third quarter of 2011.

The 10% Notes and related guarantees are secured by a pledge of and first lien security interest in (subject to certain exceptions) substantially all of the assets of Holding and the guarantors of the 10% Notes, including the Company (“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 10% Notes rank senior in right of payment to existing and future subordinated indebtedness of Holding and the Guarantors. The 10% Notes rank equal in right of payment with all existing and future senior indebtedness of Holding and the Guarantors. The 10% Notes rank junior to any priority lien obligations entered into by Holding or the Guarantors in accordance with the indenture governing the 10% Notes (“10% Notes Indenture”).

Prior to March 15, 2013, Holding may redeem up to 35% of the aggregate principal amount of the 10% Notes at the redemption premium of 110% of the principal amount of the 10% Notes redeemed, plus accrued and unpaid interest, with the net cash proceeds of certain equity offerings. Prior to March 15, 2013, Holding may redeem some or all of the 10% Notes at a make-whole premium as set forth in the 10% Notes Indenture. On or after March 15, 2013, Holding may redeem some or all of the 10% Notes at a premium that will decrease over time as set forth in the 10% Notes Indenture, plus accrued and unpaid interest.

Upon the occurrence of certain Changes of Control (as defined in the 10% Notes Indenture) with respect to the Company, Holding must give holders of the 10% Notes an opportunity to sell their 10% Notes to Holding at a purchase price of 101% of the principal amount of such 10% 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 10% Notes at 100% of their principal amount, plus accrued and unpaid interest.

The 10% 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 10% 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 10% Notes to be due and payable immediately.

Under the 10% Notes Indenture, either Holding or any Guarantor may incur additional senior secured debt, equal in right of payment to the 10% Notes, in the future that is subject to security interests in the same collateral as the 10% Notes and the related guarantees, in an aggregate principal amount outstanding (including the aggregate principal amount outstanding under the 10% Notes) equal to 2.25 times condensed consolidated EBITDA of the Company for the prior four fiscal quarters.

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 $18.0 million for the three months ended March 31, 2012 as compared to net cash provided by operating activities of $16.0 million for the three months ended March 31, 2011. For the three months ended March 31, 2012, net income, net of non-cash operating activity, provided $15.3 million of cash. In addition, cash was increased by a decrease in accounts receivable of $10.2 million and an increase in accrued interest of $5.2 million. This increase was partially offset by a decrease in accounts payable of $4.7 million; a decrease in accrued expenses, deferred revenue, other current liabilities and other liabilities, net of $4.5 million; and a decrease in accrued income taxes of $3.0 million.

 

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Net cash used in investing activities was $9.5 million for the three months ended March 31, 2012 compared to $7.5 million provided by investing activities for the three months ended March 31, 2011. Net cash used in investing activities during the three months ended March 31, 2012 included $8.1 million of capital expenditures and $1.3 million used in the acquisition of businesses and $0.1 million from the increase in restricted cash.

Net cash used in financing activities was $3.9 million for the three months ended March 31, 2012 compared to $34 thousand for the three months ended March 31, 2011. During the three months ended March 31, 2012, $1.8 million was used to reduce the principal amounts outstanding on capital leases, leased fiber capacity, financing facilities and other long-term obligations, $2.0 million was used to pay fees related to the Exchange Offers and Consent Solicitation and $0.1 million was used to satisfy the tax obligations for shares issued under share-based compensation arrangements.

Short- and Long-Term Liquidity Considerations and Risks

As of March 31, 2012, we had $46.2 million of cash and cash equivalents. We believe that our existing cash and cash equivalents will be sufficient to fund our debt service requirements, other fixed obligations (such as capital leases, vendor financing and other long-term obligations), and other cash needs for our operations for at least the next twelve months.

As of March 31, 2012, we have $13.2 million in future minimum purchase obligations, $84.8 million in future operating lease payments and $247.6 million of indebtedness.

Contractual Obligations

The obligations reflected in the table below reflect the contractual payments of principal and interest that existed as of March 31, 2012:

 

Year Ending December 31,

   Capital Leases
and Other
    13% Senior
Secured Notes
due 2016
    10% Senior
Secured Notes
due 2017
    Purchase
Obligations
     Operating
Leases
     Total  

2012 (as of March 31, 2012)

   $ 235      $ 312      $ 23,523      $ 5,853       $ 15,260       $ 45,183   

2013

     3,217        312        23,523        3,946         17,019         48,017   

2014

     3,021        312        23,523        3,389         12,379         42,624   

2015

     3,000        312        23,523        41         9,985         36,861   

2016

     3,000        2,716        23,523        —           6,843         36,082   

Thereafter

     —          —          242,092        —           23,265         265,357   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total minimum principal & interest payments

     12,473        3,964        359,707        13,229         84,751         474,124   

Less: Amount representing interest

     (2,520     (1,561     (124,476     —           —           (128,557
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total long-term obligations

   $ 9,953      $ 2,403      $ 235,231      $ 13,229       $ 84,751       $ 345,567   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

We have contractual obligations to utilize network facilities from certain carriers with terms greater than one year. We generally do not purchase or commit to purchase quantities in excess of normal usage or amounts that cannot be used within the contract term.

