<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A Amendment 2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 20, 1997
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
-----------------------------------------------
(Exact name of issuer as specified in charter)
Delaware 0-29-092 54-1708481
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
2070 Chain Bridge Road
Suite 425
Vienna, Virginia 22182
(Address of principal executive offices)
(703) 902-2800
(Registrant's telephone number, including area code)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS; PRO FORMA
FINANCIAL INFORMATION AND EXHIBITS
----------------------------------
The following financial statements have been resubmitted in full for
purposes of this Form 8-K/A Amendment 2.
(a)(1) Financial Statements of Businesses Acquired.
(a) Consolidated balance sheets of USFI, Inc. and Subsidiary as of
December 31, 1996 and 1995 and the related consolidated statements
of operations, stockholders' deficit and cash flows for the years
ended December 31, 1996, and 1995.
(b) Balance sheet of USFI, Inc. as of December 31, 1994 and the related
consolidated statements of operations, stockholders' deficit and
cash flows for the year ended December 31, 1994.
(c) Unaudited consolidated balance sheet of USFI, Inc. and Subsidiary
as of September 30, 1997 and the related consolidated statements of
operations and cash flows for the nine months ended September 30,
1997 and 1996.
(d) Unaudited balance sheet of Telepassport L.L.C. as of September 30,
1997 and the related statements of operations and cash flows for
the nine months ended September 30, 1997.
(b) Pro Forma Financial Information.
(1) Unaudited pro forma consolidated statement of operations for the
nine months ended September 30, 1997.
(2) Unaudited pro forma consolidated statement of operations for the
year ended December 31, 1996.
(3) Unaudited pro forma balance sheet as of September 30, 1997.
(c) Exhibits
<PAGE>
2.1 Asset Purchase Agreement by and among USFI, Inc., Primus
Telecommunications, Inc., Primus Telecommunications Group, Incorporated
and U.S. Cable Corporation, dated as of October 20, 1997. (Previously
filed)
2.2 Equity Purchase Agreement by and among Messrs. James D. Pearson, Stephen
E. Myers, Michael C. Anderson, Primus Telecommunications International,
Inc., and Primus Telecommunications Group, Incorporated dated as of
October 20, 1997. (Previously filed)
-3-
<PAGE>
SIGNATURE
---------
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 hereunto duly authorized.
PRIMUS TELECOMMUNICATIONS GROUP,
INCORPORATED
Date: January 7, 1998 By: /s/ Neil L. Hazard
-----------------------------
Executive Vice President and
Chief Financial Office
-4-
<PAGE>
USFI, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,024
Restricted cash and cash equivalents -
Short term investments -
Accounts receivable 7,141
Prepaid expenses and other current assets 690
-------
Total current assets 8,855
PROPERTY AND EQUIPMENT - Net 3,940
INTANGIBLES - Net 82
DEFERRED INCOME TAXES -
OTHER ASSETS 188
-------
TOTAL ASSETS $13,065
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $11,862
Accrued expenses and other current liabilities 5,770
Deferred income taxes
Accrued Interest
Current portion of long-term obligations
-------
Total current liabilities 17,632
LONG-TERM OBLIGATIONS -
-------
Total liabilities 17,632
-------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT): (4,567)
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,065
=======
</TABLE>
<PAGE>
USFI, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
-------- --------
<S> <C> <C>
NET REVENUE $25,231 $27,764
COST OF REVENUE 19,508 22,475
------- -------
GROSS MARGIN 5,723 5,289
OPERATING EXPENSES:
Selling, general and administrative 10,434 8,677
Depreciation and amortization 629 502
------ ------
Total operating Expenses 11,063 9,179
------ ------
LOSS FROM OPERATIONS (5,340) (3,890)
INTEREST EXPENSE - -
INTEREST INCOME - -
OTHER INCOME (EXPENSE) 23 (12)
------ ------
LOSS BEFORE INCOME TAXES (5,317) (3,902)
INCOME TAXES - -
------ ------
NET LOSS $(5,317) $(3,902)
====== ======
</TABLE>
<PAGE>
USFI, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,317) $ (3,902)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 626 502
Provisions for losses on receivables 96 320
Changes in Operating assets and liabilities:
Increase in accounts receivable from
customers and affiliates (914) (2,601)
Increase in other current assets (578) (276)
Increase in deposits (27) (15)
Increase in accounts payable and
accrued expenses 589 3,872
(Decrease) increase in reseller deposits
and deferred revenue (173) 62
(Decrease) increase in due to affiliates (1,412) 723
--------- ---------
Net cash used in operating activities (7,110) (1,315)
INVESTING ACTIVITIES
Purchase of equipment (1,863) (2,052)
Decrease in deferred costs 5 81
--------- ---------
Net cash used in investing activities (1,858) (1,971)
FINANCING ACTIVITIES
Capital contributions 4,918 3,025
Advances from affiliates 4,193 -
Repayment of capital lease obligation - (3)
--------- ---------
Net cash provided by financing activities 9,111 3,022
Effect of exchange rate changes on cash (3) 3
--------- ---------
Increase (decrease) in cash 140 (261)
Cash at beginning of period 884 420
--------- ---------
Cash at end of period $ 1,024 $ 159
========= =========
</TABLE>
<PAGE>
TELEPASSPORT L.L.C.
