<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
(AMENDMENT NO. 1)
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 30, 1999
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
--------------------------------------
(Exact name of issuer as specified in charter)
Delaware 0-29092 54-1708481
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
1700 Old Meadow Road
McLean, Virginia 22102
(Address of principal executive offices)
(703) 902-2800
(Registrant's telephone number, including area code)
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
------------------------------------------------------------------
(a) Financial Statements of Business Acquired.
Telegroup, Inc. and Certain Subsidiaries:
. Independent Auditors' Report.
. Combined Balance Sheets as of December 31, 1997 and 1998.
. Combined Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.
. Combined Statements of Comprehensive Losses for the years ended
December 31, 1996, 1997, and 1998.
. Combined Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1996, 1997 and 1998.
. Combined Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.
. Notes to Combined Financial Statements.
. Combined Balance Sheets as of December 31, 1998 and March 31, 1999.
. Combined Statements of Operations and Comprehensive Losses for the
three months ended March 31, 1998 and 1999.
. Combined Statements of Cash Flows for the three months ended
March 31, 1998 and 1999.
(b) Pro Forma Financial Information.
Primus Telecommunications Group, Incorporated and Subsidiaries:
. Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 1999.
. Unaudited Pro Forma Consolidated Statement of Operations for the three
months ended March 31, 1999.
. Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1998.
1
<PAGE>
(c) Exhibits.
2.1 Asset and Stock Purchase Agreement by and between the Company and
Telegroup dated June 30, 1999.*
4.1 First Supplemental Indenture dated June 30, 1999, by and between the
Company and First Union National Bank, as Trustee.*
4.2 Indenture, dated January 29, 1999, by and between the Company and First
Union National Bank, as Trustee; Incorporated by reference to Exhibit
4.7 of the Company's Registration Statement on Form S-4/A, dated May 6,
1999, File No. 333-76965.*
4.3 Specimen 11 1/4% Senior Note due 2009 of the Company, CUSIP No.
741929AF0.*
- --------------
* Previously filed.
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
/s/ Neil L. Hazard
---------------------------------
Date: July 30, 1999 By: Neil L. Hazard
Executive Vice President and
Chief Financial Officer
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Telegroup, Inc.:
We have audited the accompanying combined balance sheets of Telegroup, Inc.
and certain subsidiaries (the Company) as of December 31, 1997 and 1998 and the
related combined statements of operations, comprehensive losses, shareholders'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1998. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Telegroup, Inc. and
certain subsidiaries as of December 31, 1997 and 1998 and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying combined financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1 to
the combined financial statements, the Company has filed for protection under
Chapter 11 of the United States Bankruptcy Code due to significant financial
and liquidity problems. These circumstances raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
July 9, 1999
Lincoln, Nebraska
F-1
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
COMBINED BALANCE SHEETS
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 72,763,095 19,101,837
Securities available-for-sale.................... 21,103,030 --
Accounts receivable and unbilled services, less
allowance for credit losses of $6,074,795 in
1997 and $4,423,308 in 1998..................... 52,863,679 52,492,330
Income tax recoverable........................... 2,693,679 212,938
Prepaid expenses and other assets................ 1,274,952 2,981,706
Receivables from shareholders (note 5)........... 39,376 85,777
Receivables from employees....................... 152,259 54,901
------------ ------------
Total current assets........................... 150,890,070 74,929,489
------------ ------------
Net property and equipment (note 6)................ 27,372,572 54,676,104
------------ ------------
Other assets:
Deposits and other assets (note 6)............... 3,594,072 4,418,531
Goodwill, net of amortization of $142,203 in 1997
and $223,458 in 1998 (note 4)................... 3,102,707 4,148,679
Capitalized software, net of amortization (note
2).............................................. 1,724,758 3,334,549
Debt issuance costs, net of amortization (note
3).............................................. 3,648,026 3,513,108
------------ ------------
12,069,563 15,414,867
------------ ------------
Total assets................................... $190,332,205 145,020,460
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable (note 8)........................ $ 46,754,624 88,602,750
Commissions payable.............................. 7,691,401 4,173,700
Accrued expenses (notes 8 and 10)................ 4,466,320 6,551,162
Notes payable (note 3)........................... -- 24,832,437
Customer deposits................................ 777,847 693,781
Unearned revenue................................. 186,779 153,430
Current portion of capital lease obligations
(note 7)........................................ 158,706 123,656
Current portion of long-term debt (note 3)....... 93,788 111,130,591
------------ ------------
Total current liabilities...................... 60,129,465 236,261,507
------------ ------------
Capital lease obligations, excluding current
portion (note 7).................................. 221,179 37,483
Long-term debt, excluding current portion (note
3)................................................ 101,450,951 118,677
Minority interest (note 4)......................... -- --
Common stock, no par or stated value; 150,000,000
shares authorized, 30,889,945 and 33,689,785
issued and outstanding in 1997 and 1998,
respectively...................................... -- --
Additional paid-in capital......................... 51,649,660 63,313,048
Retained deficit (note 1).......................... (23,075,221) (155,267,829)
Accumulated other comprehensive income (deficit)... (43,829) 557,574
------------ ------------
Total shareholders' equity (deficit)........... 28,530,610 (91,397,207)
Commitments and contingencies (notes 6 and 11)
------------ ------------
Total liabilities and shareholders' equity
(deficit)..................................... $190,332,205 145,020,460
============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-2
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Retail............................... $179,146,795 220,691,970 234,662,249
Wholesale............................ 34,060,714 112,408,905 125,269,438
------------ ----------- -----------
Total revenues..................... 213,207,509 333,100,875 359,931,687
Cost of revenues (note 11)............. 150,536,859 252,054,271 299,650,665
------------ ----------- -----------
Gross profit........................... 62,670,650 81,046,604 60,281,022
------------ ----------- -----------
Operating expenses:
Selling, general and administrative
expenses (notes 6, 10
and 13)............................. 59,651,857 87,370,378 106,342,704
Depreciation and amortization........ 1,881,619 4,959,785 10,939,925
Stock option-based compensation (note
8).................................. 1,032,646 342,380 285,317
Impairment of long-lived assets
(notes 4 and 6)..................... -- -- 14,798,830
------------ ----------- -----------
Total operating expenses........... 62,566,122 92,672,543 132,366,776
------------ ----------- -----------
Operating income (loss)............ 104,528 (11,625,939) (72,085,754)
Other income (expense):
Interest expense..................... (578,500) (4,208,328) (11,069,365)
Interest income...................... 377,450 2,014,395 2,406,269
Foreign currency transaction loss.... (147,752) (571,637) (632,761)
Other................................ 118,504 290,622 84,756
------------ ----------- -----------
Loss before income taxes and
extraordinary item................ (125,770) (14,100,887) (81,296,855)
Income tax benefit (expense) (note 9).. 7,448 576,526 (29,908)
Minority interest in share of loss
(note 4).............................. -- -- --
------------ ----------- -----------
Loss before extraordinary item..... (118,322) (13,524,361) (81,326,763)
Extraordinary item, loss on
extinguishment of debt, net of income
tax benefit of $1,469,486 (note 3).... -- (9,970,815) --
------------ ----------- -----------
Net loss........................... $ (118,322) (23,495,176) (81,326,763)
============ =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
COMBINED STATEMENTS OF COMPREHENSIVE LOSSES
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- ----------- -----------
<S> <C> <C> <C>
Net loss................................. $(118,322) (23,495,176) (81,326,763)
Foreign currency translation adjustment,
net of tax.............................. (2,203) (41,626) 601,403
--------- ----------- -----------
Comprehensive loss..................... $(120,525) (23,536,802) (80,725,360)
========= =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Accumulated
other com- Total
Common Stock Additional Retained prehensive shareholders'
----------------- paid-in earnings income equity
Shares Amount capital (deficit) (deficit) (deficit)
---------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995................... 24,651,989 $-- 4,595 3,142,852 -- 3,147,447
Dividends............... -- -- -- (425,000) -- (425,000)
Net loss................ -- -- -- (118,322) -- (118,322)
Issuance of common
stock.................. 1,297,473 -- 52,366 -- -- 52,366
Notes receivable from
shareholders for common
stock.................. -- -- (52,366) -- -- (52,366)
Shares issued in
connection with
business combinations
(note 4)............... 262,116 -- 573,984 -- -- 573,984
Compensation expense in
connection with stock
option plan (notes 3
and 8)................. -- -- 1,032,646 -- -- 1,032,646
Warrants issued in
connection with the
Private Offering (note
8)..................... -- -- 9,153,951 -- -- 9,153,951
Change in foreign
currency translation... -- -- -- -- (2,203) (2,203)
---------- ---- ---------- ------------ ------- -----------
Balances at December 31,
1996................... 26,211,578 -- 10,765,176 2,599,530 (2,203) 13,362,503
Net loss................ -- -- -- (23,495,176) -- (23,495,176)
Carve-out of uncombined
subsidiaries (note 1).. -- -- -- (2,179,575) -- (2,179,575)
Issuance of shares, net
of offering expenses
(note 8)............... 4,450,000 -- 39,825,343 -- -- 39,825,343
Shares issued in
connection with
business combination
(note 4)............... 40,000 -- 470,000 -- -- 470,000
Compensation expense in
connection with stock
option plan (note 8)... -- -- 342,380 -- -- 342,380
Issuance of shares for
options exercised (note
8)..................... 188,367 -- 246,761 -- -- 246,761
Change in foreign
currency translation... -- -- -- -- (41,626) (41,626)
---------- ---- ---------- ------------ ------- -----------