New Accounting Pronouncements

For a discussion of our “New Accounting Pronouncements,” refer to Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this report.

Special Note Regarding Forward-Looking Statements

This Report on Form 10-Q contains or incorporates a number of “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based on current expectations, and are not strictly historical statements. In some cases, you can identify forward-looking statements by terminology such as “if,” “may,” “should,” “believe,” “anticipate,” “future,” “forward,” “potential,” “estimate,” “opportunity,” “goal,” “objective,” “growth,” “outcome,” “could,” “expect,” “intend,” “plan,” “strategy,” “provide,” “commitment,” “result,” “seek,” “pursue,” “ongoing,” “include” or in the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties and are not guarantees of performance or results, as well as creation of shareholder value, although they are based on our current plans or assessments which are believed to be reasonable as of the date hereof.

 

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Factors or risks that could cause our actual results to differ materially from the results we anticipate include, but are not limited to:

 

   

continuing uncertain global economic conditions;

 

   

significant changes in the competitive environment, including as a result of industry consolidation, and the effect of competition in our markets, including our pricing policies;

 

   

uncertainties from our announcement of our exploration and evaluation of strategic alternatives that may enhance shareholder value or our ability to complete any transactions arising out of that evaluation, including the pending divestiture of Primus Australia;

 

   

our possible inability to generate sufficient liquidity, margins, earnings per share, cash flow and working capital;

 

   

our ability to attract and retain customers;

 

   

our expectations regarding increased competition, pricing pressures, and declining usage patterns in our traditional products;

 

   

the effectiveness and profitability of our growth products and bundled service offerings, the pace and cost of customer migration onto our networks, and the successful network platform migration to reduce costs and increase efficiencies;

 

   

risks associated with the merger of Arbinet, including but not limited to our ability to realize the anticipated benefits of the merger of Arbinet or the timing associated with any such benefits, or volatility in the volume and mix of trading activity on the Arbinet Exchange;

 

   

strengthening of U.S. dollar against foreign currencies, which may reduce the amount of U.S. dollars generated from foreign operating subsidiaries and adversely affect our ability to service our significant debt obligations and pay corporate expenses;

 

   

our compliance with complex laws and regulations in the U.S. and internationally;

 

   

further changes in the telecommunications or Internet industry, including rapid technological, regulatory and pricing changes in our principal markets;

 

   

our liquidity and possible inability to service our substantial indebtedness or an occurrence of a default or event of default under our indentures;

 

   

our expectations regarding the timing, extent and effectiveness of our cost reduction initiatives and management’s ability to moderate or control discretionary spending;

 

   

management’s plans, goals, expectations, guidance, objectives, strategies, and timing for future operations, acquisitions, synergies, asset dispositions, fixed asset and goodwill impairment charges, tax and withholding expense, selling, general and administrative expenses, product plans, performance and results;

 

   

management’s assessment of market factors and competitive developments, including pricing actions and regulatory rulings;

 

   

our possible inability to raise additional capital when needed, on attractive terms, or at all; and

 

   

our possible inability to hire and retain qualified executive management, sales, technical and other personnel.

Other unknown or unpredictable factors could also affect our business, financial condition and results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that any of the estimated or projected results will be realized. You should not place undue reliance on these forward-looking statements, which apply only as of the date hereof. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk exposures relate to changes in foreign currency exchange rates.

Foreign currency exchange rates—Foreign currency can have a major impact on our financial results. During the three months ended March 31, 2012, approximately 82% of our net revenue is derived from sales and operations outside the U.S. The reporting currency for our condensed consolidated financial statements is the United States dollar. The local currency of each country is the functional currency for each of our respective entities operating in that country. In the future, we expect to continue to derive the majority of our net revenue and incur a significant portion of our operating costs from outside the U.S., and therefore changes in exchange rates have had and may continue to have a significant, and potentially adverse, effect on our results of operations. Our primary risk of loss regarding foreign currency exchange rate risk is caused primarily by

 

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fluctuations in the following exchange rates: USD/Canadian dollar (“CAD”), USD/Australian dollar (“AUD”), USD/British pound sterling (“GBP”), and USD/Euro (“EUR”). Due to the large percentage of our revenue derived outside of the U.S., changes in the USD relative to one or more of the foregoing currencies could have an adverse impact on our future results of operations. We have agreements with certain subsidiaries for repayment of a portion of the investments and advances made to these subsidiaries. As we anticipate repayment in the foreseeable future, we recognize the unrealized gains and losses in foreign currency transaction gain (loss) on the condensed consolidated statements of operations. The exposure of our income from operations to fluctuations in foreign currency exchange rates is reduced in part because a majority of the costs that we incur in connection with our foreign operations are also denominated in local currencies.