UNAUDITED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 163
Restricted cash and cash equivalents -
Short term investments -
Accounts receivable 627
Prepaid expenses and other current assets 255
------
Total current assets 1,044
PROPERTY AND EQUIPMENT - Net 663
INTANGIBLES - Net 157
DEFERRED INCOME TAXES -
OTHER ASSETS 214
------
TOTAL ASSETS $2,078
======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 375
Accrued expenses and other current liabilities 332
Deferred income taxes
Accrued Interest
Current portion of long-term obligations
------
Total current liabilities 707
LONG-TERM OBLIGATIONS 841
------
Total liabilities 1,548
------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT): 530
------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,078
======
</TABLE>
<PAGE>
TELEPASSPORT L.L.C.
UNAUDITED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
NET REVENUE $2,900
COST OF REVENUE 2,523
-----
GROSS MARGIN 377
OPERATING EXPENSES:
Selling, general, and administrative 1,296
Depreciation and amortization 69
-----
Total operating Expenses 1,365
-----
LOSS FROM OPERATIONS (988)
INTEREST EXPENSE (17)
INTEREST INCOME -
OTHER INCOME (EXPENSE) 151
-----
LOSS BEFORE INCOME TAXES (854)
INCOME TAXES -
-----
NET LOSS $ (854)
=====
</TABLE>
<PAGE>
TELEPASSPORT L.L.C
UNAUDITED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss $ (854)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 69
Changes in Operating assets and liabilities (545)
-------
Net cash used in operating activities (1,330)
INVESTING ACTIVITIES
Purchase of equipment (732)
-------
Net cash used in investing activities (732)
FINANCING ACTIVITIES
Capital contributions 1,384
Advances from affiliates 841
-------
Net cash provided by financing activities 2,225
Effect of exchange rate changes on cash -
-------
Increase (decrease) in cash 163
Cash at beginning of period -
-------
Cash at end of period $ 163
=======
</TABLE>
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Primus Pro Forma
Telecommunications USFI, Telepassport ----------------------------
Group, Incorporated Inc. L.L.C. Adjustments Combined
------------------- -------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
NET REVENUE $202,099 $25,231 $2,900 $(9,026)(1) $221,204
COST OF REVENUE 184,478 19,508 2,523 (7,492)(1) 199,017
-------- ------- ------ ------- --------
GROSS MARGIN 17,621 5,723 377 (1,534) 22,187
OPERATING EXPENSES:
Selling, general, and administrative 35,784 10,434 1,296 47,514
Depreciation and amortization 4,343 629 69 319 (2) 5,360
-------- ------- ------ ------- --------
Total Operating Expenses 40,127 11,063 1,365 319 52,874
-------- ------- ------ ------- --------
LOSS FROM OPERATIONS (22,506) (5,340) (988) (1,853) (30,687)
INTEREST EXPENSE (5,570) - (17) (5,587)
INTEREST INCOME 3,377 - - 3,377
OTHER INCOME (EXPENSE) 407 23 151 581
-------- ------- ------ ------- --------
LOSS BEFORE INCOME TAXES (24,292) (5,317) (854) (1,853) (32,316)
INCOME TAXES 81 - - (3) 81
-------- ------- ------ ------- --------
NET LOSS $(24,373) $(5,317) $(854) $(1,853) $(32,397)
======== ======= ====== ======= ========
NET LOSS PER COMMON AND
COMMON SHARE EQUIVALENTS $ (1.37) $ (1.82)
======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARE EQUIVALENTS
OUTSTANDING 17,780 17,780
======== ========
</TABLE>
- --------------------------------------------------------------------------------
The adjustments to the pro forma consolidated statement of operations for the
nine months ended September 30, 1997 are as follows:
(1) To eliminate selected revenue and cost of revenue of a portion of the
USFI, Inc. customer base which was not purchased.