Balances at December 31,
1997................... 30,889,945 -- 51,649,660 (23,075,221) (43,829) 28,530,610
Net loss................ -- -- -- (81,326,763) -- (81,326,763)
Carve-out of uncombined
subsidiaries (note 1).. -- -- -- (50,865,845) -- (50,865,845)
Shares issued in
connection with
business combinations
(note 4)............... 538,232 -- 7,066,524 -- -- 7,066,524
Compensation expense in
connection with stock
option plan (note 8)... -- -- 285,317 -- -- 285,317
Commission expense in
connection with
independent agent stock
option plan (note 8)... -- -- 474,241 -- -- 474,241
Shares issued in-lieu of
future commissions
(note 13).............. 181,737 -- 1,592,234 -- -- 1,592,234
Payment received on note
receivable from
shareholders........... -- -- 52,366 -- -- 52,366
Issuance of shares for
warrants exercised
(note 8)............... 1,327,333 -- -- -- -- --
Unissued warrants in
connection with
forbearance agreements
(note 8)............... -- -- -- -- -- --
Issuance of shares for
property purchase...... 204,035 -- 1,466,649 -- -- 1,466,649
Warrants issued for
property purchase (note
8)..................... -- -- 9,758 -- -- 9,758
Issuance of shares for
options exercised (note
8)..................... 537,503 -- 702,128 -- -- 702,128
Issuance of shares for
litigation settlement.. 11,000 -- 14,171 -- -- 14,171
Change in foreign
currency translation... -- -- -- -- 601,403 601,403
---------- ---- ---------- ------------ ------- -----------
Balances at December 31,
1998................... 33,689,785 $-- 63,313,048 (155,267,829) 557,574 (91,397,207)
========== ==== ========== ============ ======= ===========
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $ (118,322) (23,495,176) (81,326,763)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization......... 1,881,619 4,959,785 10,939,925
Assets held for disposal.............. -- -- 1,263,991
Deferred income taxes................. 229,933 635,167 --
Impairment of long-lived assets....... -- -- 14,798,830
Loss on sale of equipment............. -- 227,672 114,491
Loss on extinguishment of debt........ -- 10,040,301 --
Issuance of shares for litigation
settlement........................... -- -- 14,171
Provision for credit losses on
accounts receivable.................. 5,124,008 8,407,168 9,369,240
Accretion of debt discounts........... 48,077 1,874,090 8,225,692
Stock option-based compensation
expense.............................. 1,032,646 342,380 285,317
Stock option-based commission
expense.............................. -- -- 474,241
Changes in operating assets and
liabilities, excluding the effects of
business combinations:
Accounts receivable and unbilled
services............................. (14,199,095) (28,671,383) (7,518,222)
Prepaid expenses and other assets..... (134,946) (979,711) (841,421)
Deposits and other assets............. (80,001) (4,555,603) (8,963,770)
Accounts payable, commissions payable
and accrued expenses................. 16,292,448 19,091,546 36,462,512
Income taxes.......................... (5,323,692) (1,064,375) 2,480,741
Unearned revenue...................... 64,276 122,503 (33,349)
Customer deposits..................... 87,506 174,907 (84,066)
------------ ----------- -----------
Net cash provided by (used in)
operating activities................ 4,904,457 (12,890,729) (14,338,440)
------------ ----------- -----------
Cash flows from investing activities:
Purchases of equipment................ (9,067,923) (20,192,680) (36,885,963)
Sales (purchases) of securities
available-for-sale................... -- (21,103,030) 21,103,030
Proceeds from sale of equipment....... -- 450,000 126,191
Capitalization of software............ (1,789,604) (316,785) (2,057,012)
Cash paid in business combinations,
net of cash acquired................. (468,187) (656,334) (2,576,145)
Net change in receivables from
shareholders and employees........... 63,334 (91,122) 50,957
------------ ----------- -----------
Net cash used in investing
activities.......................... (11,262,380) (41,909,951) (20,238,942)
------------ ----------- -----------
Cash flows from financing activities:
Net proceeds (principal payments) from
(on) notes payable................... (2,000,000) -- 24,832,437
Proceeds from issuance of senior
subordinated notes................... 20,000,000 -- --
Proceeds from issuance of convertible
subordinated notes................... -- 25,000,000 --
Proceeds from issuance of senior
discount notes....................... -- 74,932,500 --
Prepayment of senior subordinated
notes................................ -- (20,000,000) --
Debt issuance costs................... (1,450,281) (3,753,558) (471,532)
Net proceeds from issuance of stock... -- 39,825,343 --
Net proceeds from options exercised... -- 246,761 702,128
Dividends paid........................ (950,000) -- --
Net proceeds (principal payments) from
(on) other long-term borrowings...... 530,803 (452,762) 1,478,837
Principal payments under capital lease
obligations.......................... (180,901) (168,321) (143,272)
Proceeds received (borrowings) on note
due from shareholders................ (25,881) -- 52,366
------------ ----------- -----------
Net cash provided by financing
activities.......................... 15,923,740 115,629,963 26,450,964
------------ ----------- -----------
Exchange rate changes................. (2,203) (41,626) 601,403
Carve-out of uncombined subsidiaries.. -- (2,179,575) (50,865,845)
Shares issued in connection with
business combinations of uncombined
subsidiaries......................... -- -- 4,729,602
------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents.................... 9,563,614 58,608,082 (53,661,258)
------------ ----------- -----------
Cash and cash equivalents at beginning
of year............................... 4,591,399 14,155,013 72,763,095
------------ ----------- -----------
Cash and cash equivalents at end of
year.................................. $ 14,155,013 72,763,095 19,101,837
============ =========== ===========
Supplemental disclosures of cash flow
information:
Interest paid......................... $ 356,270 3,930,558 2,545,501
============ =========== ===========
Income taxes paid..................... $ 5,164,634 795 82,283
============ =========== ===========
Supplemental disclosures of noncash
investing and financing activities:
Dividends declared.................... $ 425,000 -- --
============ =========== ===========
Common stock issued in connection with
business combinations................ $ 573,984 470,000 7,066,524
============ =========== ===========
Common stock issued in consideration
for notes receivable................. $ 52,366 -- --
============ =========== ===========
Equipment acquired under capital
lease................................ $ -- 108,504 --
============ =========== ===========
Common stock issued in-lieu of future
commissions.......................... $ -- -- 1,592,234
============ =========== ===========
Common stock and warrants issued in
connection with property purchase.... $ -- -- 1,476,407
============ =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(1) BASIS OF PRESENTATION
On February 10, 1999 (the Filing Date), amidst increasing financial and
liquidity problems, Telegroup, Inc. filed for protection under Chapter 11 of
the United States (U.S.) Bankruptcy Code, as amended (the Bankruptcy Code).
Telegroup, Inc. filed a voluntary petition to operate as a Debtor in Possession
(DIP) in the U.S. Bankruptcy Court District of New Jersey (the Bankruptcy
Court). Telegroup, Inc.'s subsidiary companies have not filed for Chapter 11
protection. Telegroup, Inc.'s equity interests in such subsidiaries represent
assets of the bankruptcy estate.
The commencement of a Chapter 11 bankruptcy proceeding results in the
imposition of an automatic stay against the commencement or continuation of any
judicial, administrative or other proceeding against Telegroup, Inc., against
any act to obtain possession of property of or from Telegroup, Inc., and
against any act to create, perfect or enforce any lien against property of
Telegroup, Inc., subject to certain exceptions permitted under the Bankruptcy
Code. Telegroup, Inc.'s creditors, therefore, are generally prohibited from
attempting to collect prepetition debts without the consent of the Bankruptcy
Court. Any creditor may seek relief from the automatic stay and, if applicable,
enforce a lien against its collateral, if authorized by the Bankruptcy Court.
There are various other provisions of the Bankruptcy Code which may impose
limitations or constraints on Telegroup, Inc.'s operations.
Pursuant to provisions of the Bankruptcy Code, claims arising prior to the
filing of the petition under Chapter 11 of the Bankruptcy Code may not be paid
outside of a plan of reorganization without prior approval of the Bankruptcy
Court. Certain prepetition claims have subsequently been paid or satisfied with
approval from the Bankruptcy Court. These claims include payments for
commissions and wages, salaries and employee benefits.
Since the Filing Date, Telegroup, Inc. has continued in possession of its
properties and as a DIP is authorized to operate and manage its business and to
enter into all transactions that it could have entered into in the ordinary
course of its business had there been no Chapter 11 filing. Subsequent to the
Filing Date, Telegroup, Inc. restructured the terms of many of its
relationships with critical telecommunications service carriers and reduced
significant portions of its general and administrative costs, in an effort to
effectively manage its liquidity problems. In March 1999, the Bankruptcy Court
set a date of June 15, 1999 (the Bar Date) as the date for which all pre-Filing
Date claims could be filed by creditors against Telegroup, Inc.
During the first quarter of 1999, Telegroup, Inc. continued to operate as a
DIP and petitioned the Bankruptcy Court for approval to sell the majority of
its assets under Sections 363 and 365 of the Bankruptcy Code. Following the
approval of the Bankruptcy Court and a public notice, on May 26, 1999, Primus
Telecommunications, Inc. (Primus) emerged as highest bidder at the auction and
committed to purchase the majority of Telegroup, Inc.'s assets, including the
common stock of Telegroup, Inc.'s subsidiary companies, excluding the
subsidiaries located in Australia and New Zealand, which include Telegroup
Network Services Australia Pty Limited, Telegroup Network Services New Zealand
Pty Limited, and Switch Telecommunications Pty Limited (collectively the
Australian and New Zealand Subsidiaries) (the Core Business Assets), for
$71,825,000. The sale of the Core Business Assets to Primus, including an
additional sale of accounts receivable and other assets less assumed
liabilities for approximately $22,190,000, closed on June 30, 1999. The
effective date of these transactions was June 1, 1999. The purchase price was
paid by Primus in unregistered debt securities of $45,467,000 in the form of
11.25% Senior Notes due 2009 (the Primus Notes), a $4,592,006 promissory note
due 60% on July 30, 1999 and 40% on August 31, 1999, and cash.
In addition, the auction resulted in other telecommunications carriers
purchasing certain other fixed assets of Telegroup, Inc. for approximately
$5,600,000 in cash.