We historically have not engaged in hedging transactions. However, in connection with the pending divestiture of Primus Australia described above, we entered into a cash flow hedging agreement to mitigate the movements in the Australia dollar versus the U.S. dollar between the announcement date of the sale to the closing date of the sale.

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

In the three months ended March 31, 2012, as compared to the three months ended March 31, 2011, the USD was stronger on average as compared to the CAD, GBP, and EUR but weaker as compared to the AUD. As a result, the revenue of our subsidiaries whose local currency is CAD, AUD, GBP, and EUR increased (decreased) (3.3%), (6.9%), 45.6%, and (100.0%), respectively, in their local currencies compared to the three months ended March 31, 2011, and increased (decreased) (4.8%), (2.2%), 41.9%, and (100.0%), in USD, respectively.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective. Disclosure controls and procedures mean our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control.

An evaluation of our internal controls over financial reporting was performed under the supervision of, and with the participation of, management, including our Chief Executive Officer and Chief Financial Officer, to determine whether any changes have occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that no changes in our internal control over financial reporting have occurred during the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Except as set forth below, there have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011:

Failure to consummate the pending divestiture of Primus Australia could negatively impact our stock price, business and financial results.

As described above, on April 16, 2012, we announced that the Company and PTII entered into the Purchase Agreement with M2, pursuant to which, and subject to the terms and conditions of which, PTII has agreed to sell to M2 100% of the outstanding equity of Primus Australia for a purchase price of approximately $AUD 192.4 million (or approximately $US 200.0 million, assuming FX spot rate as of April 13, 2012 of $AUD/$US 1.0396). The purchase price is subject to a customary post-closing net working capital adjustment. The transaction does not require stockholder approval, but is subject to the satisfaction or waiver of customary closing conditions for a transaction of this nature. The transaction is not subject to any financing condition.

The announcement of the proposed transaction, whether or not consummated, may result in the loss of key personnel and may disrupt our sales and marketing or other key business activities in Australia, which may have an impact on our financial performance. Until the proposed transaction is consummated, there may be continuing uncertainty for our employees, customers, suppliers and other business partners in Australia, which could negatively impact our business and financial results. We cannot predict whether the closing conditions for the proposed transaction will be satisfied. As a result, we cannot assure you that the proposed transaction will be completed. If the closing conditions for the proposed transaction are not satisfied or waived pursuant to the Purchase Agreement, or if the transaction is not completed for any other reason, the market price of our common stock may decline.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share Repurchases

Upon vesting of restricted stock awarded by the Company to employees, the Company withholds shares to cover employees’ tax withholding obligations, other than for employees who have chosen to satisfy their tax withholding requirements in the form of a cash payment. The table below reflects shares of common stock withheld to satisfy tax withholding obligations during the three months ended March 31, 2012.

 

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On August 8, 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, the Company may repurchase common stock from time to time in the open-market, privately negotiated transactions or block trades. During the three months ended March 31, 2012, the Company did not purchase shares of common stock in connection with our stock repurchase program:

 

Period

  Total
Number of
Shares
Purchased
    Average Price
Paid Per Share
    Total
Number of Shares
Purchased as Part of
Announced Plans  or
Programs
    Approximate Dollar
Value of Shares
that May Yet be
Purchased Under the
Plans or programs
(in millions)
 

Shares purchased in satisfaction of tax withholding obligations

  

   

January 1, 2012 to January 31, 2012

    —        $ —          —        $ —     

February 1, 2012 to February 29, 2012

    —        $ —          —        $ —     

March 1, 2012 to March 31, 2012

    52,057      $ 16.11        —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    52,057      $ 16.11        —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Shares purchased under a stock repurchase program

  

   

January 1, 2012 to January 31, 2012

    —        $ —          —        $ 14.6   

February 1, 2012 to February 29, 2012

    —        $ —          —        $ 14.6   

March 1, 2012 to March 31, 2012

    —        $ —          —        $ 14.6   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    —        $ —          —        $ 14.6   
 

 

 

   

 

 

   

 

 

   

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits (see Exhibit Index following signatures page below)

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

Date: May 10, 2012

    By:   /s/ Kenneth D. Schwarz
     

Kenneth D. Schwarz

Chief Financial Officer and Senior Vice President, Information Technology

(Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit
Number

 

Description

  31   Certifications (filed herewith).
  32*   Certification (filed herewith).
101**   The following materials from the registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2012, formatted in extensible business reporting language (XBRL); (i) Unaudited Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011, (ii) Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2012 and 2011, (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and (v) Notes to Condensed Consolidated Financial Statements (filed herewith).

 

* These certifications are being “furnished” and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

38

XNYS:PTGI Quarterly Report 10-Q Filling

XNYS:PTGI Stock - Get Quarterly Report SEC Filing of XNYS:PTGI stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNYS:PTGI Quarterly Report 10-Q Filing - 3/31/2012
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