(2) To record amortization expense associated with acquired customer list and
the excess of purchase price over the fair value of net assets acquired.
(3) The pro forma adjustment to the income tax provision is zero as a valuation
reserve was applied in full to the tax benefit associated with the pro
forma net loss before income taxes.
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Primus Pro Forma
Telecommunications Axicorp USFI ------------------------------
Group, Incorporated Pty., Ltd. (1) Inc. Adjustments Combined
--------------------- ---------------- -------- --------------- ----------
<S> <C> <C> <C> <C> <C>
NET REVENUE $ 172,972 $ 26,388 $ 36,550 $ (8,579) (2) $ 227,311
COST OF REVENUE 158,845 23,756 30,205 (7,121) (2) 205,685
--------- -------- -------- --------- ----------
GROSS MARGIN 14,127 2,612 6,345 (1,458) 21,626
OPERATING EXPENSES:
Selling, general, and administrative 20,114 2,084 12,524 34,722
Depreciation and amortization 2,164 48 679 677 (3) 3,568
--------- -------- -------- --------- ----------
Total operating Expenses 22,278 2,132 13,203 677 38,290
--------- -------- -------- --------- ----------
LOSS FROM OPERATIONS (8,151) 480 (6,858) (2,135) (16,664)
INTEREST EXPENSE (857) - (138) (4) (996)
INTEREST INCOME 785 124 909
OTHER INCOME (EXPENSE) (345) - 17 (328)
--------- -------- -------- --------- ----------
LOSS BEFORE INCOME TAXES (8,568) 604 (6,841) (2,273) (17,078)
INCOME TAXES 196 281 - (5) 477
--------- -------- -------- --------- ----------
NET LOSS $ (8,764) $ 323 $ (6,841) $ (2,273) $ (17,555)
========= ======== ======== ========= ==========
NET LOSS PER COMMON AND COMMON SHARE EQUIVALENTS $ (0.63) $ (1.26)
========= ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARE EQUIVALENTS
EQUIVALENTS OUTSTANDING 13,869 13,953
========= ==========
</TABLE>
- --------------------------------------------------------------------------------
The adjustments to the pro forma consolidated statement of operations for the
year ended December 31, 1996 are as follows:
(1) Represents the historical results of operations of Axicorp Pty., Ltd. For
the months of January and February 1996 prior to the Company's acquisition
on March 1, 1996.
(2) To eliminate selected revenue and cost of revenue of a portion of the USFI,
Inc. customer base which was not purchased.
(3) To record amortization expense associated with acquired customer list and
the excess of purchase price over the fair value of net assets acquired.
(4) To record increased interest expense related to the issuance of notes
payable for the acquisition of Axicorp Pty., Ltd.
(5) The pro forma adjustment to the income tax provision is zero as a valuation
reserve was applied in full to the tax benefit associated with the pro
forma net loss before income taxes.
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Primus
Telecommunications USFI, Telepassport Pro Forma
----------------------------
Group, Incorporated Inc. L.L.C. Adjustments Combined
------------------- ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENTS ASSETS
Cash and cash equivalents $150,187 $ 1,024 $ 163 $(12,524) (1) $138,850
Restricted cash and cash equivalents 72,521 - - 72,521
Short term investments - - - -
Accounts receivable 58,974 7,141 627 (7,141) (2) 59,601
Prepaid expenses and other current assets 2,299 690 255 3,244
-------- ------- ------ -------- --------
Total current Assets 283,981 8,855 1,044 (19,665) 274,215
PROPERTY AND EQUIPMENT - Net 48,375 3,940 663 (815) (3) 52,163
INTANGIBLES - Net 24,259 82 157 8,011 (4) 32,509
DEFERRED INCOME TAXES 4,521 - - 4,521
OTHER ASSETS 10,874 188 214 11,276
-------- ------- ------ -------- --------
TOTAL ASSETS $372,010 $13,065 $2,078 $(12,469) $374,684
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 75,035 $11,862 $ 375 $(11,862) (5) $75,410
Accrued expenses and other current liabilities 8,447 5,770 332 (3,803) (6) 10,746
Deferred income taxes 4,406 4,406
Accrued Interest 4,949 4,949
Current portion of long-term obligations 1,114 1,114
-------- ------- ------ -------- --------
Total liabilities 93,951 17,632 707 (15,665) 96,625
LONG-TERM OBLIGATIONS 224,063 - 841 (841) (7) 224,063
-------- ------- ------ -------- --------
Total liabilities 318,014 17,632 1,548 (16,506) 320,688
-------- ------- ------ -------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT) 53,996 (4,567) 530 4,037 (8) 53,996
-------- ------- ------ -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $372,010 $13,065 $2,078 $(12,469) $374,684
======== ======= ====== ======== ========
</TABLE>
- -------------------------------------------------------------------------------
The adjustments to the pro forma consolidated balance sheet as of September 30,
1997 are as follows:
(1) Reflects the payment of purchase price of $11.5 million and the elimination
of USFI, Inc. cash balances which were not purchased.