F-7
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Telegroup, Inc. used the auction proceeds to pay in full its asset-based
line of credit and term loan with Foothill Capital Corp. (Foothill) (see note
3). The remaining assets of Telegroup, Inc., consisting primarily of cash and
Primus Notes obtained from the sale of assets from the auction, are being held
subject to the review and reconciliation of creditors' proofs of claims that
have been filed with the Bankruptcy Court against Telegroup, Inc. as of the Bar
Date. Management of Telegroup, Inc. have estimated and accrued known claims it
believes are valid relating to products and/or services received prior to
December 31, 1998 in the accompanying combined financial statements. However, a
number of disputed claims exist which are individually significant in amount
and which, together, are materially in excess of the amounts reflected in the
accompanying combined financial statements. Disputed claims for products and/or
services received prior to December 31, 1998 have been reflected at such
amounts, if any, that are estimated will be allowed. Disputed claims could be
greater than or less than the amounts reflected in the accompanying financial
statements and these differences may be material. It is anticipated that claims
will be reconciled in connection with the consummation of a Chapter 11 plan of
liquidation. The ultimate amount and classification of claims which will be
allowed can not be estimated at this time.
Pursuant to provisions of the Bankruptcy Code, Telegroup, Inc. has until the
confirmation of a plan of reorganization to assume or reject executory
contracts and unexpired leases of personal property, subject to the discretion
of the Bankruptcy Court, on request of a party to such contract or lease, to
require Telegroup, Inc. to determine within a specified time period whether to
assume a particular executory contract or unexpired lease of personal property.
Generally, a Chapter 11 debtor must assume all leases of nonresidential real
property within 60 days of its Chapter 11 filing, or such leases will be deemed
rejected, unless the Bankruptcy Court, for cause, within such 60-day period
establishes a longer period for assumption decisions. Subject to certain
exceptions, by order of the Bankruptcy Court, Telegroup, Inc. obtained an
extension of time within which to assume or reject its nonresidential real
property leases.
Assumption of an executory contract or unexpired lease under the Bankruptcy
Code requires Telegroup, Inc., among other things, to cure all defaults under
such executory contract or unexpired lease. Rejection of an executory contract
or unexpired lease constitutes a breach of such executory contract or unexpired
lease immediately before the date of the filing of the Chapter 11 petition,
giving the other party to the contract or unexpired lease the right to assert a
general unsecured claim against the bankruptcy estate for damages arising out
of the breach. Prior to the filing of Telegroup, Inc.'s plan of liquidation,
Telegroup, Inc. anticipates that it will notify the Bankruptcy Court of those
contracts and leases that it will assume or reject as of the effective date of
the plan of liquidation. Included in Primus's purchase agreement, Primus will
assume certain executory contracts and unexpired leases. Telegroup, Inc. will
reject all remaining contracts and leases. Primus continues to review
Telegroup, Inc.'s contracts and leases to determine which ones they will
assume. The Disclosure Statement, which will be filed concurrently with the
plan of liquidation, will set forth Telegroup, Inc.'s estimates of the
aggregate cure amounts and rejection damage claims to be incurred in connection
with assumptions and rejections for only those contracts and leases not already
rejected or assumed prior to the filing of the plan of liquidation. Rejection
of these executory contracts and unexpired leases could result in additional
claims against the estate.
The accompanying combined financial statements have been prepared in order
for Primus to comply with certain reporting requirements of the Securities and
Exchange Commission. The accompanying combined financial statements represent
the accounts of Telegroup, Inc. and certain subsidiaries (the Company). As
Primus is not purchasing the Australian and New Zealand Subsidiaries, these
subsidiaries, in which Telegroup, Inc. has significant control, are excluded
from the combined financial statements. In accordance with the accounting rules
prescribed for "carve-out" financial statements, the excess of the purchase
price of the Australian and New Zealand Subsidiaries over fair value of their
net assets acquired recorded by Telegroup, Inc., the financial position,
results of operations, comprehensive losses and cash flows for these
F-8
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
subsidiaries are not included in the combined financial statements. The net
effect of the "carve-out" adjustment is reflected in retained deficit in the
combined financial statements.
The accompanying combined financial statements have been prepared on a going
concern basis which assumes continuity of operations and realization of assets
and liquidation of liabilities in the ordinary course of business. As discussed
herein, there are significant uncertainties relating to the ability of the
Company to continue as a going concern. The combined financial statements do
not include any adjustments relating to the recoverability and classification
of recorded asset amounts, or the amounts and classification of liabilities
that might be necessary as a result of the outcome of the uncertainties
discussed herein.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
(2) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company is an alternative provider of domestic and international
telecommunications services. The Company's revenues are derived from the sale
of telecommunications to retail customers, typically residential users and
small- to medium-sized business and wholesale customers, typically
telecommunications carriers. The Company's customers are principally located in
the United States, Europe and the Pacific Rim. In both the retail and wholesale
aspects of its business, the Company extends credit to customers on an
unsecured basis with the risk of loss limited to outstanding amounts.
The Company markets its services through a worldwide network of independent
agents and supervisory "country coordinators". The Company extends credit to
its sales representatives and country coordinators on an unsecured basis with
the risk of loss limited to outstanding amounts, less commissions payable to
the representatives and coordinators.
A summary of the Company's significant accounting policies follows:
Cash Equivalents and Securities Available-for-sale
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. At December 31, 1997, cash
equivalents consisted of money market instruments, U.S. Government securities,
and commercial paper totaling $70,133,492. There were no cash equivalents at
December 31, 1998. Securities available-for-sale represent U.S. Government
securities with maturities greater than three months. Securities available-for-
sale are recorded at the lower of amortized cost or market value. At December
31, 1997, amortized cost approximated market value.
Property and Equipment
Property and equipment are stated at cost. Equipment held under capital
leases are stated at the lower of the fair value of the asset or the net
present value of the minimum lease payments at the inception of the lease.
Depreciation on property and equipment is provided using the straight-line
method over the estimated useful lives of the assets. Equipment held under
capital leases and leasehold improvements are amortized straight-line over the
shorter of the lease term or estimated useful life of the asset. Amortization
of assets held under capital leases and leasehold improvements are included
with depreciation expense.
F-9
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Capitalized Software Development Costs
The Company capitalizes software costs incurred in the development of its
telecommunications switching software, billing systems and other support
platforms. The Company capitalizes external direct costs of materials and
services consumed, internal direct payroll and payroll related costs incurred
and estimated costs of debt funds used in the development of internal use
software. Capitalization begins upon the completion of the preliminary project
stage and ends when the software is substantially complete and ready for its
intended use. Amortization of capitalized software is provided using the
straight-line method over the software's estimated useful life, which ranges
from one to five years. For the years ended December 31, 1997 and 1998,
amortization of software development costs totaled $498,682 and $447,221,
respectively. There was no amortization during 1996 as the software had not yet
been complete and ready for its intended use.
Stock Option Plan
The Company accounts for its stock option plan using the intrinsic value
based method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations. As such, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeds the exercise
price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123), which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB No. 25 and provide pro forma net income disclosures as if the
fair-value method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123.
Impairment of Long-lived Assets
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. This statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Fair
value is determined using valuation techniques such as quoted market prices or
the discounted present value of expected future cash flows. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
Goodwill
Goodwill results from the application of the purchase method of accounting
for business combinations and represents the excess of purchase price over fair
value of net assets acquired. Amortization is provided using the straight-line
method over a maximum of fifteen years. For business combinations relating to
the purchase of an entity's customers, goodwill is amortized using an
accelerated method over the estimated life of the customers purchased or three
years, whichever is shorter. Impairment is determined pursuant to the
methodology used for other long-lived assets.
F-10
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes (SFAS No. 109). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Estimates
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 at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual amounts could differ from those
estimates.
Business and Credit Concentration
Financial instruments which potentially expose the Company to a
concentration of credit risk, as defined by SFAS No. 105, Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk (SFAS No. 105),
consist primarily of accounts receivable. At December 31, 1998, the Company's
accounts receivable balance from customers in countries outside of the U.S. was
approximately $31,400,000 with an associated reserve for credit losses of
approximately $2,400,000. The Company estimates an allowance for doubtful
accounts based on the credit worthiness of its customers as well as general
economic conditions. Consequently, an adverse change in those factors could
effect the Company's estimate of its bad debts.
Foreign Currency Contracts
The Company uses foreign currency contracts to hedge foreign currency risk
associated with its international accounts receivable balances. Gains or losses
pursuant to these foreign currency contracts are reflected as an adjustment of
the carrying value of the hedged accounts receivable. At December 31, 1997 and
1998, the Company had no material deferred hedging gains or losses.
Revenues, Cost of Revenues and Commissions Expense
Revenues from retail telecommunications services are recognized when
customer calls are completed. Revenues from wholesale telecommunications
services are recognized when the wholesale carrier's customers' calls are
completed. Cost of retail and wholesale revenues are based primarily on the
direct costs associated with owned and leased transmission capacity and the
cost of transmitting and terminating traffic on other carriers' facilities. The
Company does not differentiate between the cost of providing transmission
services on a retail or wholesale basis. Commissions paid to acquire customer
call traffic are expensed in the period when associated call revenues are
recognized.
Prepaid Phone Cards
Substantially all the prepaid phone cards sold by the Company have an
expiration date of twenty-four months after issuance or six months after last
use. The Company records the net sales price as deferred revenue
F-11
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
when cards are sold and recognizes revenue as the ultimate consumer utilizes
calling time. Deferred revenue relating to unused calling time remaining at
each card's expiration is recognized as revenue upon the expiration of such
card.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income (SFAS No. 130). SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of the Company's net
losses and foreign currency translation adjustments and is presented in the
combined statements of comprehensive losses. SFAS No. 130 requires only
additional disclosures in the combined financial statements; it does not affect
the Company's financial position or results of operations.
Foreign Currency Translation
The functional currency of the Company is the U.S. dollar. The functional
currency of the Company's foreign operations generally is the applicable local
currency for the foreign subsidiary. Assets and liabilities of its foreign
subsidiaries are translated at the spot rate in effect at the applicable
reporting date, and the combined statements of operations and the Company's
share of the results of operations of its foreign subsidiaries are translated
at the average exchange rates in effect during the applicable period. The
resulting unrealized cumulative translation adjustment is recorded as a
separate component of equity and is included in other comprehensive income
(deficit).
Fair Value of Financial Instruments
The fair values of cash and cash equivalents and receivables are estimated
to approximate carrying value due to the short-term maturities of these
financial instruments. The carrying value of accounts payable, commissions
payable, lease obligations, notes payable and long-term debt cannot be
reasonably estimated at December 31, 1998 due to the Company's financial and
liquidity problems and uncertainties surrounding the Bankruptcy proceedings
(see note 1).
Valuation of Common Stock Issuances
The Company issues shares of common stock for consideration on certain
transactions. The Company values the shares issued based on the fair-market
value of the securities issued.
Segment Reporting
On January 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS No. 131). SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments. The basis for determining an enterprise's
operating segments is the manner in which management operates the business.
New Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
was issued in June 1998. This statement provides new accounting and reporting
standards for the use of derivative instruments. Adoption of this statement is
required by the Company effective January 1, 2001. Management believes that the
impact of such adoption will not be material to the financial statements.
F-12
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(3) Debt
Long-term debt at December 31, 1997 and 1998 is shown below:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
8.00% convertible subordinated notes, due April
15, 2005, unsecured............................ $ 25,000,000 25,000,000
10.50% senior discount notes, net of discount,
due November 1, 2004, unsecured................ 76,442,135 84,667,827
8.50% note payable, paid in April 1998.......... 11,082 --
10.80% note payable, paid in November 1998...... 80,955 --
8.75% note payable, due monthly through February
1999, balloon payment due March 1999, secured
by building.................................... -- 578,584
15.00% note payable, due monthly through June
1999, secured by building...................... -- 450,512
2.50% above prime note payable, due monthly
through fiscal 2002, secured by office unit,
London......................................... -- 105,118
8.00% note payable, due monthly through July
1999, unsecured................................ -- 360,575
10.35% note payable, due monthly through 2001,
secured by vehicle............................. -- 20,061
8.25% note payable, due monthly through 2001,
secured by vehicle............................. -- 23,963
9.28% note payable, due monthly through 2001,
secured by vehicle............................. -- 38,793
6.85% note payable, due monthly through 1999,
unsecured...................................... 8,204 3,835
8.00% note payable, paid in April 1998.......... 2,363 --
------------ ------------
Total long-term debt.......................... 101,544,739 111,249,268
Less current installments..................... (93,788) (111,130,591)
------------ ------------
Long-term debt, excluding current
installments................................. $101,450,951 118,677
============ ============
</TABLE>
Senior Subordinated Notes
On November 27, 1996, the Company completed a private placement (Private
Offering) of 12% senior subordinated notes (the Subordinated Notes) for gross
proceeds of $20,000,000 which was due and payable on November 27, 2003. Net
proceeds from the Private Offering, after issuance costs of $1,450,281, were
$18,549,719. In connection with the Private Offering, the Company issued 20,000
warrants to purchase 1,160,107 shares of the Company's common stock (see note
8).
The Subordinated Notes were originally recorded at $10,846,049 (a yield of
26.8%), which represents the $20,000,000 in proceeds less the $9,153,951 value
assigned to the detachable warrants, which is included in additional paid-in
capital. The value assigned to the warrants was being accreted to the debt
using the interest method over seven years. The accretion of the value assigned
to the warrants is included in interest expense in the accompanying combined
financial statements.
On September 5, 1997, the Company prepaid in full all of the outstanding
Subordinated Notes. The Company paid $21,400,000, which included $20,000,000 in
principal and $1,400,000 for a prepayment penalty. In addition, the Company
recognized a loss of $8,741,419 and $1,298,882 for the write-off of the
unamortized original issue discount and debt issuance costs, respectively. The
early extinguishment of the Subordinated Notes is reflected on the combined
statement of operations as an extraordinary item, net of income taxes.
F-13
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Convertible Subordinated Notes
On September 30, 1997, the Company issued $25,000,000 in aggregate principal
amount of convertible subordinated notes due April 15, 2005. Net proceeds from
the convertible notes, after issuance costs of $890,475, were $24,109,525.
The convertible notes bear interest at 8% per annum, payable on each April
15 and October 15. The convertible notes are convertible into shares of common
stock of the Company at any time before April 15, 2005, at a conversion price
of $12.00 per share, subject to adjustment upon the occurrence of certain
events.
The convertible notes are redeemable, in whole or in part, at the option of
the Company, at any time on or after October 15, 2000 at redemption prices
(expressed as a percentage of the principal amount) declining annually from
104% beginning October 15, 2000 to 100% beginning October 15, 2003 and
thereafter, together with accrued interest to the redemption date and subject
to certain conditions.
The convertible notes are unsecured obligations of the Company and are
subordinated to all existing and future senior indebtedness of the Company.
Senior Discount Notes
On October 23, 1997, the Company issued $97,000,000 in aggregate principal
amount of 10.5% senior discount notes due November 1, 2004. Net proceeds from
the senior discount notes, after issuance costs of $2,863,083, were
$72,069,417. The discount of $22,067,500 recorded on the senior discount notes
is being accreted to the debt through May 1, 2000 using the interest method,
resulting in an effective interest rate of 10.5%. The accreted value of the
notes will equal the following on their semi-annual accrual dates.
<TABLE>
<CAPTION>
Semi-annual Accreted
date value
----------- ----------
<S> <C>
May 1, 1999...................................................... 87,576,365
November 1, 1999................................................. 92,167,906
May 1, 2000...................................................... 97,000,000
</TABLE>
Interest on the senior discount notes will neither accrue nor be payable
prior to May 1, 2000 and are payable on each May 1 and November 1 thereafter.
The notes are redeemable, in whole or in part, at the option of the Company, at
any time on or after November 1, 2001 at redemption prices (expressed as a
percentage of the principal amount) declining annually from 105.25% beginning
November 1, 2001 to 100% beginning November 1, 2004 and thereafter, together
with accrued interest to the redemption date and subject to certain conditions.
The senior discount notes are unsecured obligations of the Company and are
subordinated to all existing and future indebtedness of the Company, with the
exception of the convertible subordinated notes.
The convertible subordinated note and senior discount note indentures place
certain restrictions on the ability of the Company and its subsidiaries to (i)
incur additional indebtedness, (ii) make restricted payments (dividends,
redemptions and certain other payments), (iii) incur liens, (iv) enter into
mergers, consolidations or acquisitions, (v) sell or otherwise dispose of
property, business or assets, (vi) issue and sell preferred stock of a
subsidiary, and (vii) engage in transactions with affiliates.
F-14
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Subsequent to December 31, 1998, the Company defaulted on the convertible
subordinated note and senior discount note indentures by filing for protection
under Chapter 11 of the U.S. Bankruptcy Code (see note 1). As a result, these
notes are due and payable upon the request of the note holders. At December 31,
1998, these notes are presented as current liabilities in the combined
financial statements.
Line of Credit
At December 31, 1998, the Company had a $15,000,000 asset-based line of
credit and a $10,000,000 term loan with Foothill which provided for up to
$25,000,000 in committed credit. Aggregate borrowings under the line of credit
and term loan were $24,832,437 at December 31, 1998. Interest was payable at
Norwest Bank's most recently announced base rate (Reference Rate) plus 2%
(9.75% at December 31, 1998) and 12% per annum, respectively. Subsequent to
December 31, 1998, these rates increased due to an event of default. The
default rates were the Reference Rate plus 6% and 16% per annum, respectively.
The credit line and term loan were collateralized by the Company's accounts
receivable and substantially all other Company assets. The line of credit and
term loan were paid by the Company with the proceeds received from the sale of
the Company's assets on June 30, 1999 (see note 1).
(4) Business Combinations
During 1996, 1997 and 1998, the Company acquired assets and/or common stock
of various companies providing products or services in the telecommunications
industry. Each acquisition was accounted for using the purchase method of
accounting and, accordingly, the net assets and results of operations are
included in the combined financial statements from the date of acquisition.
On August 21, 1996, the Company purchased TeleContinent, S.A. for $200,000.
Also on August 21, 1996, the Company purchased Telegroup South Europe, Inc.
Consideration for the purchase was $1,031,547 and 262,116 shares of common
stock of the Company valued at $573,984, for total consideration of $1,605,531.
The value of the common stock was determined by management based on information
obtained from the Company's independent financial advisors. The aggregate
purchase price of the acquisitions was allocated based on estimated fair values
as follows:
<TABLE>
<S> <C>
Current assets................................................... $ 794,452
Property and equipment........................................... 54,571
Goodwill......................................................... 1,024,609
Current liabilities.............................................. (68,101)
----------
Total.......................................................... $1,805,531
==========
</TABLE>
During the fourth quarter of 1998, the Company recognized an impairment loss
of $1,221,729 for unamortized goodwill and other long-term intangible assets
relating to these subsidiaries.
Pro forma operating results of the Company, assuming the 1996 acquisitions
were consummated on January 1, 1996, do not significantly differ from reported
amounts.
On August 14, 1997, the Company acquired 60% of the common stock of, and
controlling interest in, PCS Telecom, Inc. (PCS). Consideration for the
purchase was $1,340,000 and 40,000 shares of unregistered common stock of the
Company valued at $470,000, for total consideration of $1,810,000. PCS is a
developer
F-15
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
and manufacturer of calling card platforms used by the Company and other
companies. The aggregate purchase price of the acquisition was allocated based
on estimated fair values as follows:
<TABLE>
<S> <C>
Current assets.................................................. $ 1,279,971
Property and equipment.......................................... 534,600
Other assets.................................................... 1,855
Goodwill........................................................ 2,041,258
Current liabilities............................................. (2,047,684)
-----------
Total......................................................... $ 1,810,000
===========
</TABLE>
The minority interest deficit of 40% was included in the calculation of the
Company's goodwill due to the Company recognizing 100% of PCS's net earnings
or losses until the historical shareholder's equity of PCS becomes positive.