(2) Reflects the elimination of USFI, Inc.'s accounts receivable which were not
purchased.
(3) To adjust the property and equipment - net to the fair market value.
(4) To record $8.25 million of value of customer list and excess of purchase
price over far value of net assets acquired and to eliminate $0.239 million
of previously reflected intangible deemed worthless.
(5) Reflects the elimination of USFI, Inc.'s accounts payable which were not
purchased.
(6) Reflects the elimination of selected USFI, Inc.'s accrued expenses which
were not purchased.
(7) To eliminate Telepassport L.L.C. debt which was not purchased.
(8) To eliminate the equity of the purchased entities.
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
USFI, Inc.
We have audited the accompanying consolidated balance sheets of USFI, Inc. and
subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of USFI, Inc. and
subsidiary at December 31, 1996 and 1995, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that USFI,
Inc. will continue as a going concern. As more fully described in Note 2, the
Company has incurred recurring operating losses and has a working capital
deficiency and a deficit in stockholders' equity. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
September 30, 1997
<PAGE>
USFI, Inc. and Subsidiary
Consolidated Balance Sheets
(In thousands, except share information)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-----------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 884 $ 420
Accounts receivable:
Customers, less allowance of $790 in 1996 and $683 in 1995 4,620 3,852
Affiliates 1,703 304
Prepaid expenses and other current assets 112 75
------------------
Total current assets 7,319 4,651
Property and equipment, net (Note 4) 2,702 1,974
Deferred costs, net of accumulated amortization of $22 in
1996 and $4 in 1995 88 77
Goodwill, net of accumulated amortization of $5 in 1995 122
Deposits 161 123
------------------
Total assets $10,270 $ 6,947
==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $10,885 $ 4,624
Accrued liabilities and other current liabilities 1,828 1,844
Reseller deposits and deferred revenue 310 263
Capital lease obligations 3
Due to affiliates (Note 7) 1,412 1,523
------------------
Total current liabilities 14,435 8,257
Commitments and contingencies (Note 5)
Stockholders' deficit:
Common stock, no par value, authorized 5,000 shares in 1996
and 2,500 shares in 1995; issued and outstanding 536 shares
in 1996 and 100 shares in 1995
Additional paid-in capital 9,126 5,126
Accumulated deficit (13,275) (6,434)
Foreign currency translation adjustment (16) (2)
------------------
Total stockholders' deficit (4,165) (1,310)
------------------
Total liabilities and stockholders' deficit $10,270 $ 6,947
==================
</TABLE>
See accompanying notes.
<PAGE>
USFI, Inc. and Subsidiary
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1996 1995
------------------
<S> <C> <C>
Telecommunications revenue $36,550 $27,643
Costs and expenses:
Costs of telecommunications services (Note 6) 30,205 19,901
Selling, general and administrative 12,524 7,917
Depreciation and amortization (Note 3) 679 379
------------------
Total costs and expenses 43,408 28,197
------------------
Loss from operations (6,858) (554)
Other income 17 19
------------------
Loss before minority interest (6,841) (535)
Minority interest 19
------------------
Net loss $(6,841) $ (516)
==================
</TABLE>
See accompanying notes.
<PAGE>
USFI, Inc. and Subsidiary
Consolidated Statements of Stockholders' Deficit
(In thousands)
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
PAID-IN ACCUMULATED TRANSLATION
CAPITAL DEFICIT ADJUSTMENT TOTAL
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $4,325 $(5,918) $(1,593)
Capital contributions 801 801
Net loss for 1995 (516) (516)
Foreign currency translation $ (2) (2)
--------------------------------------------
Balance at December 31, 1995 5,126 (6,434) (2) (1,310)
Capital contributions 4,000 4,000
Net loss for 1996 (6,841) (6,841)
Foreign currency translation (14) (14)
--------------------------------------------
Balance at December 31, 1996 $9,126 $(13,275) $(16) $(4,165)
============================================
</TABLE>
See accompanying notes.