No minority interest relating to PCS is reflected in the accompanying
financial statements, as PCS's net assets remained at a deficit since it's
acquisition.
During the third quarter of 1998, the Company decided to significantly
scale back the development and assembly of calling card platforms at PCS. This
decision significantly reduced the Company's estimated future cash flows for
this subsidiary. As a result of the Company's estimated shortfalls of cash
flows, the Company recognized an impairment loss of $1,888,064 for unamortized
goodwill relating to this subsidiary. During the fourth quarter of 1998, the
Company abandoned the remaining operations of PCS. This resulted in an
impairment loss on the remaining long-lived assets of $552,996.
Pro forma operating results of the Company, assuming the PCS acquisition
was consummated on January 1, 1996, do not significantly differ from reported
amounts.
On January 15, 1998, the Company acquired the operations of its Australian
country coordinator. Consideration for the Australian country coordinator was
$107,584 and 107,036 shares of unregistered common stock of the Company valued
at $1,422,382, for total consideration of $1,529,966.
The agreement also contained provisions which called for additional
consideration if certain financial measures of the acquired operations were
met subsequent to the date of acquisition. On June 5, 1998, the Company issued
an additional 39,600 shares of unregistered common stock valued at $426,639 to
the Australian coordinator to cancel such contingent consideration provisions
in the original purchase agreement.
The aggregate purchase price of the acquisition was allocated based on
estimated fair values as follows:
<TABLE>
<S> <C>
Property and equipment............................................ $ 18,104
Goodwill.......................................................... 1,938,501
----------
Total........................................................... $1,956,605
==========
</TABLE>
The excess of the purchase price over fair value, financial position,
results of operations, comprehensive losses, and cash flows for the Australian
coordinator is not included in the combined financial statements (see note 1).
Also on January 15, 1998, the Company acquired the operations of its New
Zealand country coordinator. Consideration for the New Zealand country
coordinator was $105,649 and 160,554 shares of unregistered common stock of
the Company valued at $2,135,368, for total consideration of $2,241,017.
F-16
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
The agreement also contained provisions which called for additional
consideration if certain financial measures of the acquired operations were
met subsequent to the date of acquisition. On June 5, 1998, the Company issued
an additional 59,400 shares of unregistered common stock valued at $639,959 to
the New Zealand coordinator to cancel such contingent consideration provisions
in the original purchase agreement.
The aggregate purchase price of the acquisition was allocated based on
estimated fair values as follows:
<TABLE>
<S> <C>
Property and equipment............................................ $ 18,122
Goodwill.......................................................... 2,862,854
----------
Total........................................................... $2,880,976
==========
</TABLE>
The excess of the purchase price over fair value, financial position,
results of operations, comprehensive losses, and cash flows for the New
Zealand coordinator is not included in the combined financial statements (see
note 1).
On January 21, 1998, the Company acquired the telephone portion of the
operations of its Japan country coordinator. Consideration for the Japan
country coordinator was $472,500. The aggregate purchase price for this
acquisition was allocated based on estimated fair values as follows:
<TABLE>
<S> <C>
Current assets...................................................... $ 22,241
Property and equipment.............................................. 10,115
Goodwill............................................................ 440,144
--------
Total............................................................. $472,500
========
</TABLE>
During the fourth quarter of 1998, the Company recognized an impairment
loss of $475,061 for unamortized goodwill and other long-term intangible
assets relating to this subsidiary.
On February 3, 1998, the Company acquired a 9.9% interest in Newsnet ITN
Limited (Newsnet), an Australian-based provider of international and long-
distance facsimile services, for $880,770. On May 31, 1998, the Company
acquired the remaining 90.1% of Newsnet for an additional $8,909,565 bringing
the total consideration paid to $9,790,335. The aggregate purchase price for
this acquisition was allocated based on estimated fair values as follows:
<TABLE>
<S> <C>
Current assets.................................................. $ 6,504,055
Property and equipment.......................................... 682,398
Goodwill........................................................ 8,719,794
Current liabilities............................................. (5,747,820)
Non-current liabilities......................................... (368,092)
-----------
Total......................................................... $ 9,790,335
===========
</TABLE>
The excess of the purchase price over fair value, financial position,
results of operations, comprehensive losses, and cash flows for Newsnet is not
included in the combined financial statements (see note 1).
On February 27, 1998, the Company acquired 60% of the common stock of, and
controlling interest in, Redicall Pty Limited (Redicall) for $531,751 and
7,179 shares of unregistered common stock valued at $105,254, for total
consideration of $637,005. Redicall is an Australian-based entity engaged in
the wholesale
F-17
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
distribution of prepaid telephone calling cards. The aggregate purchase price
for this acquisition was allocated based on estimated fair values as follows:
<TABLE>
<S> <C>
Current assets.................................................... $ 156,337
Property and equipment............................................ 1,672
Deposits.......................................................... 8,207
Goodwill.......................................................... 760,110
Current liabilities............................................... (147,532)
Non-current liabilities........................................... (141,789)
---------
Total........................................................... $ 637,005
=========
</TABLE>
The minority interest deficit of 40% was included in the calculation of the
Company's goodwill due to the Company recognizing 100% of Redicall's net
earnings or losses until the historical shareholder's equity of Redicall
becomes positive.
The excess of the purchase price over fair value, financial position,
results of operations, comprehensive losses, and cash flows of Redicall is not
included in the combined financial statements (see note 1).
On April 20, 1998, the Company purchased South East Telecom Limited, Phone
Centre Communications Limited, and Corporate Networks Limited (collectively
Corporate Networks). Corporate Networks is engaged in the supply, installation,
and maintenance of telecommunications equipment. Consideration for the purchase
was $261,600 and 164,463 shares of unregistered common stock of the Company
valued at $2,336,922, for total consideration of $2,598,522. The agreement also
contained provisions which called for additional consideration based on monthly
usage of telephone related services by customers over a predetermined length of
time as specified in the agreement. The aggregate purchase price for this
acquisition was allocated based on estimated fair values as follows:
<TABLE>
<S> <C>
Current assets.................................................. $ 2,171,640
Property and equipment.......................................... 501,673
Goodwill........................................................ 3,877,964
Current liabilities............................................. (3,952,755)
-----------
Total......................................................... $ 2,598,522
===========
</TABLE>
On February 10, 1999, the Company entered into an agreement that outlined
the final consideration to be paid by the Company relating to the Corporate
Networks acquisition. Additional consideration of $519,027 and 323,966 shares
of unregistered common stock of the Company valued at $207,338 was paid and
issued by Telegroup, respectively. The $519,027 was paid by Telegroup by
relieving a note receivable due from the seller of Corporate Networks. At
December 31, 1998, this note receivable is included in non-current other assets
in the combined financial statements.
On June 5, 1998, the Company purchased approximately 2,500 long distance
customer accounts of Mediacom Telefacilities Limited (Mediacom). Mediacom
provides national and international long distance services to corporate
customers throughout the United Kingdom. In accordance with the purchase
agreement, the Company paid consideration of $576,100. The agreement also
contained provisions which called for additional consideration based on average
monthly usage of the acquired customer accounts from April 1, 1998
F-18
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
through October 31, 1998. As a result of this contingent consideration, the
Company paid an additional $1,317,698 in the fourth quarter of 1998. The
aggregate purchase price of $1,893,798 was allocated to goodwill and will be
amortized using an accelerated method over the estimated life of the acquired
customers or three years, whichever is shorter.
During the fourth quarter of 1998, the Company recognized an impairment loss
of $1,485,327 for a portion of the carrying value of goodwill relating to the
purchase of the Mediacom customers.
On August 7, 1998, the Company purchased Switch Telecom Pty Ltd (Switch
Telecom). Switch Telecom is a full service telecommunications provider serving
medium-sized businesses throughout Australia. Consideration for Switch Telecom
was $12,952,500. The purchase price for Switch Telecom was allocated based on
estimated fair values as follows:
<TABLE>
<S> <C>
Current assets................................................. $ 6,441,499
Property and equipment......................................... 2,195,538
Goodwill....................................................... 16,932,383
Current liabilities............................................ (12,616,920)
------------
Total........................................................ $ 12,952,500
============
</TABLE>
The Company, through its subsidiary Switch Telecom, purchased all the assets
of Frame Relay Pty Ltd (Frame Relay). Frame Relay owns an extensive data
network throughout Australia and the Pacific Rim. Consideration for Frame Relay
was $3,333,000. The purchase price for Frame Relay was allocated based on
estimated fair values as follows:
<TABLE>
<S> <C>
Current assets................................................... $ 486,716
Property and equipment........................................... 2,862,597
Goodwill......................................................... 657,177
Current liabilities.............................................. (673,490)
----------
Total.......................................................... $3,333,000
==========
</TABLE>
The excess of the purchase price over fair value, financial position,
results of operations, comprehensive losses, and cash flows of Switch Telecom
and Frame Relay are not included in the combined financial statements (see note
1).
Pro forma operating results of the Company, assuming the 1998 acquisitions
were consummated on January 1, 1997 do not differ significantly from reported
amounts.
(5) Related Parties
During 1996, the Company had a management agreement with an affiliate owned
by certain shareholders of the Company whereby it paid a management fee,
determined annually, plus an incentive fee based upon performance. Amounts paid
under this agreement totaled $415,000. The management agreement was terminated
on May 15, 1996.
In August of 1998, the Company advanced $441,000 and $1,361,000 to its
Chairman of the Board of Directors and Chief Executive Officer, respectively.
These advances were repaid to the Company in September 1998 with the exception
of $85,777. This remaining unpaid balance is reflected as a receivable from
shareholder at December 31, 1998. No interest was earned by the Company on
these advances.
F-19
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(6) Property and Equipment
Property and equipment, including network equipment owned under capital
leases of $720,782 and $669,261 in 1997 and 1998, respectively, is comprised of
the following:
<TABLE>
<CAPTION>
December 31
---------------------- Useful
1997 1998 lives
----------- ---------- ------
<S> <C> <C> <C>
Network equipment not in-service.............. $ -- 2,118,158 --
Land.......................................... 155,707 155,707 --
Building and leasehold improvements........... 900,660 4,439,150 2--20
Furniture, fixtures and office equipment...... 816,085 1,540,702 5--7
Computer equipment............................ 10,692,148 17,646,176 5
Network equipment............................. 20,997,896 32,394,701 5
Indefeasible right of use agreements.......... -- 11,156,410 25
Automobiles................................... 193,426 196,362 5
----------- ----------
33,755,922 69,647,366
Less accumulated depreciation, including
amounts applicable to assets acquired under
capital leases of $315,805 in 1997 and
$533,241 in 1998............................. 6,383,350 14,971,262
----------- ----------
Net property and equipment.................. $27,372,572 54,676,104
=========== ==========
</TABLE>
On April 23, 1998, the Company entered into a 25-year indefeasible right of
use (IRU) agreement with Cable and Wireless Communications Services Limited
(Cable and Wireless) for the right to use network
capacity in an under-sea fiber cable system. The Company paid $975,000 upon
execution of the agreement and $8,775,000 on June 15, 1998, the date of
activation. The cost of the IRU will be amortized over the life of the 25 year
agreement. In addition, the Company will be responsible for its pro rata share
of the cost and fees in relation to the operation and maintenance of the cable
system.
On May 21, 1998, the Company entered into an IRU agreement with Southern
Cross Cable Network (Southern Cross) for the right to use network capacity in
an under-sea fiber cable system. The Company paid $2,520,000 upon execution of
the agreement. The IRU is scheduled to be ready for service by December 1999.
Provided that the cable system is ready for service by this date, the Company
will owe an additional $17,480,000, payable $2,480,000 in December 1999, and in
three annual installments of $5,000,000 thereafter. Until such time as the
cable system is ready for service, the Company is accounting for the initial
payment of $2,520,000 as a deposit. In addition, the Company will be
responsible for its pro rata share of the cost and fees in relation to the
operation and maintenance of the cable system. As a result of the Company's
financial and liquidity problems (see note 1), the Company does not intend to
make the scheduled payments on the Southern Cross IRU. The Company is
attempting to sell its interests in this IRU. The Company recorded an
impairment loss of $2,020,000 in 1998 on the Southern Cross deposit.
In October 1998, the Company developed a restructuring plan (see note 10).
As part of this restructuring plan, management of the Company committed to a
plan to stop providing wholesale services to customers. Certain network
equipment assets and leasehold improvements were identified by the Company that
supported the wholesale business exclusively. These assets are reported on the
combined financial statements at the lower of net carrying value or estimated
fair value less costs to sell. The net carrying value of these assets at
December 31, 1998 is $1,254,354 and is included in network equipment. Upon
recording these assets at the lower of net carrying value or estimated fair
value, the Company recognized a loss of $1,263,991. This loss is
F-20
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
included in selling, general, and administrative expenses on the combined
financial statements. No further depreciation is being recorded on these
assets. The majority of these assets were sold in June 1999. All remaining
assets are expected to be sold by December 1999.
As a result of the Company's financial and liquidity problems (see note 1),
management of the Company decided not to complete their Saville Systems
Convergent Billing Platform. Capitalized costs of $6,414,878 relating to this
billing system were recognized by the Company as an impairment loss in the
fourth quarter of 1998.
Also in the fourth quarter of 1998, the Company recognized an impairment
loss of $740,775 relating to certain network equipment assets. Management
concluded that the future cash flows expected from these assets were less than
their net carrying value.
(7) Leases
The Company leases certain network equipment under capital leases and
certain network equipment and office space under operating leases. Future
minimum lease payments under these lease agreements are summarized as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
-------- ---------
<S> <C> <C>
Year ending December 31:
1999...................................................... $138,805 519,461
2000...................................................... 39,327 273,495
2001...................................................... -- 134,483
-------- --------
Total minimum lease payments............................ 178,132 $927,439
========
Less amount representing interest........................... (16,993)
--------
$161,139
========
</TABLE>
Rent expense under operating leases totaled $682,630, $1,423,104 and
$1,896,844 for the years ended December 31, 1996, 1997 and 1998, respectively.
(8) Shareholders' Equity
Initial Public Offering (IPO)
On July 14, 1997, the Company consummated an IPO. The Company sold 4,000,000
shares of common stock at a price to the public of $10 per share for net
proceeds of $35,640,343. On August 12, 1997, the underwriters exercised their
over-allotment option and purchased an additional 450,000 shares at $10 per
share which yielded net proceeds to the Company of $4,185,000.
Stock Option Plan
The Company has a stock option plan (the Plan) pursuant to which the
Company's Board of Directors may grant nonqualified and performance-based
options to employees. The Plan authorizes grants of option to purchase up to
4,750,000 shares of authorized but unissued common stock. All options
subsequent to September 30, 1996 have been granted with an exercise price equal
to the stock's fair market value at the date
F-21
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
of grant. All stock options have a three or ten-year term and become fully
exercisable on the date of grant or in increments over a three-year vesting
period. At December 31, 1998, there were 825,077 shares available for grant
under the Plan.
Stock option activity during the periods indicated is summarized below:
<TABLE>
<CAPTION>
Weighted Weighted
Shares average Options average
reserved Options exercise exercis- exercise
for options outstanding price able price
----------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at January
1, 1996................ 4,000,000 -- $ --
Granted............... 2,368,969 1,631,031 1.31
Exercised............. -- -- --
Canceled.............. 2,373,079 (4,110) 1.31
--------- ---------
Outstanding at December
31, 1996............... 2,373,079 1,626,921 1.31 513,888 $1.31
========= =====
Granted............... 1,889,640 483,439 10.06
Exercised............. -- (188,367) 1.31
Canceled.............. 1,915,055 (25,415) 1.39
--------- ---------
Outstanding at December
31, 1997............... 1,915,055 1,896,578 3.54 1,036,544 $2.21
========= =====
Additional shares
authorized........... 2,665,055 -- --
Granted............... 378,168 2,286,887 12.84
Exercised............. -- (537,503) 1.31
Canceled.............. 825,077 (446,909) 11.82
--------- ---------
Outstanding at December
31, 1998............... 825,077 3,199,053 $ 9.40 1,477,270 $6.25
========= ========= ====== ========= =====
</TABLE>
On May 19, 1998, the Company increased the number of shares available for
grant under the stock option plan from 4,000,000 to 4,750,000.
<TABLE>
<CAPTION>
Options exercisable at
Options outstanding at December 31, 1998 December 31, 1998
---------------------------------------------------------------------------
Weighted
average
Number remaining Weighted Number Weighted
Range of outstanding at contractual average exercisable at average
exercise December 31, life exercise December 31, exercise
prices 1998 (years) price 1998 price
-------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 1.31 800,184 7.26 $ 1.31 702,324 $ 1.31
1.31 - 2.00 138,600 9.80 1.34 25,000 1.34
2.09 - 9.00 258,200 3.82 7.55 170,000 8.51
10.00 427,288 8.44 10.00 308,702 10.00
10.06 - 14.47 583,110 8.95 13.43 217,244 13.34
14.50 10,000 9.35 14.50 10,000 14.50
14.81 600,000 9.11 14.81 -- --
15.00 347,671 9.33 15.00 12,000 15.00
15.25 4,000 9.34 15.25 2,000 15.25
16.27 - 16.28 30,000 9.18 16.28 30,000 16.28
--------- ---- ------ --------- ------
$ 1.31 - 16.28 3,199,053 8.16 $ 9.40 1,477,270 $ 6.25
========= ==== ====== ========= ======
</TABLE>
The Company applies the intrinsic value method prescribed by APB No. 25 in
accounting for the Plan and, accordingly, compensation costs of $1,032,646,
$342,380 and $285,317 have been recognized for its stock
F-22
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
options in the combined financial statements for the years ended December 31,
1996, 1997 and 1998, respectively. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net loss would have been:
<TABLE>
<CAPTION>
December 31,
1996 December 31, 1997 December 31, 1998
--------------- --------------------- ---------------------
As Pro As Pro As Pro
reported forma reported forma reported forma
-------- ------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loss before
extraordinary item..... $118,322 79,767 13,524,361 14,296,982 81,326,763 88,620,000
-------- ------ ---------- ---------- ---------- ----------
Net loss................ $118,322 79,767 23,495,176 24,267,797 81,326,763 88,620,000
======== ====== ========== ========== ========== ==========
</TABLE>
The pro forma impact on income assumes no options will be forfeited. The pro
forma effects are not representative of the effects on reported net income for
future years, as most of the Company's employee stock option grants vest in
increments over a period of three years.
Under SFAS No. 123, the per-share minimum value of stock options granted in
1996 was $0.61. For the year ended December 31, 1996, the minimum value,
estimated as of the grant date, does not take into account the expected
volatility of the underlying stock as prescribed by SFAS No. 123 for privately
held companies. The input variables used to calculate the per-share minimum
value included a weighted-average risk-free interest rate of 6.43%, no expected
dividend yields, and an estimated option life of 3 years.
The per-share weighted-average fair value of stock options granted during
1997 and 1998 was $4.79 and $9.57, respectively. For the year ended December
31, 1997 and 1998, the fair value was estimated as of the grant date using the
Black-Scholes option pricing model. Input variables used in the model for 1997
and 1998 included a weighted-average risk-free interest rate of 5.33% and
4.70%, respectively, no expected dividend yields, an expected volatility factor
of 65% and 120%, respectively and an estimated option life of 3.05 and 3.00
years, respectively.
Options granted during 1996 included performance based options. The
compensation expense recorded for these performance based options under APB No.