<PAGE>
USFI, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1996 1995
---------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(6,841) $ (516)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 679 379
Write-off of goodwill 113
Provisions for losses on receivables 352 184
Minority interest (19)
Changes in operating assets and liabilities:
Increase in accounts receivable from customers and affiliates (2,519) (2,788)
(Increase) decrease in other current assets (37) 28
Increase in deposits (38) (76)
Increase in accounts payable and accrued expenses 6,245 2,471
Increase (decrease) in reseller deposits and deferred revenue 47 (6)
Increase in due to affiliates 1,147 201
----------------------
Net cash used in operating activities (852) (142)
INVESTING ACTIVITIES
Purchase of interest in Mastercall (net of cash acquired) (70)
Purchase of equipment (1,380) (1,654)
Increase in deferred costs (29) (67)
----------------------
Net cash used in investing activities (1,409) (1,791)
FINANCING ACTIVITIES
Capital contributions 2,742 801
Advances from affiliates 1,258
Repayment of capital lease obligation (3) (22)
----------------------
Net cash provided by financing activities 2,739 2,037
Effect of exchange rate changes on cash (14) (2)
----------------------
Increase in cash 464 102
Cash at beginning of year 420 318
----------------------
Cash at end of year $ 884 $ 420
======================
</TABLE>
See accompanying notes.
<PAGE>
USFI, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1996
1. ORGANIZATION AND NATURE OF BUSINESS
USFI. Inc. (the "Company") which was incorporated in New York on February 12,
1993, provides least cost routing for international long distance
telecommunication services, which primarily originate and terminate outside of
the United States. Substantially, all billings for service are denominated in
U.S. currency.
Customers are principally located in Western Europe, Japan and South Africa. No
individual customer represents a significant percentage of revenues, however,
the Company utilizes outside agents to sell its services in certain geographic
areas, with agents in Germany and South Africa representing customers with
revenues aggregating 18% and 15%, and 13% and 10%, respectively, of total 1996
and 1995 revenues. The Company performs a credit evaluation of all new customers
and requires certain customers to provide collateral in the form of a cash
deposit or letter of credit. At December 31, 1996 and 1995, the Company had
letters of credit issued on its behalf from customers in the amount of
approximately $327,000 and $525,000, respectively.
On May 15, 1995 the Company acquired a 51% interest in Mastercall, Ltd.
("Mastercall"), a joint venture that resells the Company's international
telecommunications services in the United Kingdom, for a purchase price of
approximately $148,000. The acquisition was accounted for using the purchase
method of accounting and the results of operations have been included in the
financial statements of the Company from the date of acquisition.
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has incurred losses since inception and has a working capital deficiency
and a deficit in stockholders' equity as of December 31, 1996. All of these
matters raise substantial doubt about the Company's ability to continue as a
going concern. The Company plans on selling its assets and ceasing its
operations (see Note 10) and, on September 11, 1997, the Company entered into a
letter of intent to sell all of its assets, except for cash and accounts and
notes receivable. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts or classifications of liabilities that may result from the
outcome of this uncertainty.
<PAGE>
USFI, Inc. and Subsidiary
Notes To Consolidated Financial Statements (continued)
2. BASIS OF PRESENTATION (CONTINUED)
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. SIGNIFICANT ACCOUNTING POLICIES
DEPRECIATION
Furniture and equipment are recorded at cost and are depreciated over the
estimated useful lives of three to five years, utilizing the straight-line
method. Assets acquired pursuant to capital lease arrangements and leasehold
improvements are amortized on a straight-line basis over the shorter of their
estimated useful lives or the terms of the leases. Depreciation expense for the
years ended December 31, 1996 and 1995 was $652,000 and $371,000, respectively.
DEFERRED COSTS AND GOODWILL
Deferred costs include costs to obtain trademarks and certain organizational
costs. Goodwill includes approximately $127,000 relating to the 1995 acquisition
of Mastercall (see Note 1). Such deferred costs are amortized on the straight-
line basis generally as follows:
<TABLE>
<CAPTION>
PERIOD OF
ASSET AMORTIZATION
------------------ -------------
<S> <C>
Trademarks 5 years
Organization costs 5 years
Goodwill 15 years
</TABLE>
The carrying amount of goodwill is reviewed if facts and circumstances suggest
that it may be impaired. Due to recurring losses of Mastercall, the Company
evaluated the ongoing value of goodwill, as determined based on the estimated
undiscounted cash flows of the entity over the remaining amortization period and
determined that goodwill with a carrying value of $113,000 is impaired. As a
result, the Company has recorded a charge in 1996 to write-off the full amount
of goodwill associated with Mastercall, which is included in selling, general
and administrative expenses.
<PAGE>
USFI, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue from services and the related costs at the time
the services are rendered.
INCOME TAX
Income taxes are accounted for under the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
Mastercall. All significant intercompany accounts and transactions have been
eliminated.
BASIS OF PRESENTATION
Certain amounts in the 1995 financial statements have been reclassified to
conform with the 1996 presentation.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------------------
(in thousands)
<S> <C> <C>
Furniture and equipment $1,131 $ 892
Switching equipment 2,888 1,717
Leasehold improvements 60 89
------------------
4,079 2,698
Less accumulated depreciation and amortization 1,377 724
------------------
$2,702 $1,974
==================
</TABLE>
<PAGE>
USFI, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office and switch site space under noncancellable operating
leases. The future minimum annual rental commitments under leases having terms
in excess of one year are as follows:
<TABLE>
<S> <C>
1997 $346,000
1998 399,000
1999 399,000
2000 213,000
2001 116,000
</TABLE>
Rent expense for the years ended December 31, 1996 and 1995 was $284,000 and
$256,000, respectively.
LITIGATION
During 1994, the Company was involved in a contract dispute which was presented
to an arbitrator and, in August 1995, an award in the amount of $333,450
representing damages and administrative fees and costs was determined to be
payable by the Company. The award amount was recorded as an expense in 1994 and
was paid in 1996.
The Company is involved in litigation in the normal course of business. In the
opinion of management, such litigation will not have a material effect on the
Company's cash flows, financial condition or results of operations.
INCENTIVE PLANS
The Company maintains incentive plans which entitle certain key employees to
participate in certain distributions, if any, by the Company of cash or property
to two of the Company's principal stockholders. Participation commences when the
amount of distributions paid exceeds certain stipulated amounts. No such
distributions have been made or are expected.
6. MAJOR SUPPLIERS
During 1996 and 1995, MCI, World Com, Inc. (formerly IDB) and Cable and Wireless
International, Inc. provided the Company with a majority of its international
telecommunications network services. Charges for such services are included in
cost of telecommunications services in the accompanying statement of operations.
<PAGE>
USFI, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. RELATED PARTIES
In March 1995, the Company entered into an agreement with TelePassport Japan
Co., Ltd. ("TelePassport Japan"), an affiliated joint venture formed in 1995, to
provide international telecommunication services and to lease switching
equipment to TelePassport Japan. Telecommunication revenue for 1996 and 1995
includes $3,400,000 and $371,000, respectively, for services provided to
TelePassport Japan. The equipment under lease has a net book value of $140,000
and $186,000 at December 31, 1996 and 1995, respectively, and is included in
property and equipment. The joint venture was terminated in 1997 and the
equipment was transferred to an affiliate.
Included in due to affiliates at December 31, 1995 is a $1,258,000 note due to
US Cable Corporation ("US Cable"), an affiliate of certain stockholders. During
1996, US Cable transferred the note to such stockholders who contributed the
outstanding balance to capital.
Included in due to affiliates at December 31, 1996 and 1995 are amounts due to
TelePassport Japan for carrier charges paid by TelePassport Japan on behalf of
the Company and amounts due to US Cable for expenses paid on behalf of the
Company.
8. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan that qualifies as a deferred
salary arrangement under Section 401(a) of the Internal Revenue Code. All
full-time employees meeting minimum service requirements are eligible to
participate and may contribute up to 18% of their pre-tax earnings subject to
certain Internal Revenue Code restrictions. The Company matches 50% of each
employee's contribution up to an annual maximum of $500 per employee. Total
Company contributions for 1996 and 1995 of $16,000 and $14,000, respectively,
are included in selling, general and administrative expenses.
9. INCOME TAXES
The Company has elected to be taxed as an "S" Corporation for federal income tax
purposes. For New York City income tax purposes, the Company is taxed as a "C"
corporation and at December 31, 1996 the Company has available New York City net
operating loss carryforwards of $8,488,000, which principally expire in the year
2011. At December 31, 1996, the Company had deferred city income tax assets of
$1,132,000, which are primarily attributable to temporary differences which are
not currently
<PAGE>
USFI, Inc., and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
deductible for income tax purposes, including net operating loss carryforwards,
accrued liabilities and certain other reserves. The Company has recorded a full
valuation allowance against its deferred tax assets at December 31, 1996.