25 was greater than the expense recorded if the Company had determined
compensation cost under SFAS No. 123.
Independent Agent Stock Option Plan
During 1998, the Company adopted an incentive program for independent agents
that allows these non-employees to obtain stock options for certain
contributions made to the Company. Total options granted to agents were
321,400. The Company recognized commission expense of $474,241 as a result of
granting these options. The weighted-average grant-date fair value of these
options was approximately $1.48.
Warrants--Private Offering
In connection with the Private Offering, the Company issued warrants to
purchase 1,160,107 shares of the Company's common stock which, at the time of
closing of the Private Offering, represented 4% of the Company's fully diluted
common stock. On July 2, 1997, in accordance with the provisions of the Private
Offering Agreement, the warrants increased in value by 167,393 shares to
represent 4.5% of the Company's fully diluted common stock. During 1998, these
warrants were exercised in a cashless transaction. Total warrants exercised
were 1,327,333, which represented the total warrants outstanding of 1,327,500
less 167 warrants which were canceled. The canceled warrants represent the
value of the consideration (exercise price) due from the warrant holder at the
time of exercise.
F-23
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Warrants -- Forbearance Agreements
During November and December 1998, the Company entered into forbearance
agreements with certain telecommunications carriers and vendors. The
forbearance agreements include terms of repayment to satisfy a portion of the
amount the Company owed the carrier or vendor at a date agreed to in the
agreement. At December 31, 1998, the Company owed $31,324,381 to carriers and
vendors under the terms of these agreements. The amounts owed by the Company
subject to the forbearance agreements is included in accounts payable in the
combined financial statements. The Company is to pay the carrier or vendor the
amount included in the forbearance agreement in equal installments over a three
to six month period. Interest on the forbearance agreements range from 7.75% to
12.00%. At December 31, 1998, accrued interest of $381,505 relating to these
agreements is included in accrued expenses on the combined financial
statements. Certain forbearance agreements provide for the Company to issue
warrants to the carrier or vendor upon the last monthly payment made under the
agreement. The number of warrants to be issued by the Company is equal to a
certain percent, ranging from 2% to 5% of the amount included in the
forbearance agreement. The total number of warrants to be issued by the Company
under these forbearance agreements at December 31, 1998 is 924,567. The
warrants are exercisable at any time after issuance and have an exercise price
of $1.00. Each warrant can be exercised for one common share of the Company's
common stock. The weighted-average grant-date fair value of these warrants was
$1.30.
The Company entered into forbearance agreements with other
telecommunications carriers subsequent to December 31, 1998 totaling $579,482.
The total number of warrants to be issued under these forbearance agreements is
5,500, which can be exercised for one common share of the Company's common
stock.
Warrants -- Building Purchase
During December 1998, the Company issued 11,010 warrants for partial payment
on a building purchase. These warrants are exercisable through December 2001 at
an exercise price of $1.00. The weighted-average grant-date fair value of these
warrants was approximately $0.89. Each warrant can be exercised for one common
share of the Company's common stock.
(9) Income Tax Matters
Income tax expense (benefit) for the years ended December 31 is comprised of
the following:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ------
<S> <C> <C> <C>
Current:
Federal...................................... $(172,478) (1,309,398) --
State........................................ (64,903) (42,202) --
Foreign...................................... -- 139,907 29,908
--------- ---------- ------
(237,381) (1,211,693) 29,908
Deferred:
Federal...................................... 167,066 552,571 --
State........................................ 62,867 82,596 --
Foreign...................................... -- -- --
--------- ---------- ------
229,933 635,167 --
--------- ---------- ------
$ (7,448) (576,526) 29,908
========= ========== ======
</TABLE>
F-24
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Income tax expense (benefit) differs from the amount computed by applying
the federal income tax rate of 34% to losses before taxes, as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- -----------
<S> <C> <C> <C>
Expected federal income tax (benefit)... $(42,762) (4,872,309) (27,640,931)
State income tax (benefit), net of
federal effect......................... (1,344) 26,660 --
Increase in valuation allowance, net of
amount allocated to extraordinary
item................................... -- 3,695,829 21,354,691
Foreign and unconsolidated subsidiary,
net operating losses................... -- 853,407 7,636,991
Stock options exercised................. -- (416,960) (2,438,767)
Nondeductible goodwill.................. -- 3,537 747,464
Other nondeductible expenses, net....... 36,658 133,310 370,460
-------- ---------- -----------
$ (7,448) (576,526) 29,908
======== ========== ===========
</TABLE>
The tax effect of significant temporary differences giving rise to deferred
income tax assets and liabilities as of December 31 are shown below:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment, principally
depreciation adjustments...................... $ 1,404,074 1,898,908
Capitalized software........................... 605,321 1,133,747
Unearned foreign exchange difference........... 323 13,483
----------- -----------
Total gross deferred tax liabilities......... 2,009,718 3,046,138
----------- -----------
Deferred income tax assets:
Allowance for credit losses.................... 2,115,503 1,061,404
Accrued compensation........................... 603,001 631,116
Net operating loss carryforward................ 4,986,678 28,092,567
Charitable contribution carryforward........... -- 151,339
Unearned revenue............................... 65,552 9,062
Amortization of goodwill....................... -- 246,251
Tax credit carryforward........................ 248,985 249,150
Other.......................................... 106,044 75,985
----------- -----------
Total gross deferred tax assets.............. 8,125,763 30,516,874
Less valuation allowance......................... (6,116,045) (27,470,736)
----------- -----------
Net deferred tax assets...................... 2,009,718 3,046,138
----------- -----------
Net deferred tax asset (liability)........... $ -- --
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1997 and
1998 was $6,116,045 and $27,470,736, respectively. The net change in the total
valuation allowance for the years ended December 31, 1997 and 1998 was an
increase of $6,116,045 and $21,354,691, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. In order to fully realize the deferred
tax asset,
F-25
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
the Company will need to generate future taxable income of approximately
$80,000,000 prior to the expiration of the net operating loss carryforwards in
2018. Taxable loss for the years ended December 31, 1997 and 1998 was
approximately $22,000,000 and $68,500,000, respectively. Based upon the level
of historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, a valuation allowance has
been established for the Company's net deferred tax assets as of December 31,
1997 and 1998.
At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $82,600,000, which are available
to offset future federal taxable income, if any, through 2018. In addition, the
Company has alternative minimum tax credit carryforwards of approximately
$249,000 which are available to reduce future federal regular income taxes, if
any, over an indefinite period.
(10) Restructuring Plan
In the fourth quarter of 1998, the Company recorded provisions of $2,060,770
for restructuring expenses. These expenses are included in selling, general,
and administrative expenses in the combined financial statements. Included in
this charge are severance and other costs of $1,938,501 and costs related to
losses on contractual obligations of $122,269. The Company's restructuring plan
commitments in 1998, which are expected to be fully completed in 1999, included
initiatives to cease all activities related to the strategy to create a multi-
service network, including terminating all employees assigned specifically to
this task and abandoning all contractual obligations. The restructuring plan
also committed to terminate and pay severance to certain personnel. As part of
the restructuring initiative, 130 employees have been eliminated from the
Company as of December 31, 1998. The remaining restructuring accrual of
$1,256,628 at December 31, 1998 is included with accrued expenses in the
combined financial statements.
(11) Commitments and Contingencies
Commitments with Telecommunications Companies
The Company has a $3,000,000 usage commitment with MFS/WorldCom in
Frankfurt, Germany, to use MFS/WorldCom's fiber-optic network in its delivery
of telecommunications services. This agreement began on September 5, 1997 and
extends through June 30, 1999. A charge to cost of revenues of $2,150,496 was
recognized by the Company for a shortfall in the usage commitment during
December 1998.
The Company also has a two-year minimum usage commitment of $55,000,000 with
WorldCom which began on May 1, 1998.
The Company has an agreement with Epoch Networks, Inc. for internet
services, with a minimum usage commitment of $875,000 over the next two years.
This agreement began June 1, 1998. A charge to cost of revenues of $875,000 was
recognized by the Company for a shortfall in the usage commitment during
December 1998.
Shortfalls in usage commitments, if any, are recorded as cost of revenues in
the period identified.
Letters of Credit
The Company has outstanding irrevocable letters of credit in the amount of
$418,520 as of December 31, 1998 with certain lessors and carriers. These
letters of credit, which have expiration dates from March 15, 1999 through June
15, 1999, collateralize the Company's obligations for lease commitments and
network usage on
F-26
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
the carriers' networks. The fair value of these letters of credit is estimated
to be the same as the contract values based on the nature of the arrangement
with the issuing banks.
Retirement Plan
Effective January 1, 1996, the Company adopted the Telegroup, Inc. 401(k)
Retirement Savings Plan (the 401(k) Plan). The 401(k) Plan is a defined
contribution plan covering all employees of the Company who have one year of
service and have attained the age of twenty-one. Participants may contribute up
to 15% of their base pay in pretax dollars. The Company will match employee
contributions on a discretionary basis. Vesting in Company contributions is
100% after five years in the 401(k) Plan. The Company made no contributions to
the 401(k) Plan in 1996, 1997 and 1998.
Litigation
The Company is a party to certain litigation which has arisen in the
ordinary course of business. The most significant of these is described below.
Subsequent to December 31, 1998, the Company was contacted by Cygnus
Telecommunications Technology (Cygnus) asserting that the Company has infringed
upon its patent rights. Cygnus is currently seeking relief from the automatic
stay provision of the Bankruptcy Code (see note 1) to proceed with the
infringement suit asserting an administrative claim of $1,200,000 against the
Company. While it is not possible to predict with certainty the outcome of the
litigation pending against the Company, it is the opinion of management that
the ultimate disposition of these matters will not have a material adverse
effect on the financial statements of the Company.