10. SUBSEQUENT EVENTS
On March 10, 1997, the Company acquired the remaining 49% interest in Mastercall
for a purchase price of approximately $15,000.
During 1997, the Company and certain affiliates planned an initial public
offering of common stock. The initial public offering was postponed in April
1997 and subsequently abandoned, and accordingly, the initial public offering
was not completed. Costs incurred as of December 31, 1996 related to the initial
public offering of $284,000 are included in 1996 selling, general and
administrative expenses.
On September 11, 1997, the Company entered into a letter of intent to sell all
of its assets, except for cash and accounts and notes receivable to Primus
Telecommunications Group, Incorporated. Subsequent to the sale, the Company
intends to cease operations.
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
USFI, Inc.
We have audited the accompanying balance sheets of USFI, Inc. as of December 31,
1994 and 1993, and the related statements of operations, stockholders' deficit
and cash flows for the year ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USFI, Inc. at December 31, 1994
and 1993, and the results of its operations and its cash flows for the year
ended December 31, 1994 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
January 31, 1996
<PAGE>
USFI, Inc.
Balance Sheets
[CAPTION]
<TABLE>
DECEMBER 31
1994 1993
--------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 318,384 $ 52,672
Accounts receivable, less allowance of $500,000 in
1994 and $320,000 in 1993 1,496,020 450,486
Prepaid expenses and other current assets 95,355 51,150
---------- ----------
Total current assets 1,909,759 554,308
Property and equipment, net (Note 3) 644,122 261,086
Deferred costs, net of accumulated amortization 12,686
Deposits 47,133 7,000
----------- ----------
Total Assets $2,613,700 $ 822,394
=========== ==========
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $2,606,259 $1,023,571
Accrued liabilities and other current liabilities 1,242,905 317,664
Reseller deposits and deferred revenue 269,278 116,793
Capital lease obligations 24,376
Due to affiliates 63,600 480,300
---------- ----------
Total current liabilities 4,206,418 1,938,328
Commitments and contingencies (Note 4)
Stockholders' deficit
Common stock, no par value, authorized 2,500 shares;
issued and outstanding 100 shares in 1994 and 1993 100 100
Additional paid-in capital 4,325,275 1,395,350
Accumulated deficit (5,918,093) (2,511,384)
---------- ----------
Total stockholders' deficit (1,592,718) (1,115,934)
---------- ---------
Total liabilities and stockholders' deficit $2,613,700 $ 822,394
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
USFI, Inc.
Statement of Operations
Year ended December 31, 1994
<TABLE>
<S> <C>
Net sales $ 12,774,803
Costs and expenses:
Direct costs (Note 5) (8,906,908)
Selling, general and administrative (6,960,279)
------------
Total costs and expenses (15,867,187)
------------
Loss from operations (3,092,384)
Other income (expense) (Note 4) (314,325)
------------
Net loss $ (3,406,709)
=============
</TABLE>
See accompanying notes.
<PAGE>
Statement of Stockholders' Deficit
Year ended December 31, 1994
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $100 $1,395,350 $(2,511,384) $(1,115,934)
Cash contributions 1,885,000 1,885,000
Contribution of USFN net assets 1,044,925 1,044,925
Net loss for 1994 (3,406,709) (3,406,709)
----------------------------------------------------------------
Balance at December 31, 1994 $100 $4,325,275 $(5,918,093) $(1,592,718)
================================================================
</TABLE>
See accompanying notes.
<PAGE>
USFI, Inc.
Statement of Cash Flows
Year ended December 31, 1994
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss $(3,406,709)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 99,529
Provisions for losses on receivables 645,570
Changes in operating assets and liabilities:
Increase in accounts receivable (1,691,104)
Increase in other current assets (37,205)
Increase in accounts payable and accrued expenses 2,505,648
Increase in reseller deposits and deferred revenue 152,485
Decrease in due to affiliates 396,738
-----------
Net cash used in operating activities (1,335,048)
INVESTING ACTIVITIES
Purchase of equipment (304,438)
Increase in deferred costs (14,096)
-----------
Net cash used in investing activities (318,534)
FINANCING ACTIVITIES
Capital contributions (including $34,294 of cash of USFN) 1,919,294
-----------
Net cash provided by financing activities 1,919,294
-----------
Increase in cash 265,712
Cash at beginning of year 52,672
-----------
Cash at end of year $ 318,384
===========
</TABLE>
See accompanying notes.
<PAGE>
USFI, Inc.
Notes to Financial Statements
December 31, 1994
1. ORGANIZATION AND NATURE OF BUSINESS
USFI, Inc. (the "Company") was incorporated in New York on February 12, 1993.
The Company provides least cost routing for international long distance
telecommunication services, which primarily originate and terminate outside of
the United States. All billings for service are denominated in U.S. currency.
Customers are principally located in Western Europe, the Middle East and Japan.
No individual customer represents a significant percentage of sales. The
Company performs a credit evaluation of all new customers and requires certain
customers to provide collateral in the form of a cash deposit or letter of
credit.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
DEPRECIATION
Furniture and equipment are recorded at cost and are depreciated over the
estimated useful lives of three to five years, utilizing the straight-line
method. Leasehold improvements are amortized on a straight-line basis over the
shorter of their estimated useful lives or the terms of the leases. Depreciation
expense for the year ended December 31, 1994 was $98,000.
REVENUE RECOGNITION
The Company recognizes revenue from services and the related costs in the period
in which the services are rendered.
INCOME TAX
The Company has elected to be taxed as an "S" Corporation and, as such, any
income of the Corporation will be taxable directly to the shareholders and not
to the corporate entity.
<PAGE>
USFI, Inc.
Notes to Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following at December 31, 1994 and
1993:
<TABLE>
<CAPTION>
1994 1993
----------------------
<S> <C> <C>
Furniture and equipment $ 482,834 $ 60,071
Switching equipment 412,628 212,273
Leasehold improvements 65,044
Leased assets 155,763 20,334
----------------------
1,116,269 292,678
Less accumulated depreciation 472,147 31,592
----------------------
$ 644,122 $261,086
======================
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office and switch site space under noncancellable operating
leases. The future minimum annual rental commitments under leases having terms
in excess of one year are as follows:
<TABLE>
<S> <C>
1995 $262,000
1996 262,000
1997 262,000
1998 283,000
1999 283,000
2000 131,000
</TABLE>
Rent expense for the year ended December 31, 1994 was $253,000.
LITIGATION
During 1994, the Company was involved in a contract dispute which was presented
to an arbitrator and, in August 1995, an award in the amount of $333,450
representing damages and administrative fees and costs was determined to be
payable by the Company. The Company has appealed the decision. The award amount
has been included in other income (expense).
LETTERS OF CREDIT
At December 31, 1994, the Company had letters of credit outstanding amounting to
$400,000 on behalf of certain telecommunications carriers.
<PAGE>
Notes to Financial Statements (continued)
5. MAJOR SUPPLIERS
During 1994, MCI and World Com, Inc. (formerly IDB) provided the Company with a
majority of its international telecommunications network services. Charges for
such services are included in direct costs in the accompanying statement of
operations.
6. RELATED PARTIES
On December 27, 1994 the net assets of US FiberCom Network, Inc. ("USFN"), an
inactive affiliate under common control, were merged into the Company, with the
net assets recorded at their historical carrying value by the Company. Net
assets, primarily consisting of property and equipment and amounts due from the
Company, had a net historical carrying value of $1,045,000, resulting in an
increase to additional paid-in capital of this amount.
Prior to the merger, the Company utilized the fixed assets of USFN and was
charged certain expenses amounting to $86,000, which is included in 1994
selling, general and administrative expenses.
Included in due to affiliates at December 31, 1994 are amounts due to US Cable
Corporation, an affiliate, for expenses paid on behalf of the Company. Included
in due to affiliates at December 31, 1993 are charges for common operating
expenses provided by USFN, which were allocated based on the Company's usage of
such items.
7. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan that qualifies as a deferred
salary arrangement under Section 401(a) of the Internal Revenue Code. All
full-time employees meeting minimum service requirements are eligible to
participate and may contribute up to 18% of their pre-tax earnings. The Company
matches 50% of each employee's contribution up to an annual maximum of $390 per
employee. Total Company contributions for 1994 were $7,000 and are included in
selling, general and administrative expenses.
8. SUBSEQUENT EVENT
In May 1995, the Company acquired a 51% interest in Mastercall, Ltd., a joint
venture that resells the Company's international telecommunications services in
the United Kingdom, for a purchase price of $140,000.