Other Commitments
On August 3, 1998, the Company entered into a Construction and Maintenance
Agreement (C&MA) to build the Japan-U.S. Cable Network, an under-sea cable
system that will connect Japan and the U.S. by mid-year 2000. Under the C&MA,
the Company is committed to pay approximately $2,200,000 for ownership of its
0.17% share of this trans-Pacific cable over the next two years. The Company
does not intend to make any future payments on this agreement.
(12) Business Segment and Significant Customer
The Company operates in a single industry segment. The geographic origin of
revenue is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
United States........................... $ 60,360,882 124,195,135 164,413,294
Europe.................................. 81,137,404 96,725,712 107,308,784
Pacific Rim............................. 42,185,403 81,248,379 56,473,521
Other................................... 29,523,820 30,931,649 31,736,088
------------ ----------- -----------
$213,207,509 333,100,875 359,931,687
============ =========== ===========
</TABLE>
All revenue was derived from unaffiliated customers. For the years ended
December 31, 1996 and 1997, approximately 12% and 13%, respectively, of the
Company's total revenues were derived from a single customer. There were no
customers representing over 10% of total revenues during 1998.
F-27
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(13) Consideration Given In-Lieu of Future Commissions
On January 15, 1998, the Company prepaid sales commissions owed to certain
independent sales agents. Total consideration was $700,000 and 40,000 shares of
unregistered common stock valued at $565,000.
On April 30, 1998, the Company prepaid sales commissions owed to an
independent sales agent. Total consideration was $210,000.
On May 31, 1998, the Company prepaid sales commissions owed to its Latin
American coordinator. Consideration was 25,294 shares of unregistered common
stock valued at $337,193.
On June 30, 1998, the Company entered into an agreement to prepay
commissions owed to an independent sales agent. Total consideration paid on
June 30, 1998 was $1,100,000. Per the agreement, common stock valued at
$1,000,000 was to be issued. On August 29, 1998, the agreement was amended.
Instead of common stock valued at $1,000,000, the Company agreed to issue
85,179 shares of registered common stock valued at $574,671 and a promissory
note for $500,000. The promissory note bears interest at 8.0% per annum. At
December 31, 1998, $360,575 remains outstanding on this note and is included in
long-term debt on the financial statements.
On September 18, 1998, the Company prepaid sales commissions owed to a
country coordinator. Total consideration was 31,264 shares of unregistered
common stock valued at $115,370.
The consideration given by the Company for the prepayment of these
commissions is being amortized to selling, general and administrative expenses
using an accelerated method over the estimated life of the agent or
coordinator's customers or three years, whichever is shorter.
F-28
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
COMBINED BALANCE SHEETS
December 31, 1998 and March 31, 1999
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................... $ 19,101,837 14,118,503
Accounts receivable and unbilled services, less
allowance for credit losses of $4,423,308 at
December 31, 1998 and $5,582,388 at
March 31, 1999.................................... 52,492,330 40,623,867
Prepaid expenses and other assets.................. 3,194,644 11,562,433
Receivables from shareholders...................... 85,777 --
Receivables from employees......................... 54,901 44,633
------------- -------------
Total current assets............................. 74,929,489 66,349,436
------------- -------------
Net property and equipment........................... 54,676,104 51,881,283
------------- -------------
Other assets:
Deposits and other assets.......................... 4,418,531 3,583,161
Goodwill, net of amortization of $223,458 at
December 31, 1998 and $355,080 at March 31, 1999.. 4,148,679 4,610,327
Capitalized software, net of amortization.......... 3,334,549 2,350,056
Debt issuance costs, net of amortization........... 3,513,108 3,365,482
------------- -------------
15,414,867 13,909,026
------------- -------------
Total assets..................................... $ 145,020,460 $ 132,139,745
============= =============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable................................... $ 88,602,750 81,537,529
Commissions payable................................ 4,173,700 3,054,966
Accrued expenses................................... 6,551,162 8,757,396
Notes payable...................................... 24,832,437 25,234,421
Customer deposits.................................. 693,781 639,691
Unearned revenue................................... 153,430 115,215
Current portion of capital lease obligations....... 123,656 124,195
Current portion of long-term debt.................. 111,130,591 113,130,460
------------- -------------
Total current liabilities........................ 236,261,507 232,593,873
------------- -------------
Capital lease obligations, excluding current por-
tion................................................ 37,483 30,564
Long-term debt, excluding current portion............ 118,677 107,194
Common stock, no par or stated value; 150,000,000
shares authorized, 33,689,785 and 33,851,728 issued
and outstanding at December 31, 1998 and March 31,
1999, respectively.................................. -- --
Additional paid-in capital........................... 63,313,048 63,521,300
Retained deficit..................................... (155,267,829) (164,224,629)
Accumulated other comprehensive income............... 557,574 111,443
------------- -------------
Total shareholders' equity (deficit)............. (91,397,207) (100,591,886)
------------- -------------
Commitments and contingencies
Total liabilities and shareholders' equity (defi-
cit)............................................ $ 145,020,460 132,139,745
============= =============
</TABLE>
F-29
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSES
Three months ended March 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
------------ ----------
<S> <C> <C>
Revenues:
Retail............................................ $ 54,644,211 59,607,224
Wholesale......................................... 28,846,014 4,947,228
------------ ----------
Total revenues.................................. 83,490,225 64,554,452
Cost of revenues.................................... 66,940,491 43,448,399
------------ ----------
Gross profit.................................... 16,549,734 21,106,053
------------ ----------
Operating expenses:
Selling, general and administrative expenses...... 23,464,359 21,227,910
Depreciation and amortization..................... 2,098,760 3,499,058
Stock option-based compensation................... 85,595 --
------------ ----------
Total operating expenses........................ 25,648,714 24,726,968
------------ ----------
Operating loss ................................. (9,098,980) (3,620,915)
Other income (expense):
Interest expense.................................. (2,490,005) (3,910,386)
Interest income................................... 1,123,819 145,213
Foreign currency transaction gain (loss).......... (135,306) 149,587
Other............................................. 42,565 65,436
------------ ----------
Loss before income taxes ....................... (10,557,907) (7,171,065)
Income tax expense.................................. (87,880) (117,331)
------------ ----------
Net loss........................................ $(10,645,787) (7,288,396)
Foreign currency translation adjustment, net of
tax................................................ (162,913) (446,131)
------------ ----------
Comprehensive loss.............................. $(10,808,700) (7,734,527)
============ ==========
</TABLE>
F-30
<PAGE>
TELEGROUP, INC. AND CERTAIN SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(10,645,787) (7,288,396)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 2,098,760 3,499,058
Loss on sale of equipment........................ 378 131,675
Provision for credit losses on accounts
receivable...................................... 1,369,658 2,652,876
Accretion of debt discounts...................... 1,969,473 2,181,402
Stock option-based compensation expense.......... 85,595 --
Changes in operating assets and liabilities,
excluding the effects of business combinations:
Accounts receivable and unbilled services........ 5,070,133 9,215,587
Prepaid expenses and other assets................ 1,015,181 (8,367,789)
Deposits and other assets........................ (2,539,503) 835,370
Accounts payable, commissions payable and accrued
expenses........................................ (776,218) (5,977,721)
Unearned revenue................................. (90,953) (38,215)
Customer deposits................................ 301,786 (54,090)
------------ ----------
Net cash used in operating activities.......... (2,141,497) (3,210,243)
------------ ----------
Cash flows from investing activities:
Purchases of equipment............................. (5,708,070) (151,344)
Sales of securities available-for-sale............. 9,208,572 --
Proceeds from sale of equipment.................... 250 194,155
Capitalization of software......................... (394,068) --
Cash paid in business combinations, net of cash
acquired.......................................... (424,050) --
Net change in receivables from shareholders and
employees......................................... 41,999 96,045
------------ ----------
Net cash provided by investing activities.......... 2,724,633 138,856
------------ ----------
Cash flows from financing activities:
Net proceeds from notes payable.................... -- 401,984
Debt issuance costs................................ (164,194) --
Net proceeds from options exercised................ 579,489 --
Net principal payments on other long-term
borrowings........................................ (22,099) (193,016)
Principal payments under capital lease
obligations....................................... (40,054) (6,380)
Proceeds received on note due from shareholders.... 31,420 --
------------ ----------
Net cash provided by financing activities...... 384,562 202,588
------------ ----------
Exchange rate changes................................ (162,913) (446,131)
Carve-out of uncombined subsidiaries................. (5,100,079) (1,668,404)
Shares issued in connection with business
combinations of uncombined subsidiaries............. 4,056,504 --
------------ ----------
Net decrease in cash and cash equivalents...... (238,790) (4,983,334)
------------ ----------
Cash and cash equivalents at beginning of year....... 72,763,095 19,101,837
------------ ----------
Cash and cash equivalents at end of year............. $ 72,524,305 14,118,503
============ ==========
Supplemental disclosures of cash flow information:
Interest paid...................................... $ 20,532 718,592
============ ==========
Income taxes paid.................................. $ 10,370 --
============ ==========
Supplemental disclosures of noncash investing and
financing activities:
Common stock issued in connection with business
combinations...................................... $ 4,056,504 208,252
============ ==========
Common stock issued in-lieu of future sales
commissions....................................... $ 565,000 --
============ ==========
</TABLE>
F-31
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Acquisition
Primus(1) Telegroup(1) Adjustments Pro Forma
--------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 268,530 $ 14,119 $ (43,956) (2) $ 226,466
(12,227) (3)
Restricted investments 27,464 - - 27,464
Accounts receivable, net 102,510 40,624 (8,011) (4) 135,123
Prepaid expenses and other current assets 20,876 11,607 - 32,483
--------------- ----------------- ------------------ -----------------
Total current assets 419,380 66,350 (64,194) 421,536
RESTRICTED INVESTMENTS 10,546 - - 10,546
PROPERTY AND EQUIPMENT, net 171,013 54,231 (36,000) (5) 189,244
INTANGIBLES, net 214,347 7,976 (4,610) (6) 284,347
(3,366) (7)
70,000 (11)
OTHER ASSETS 27,508 3,583 - 31,091
--------------- ----------------- ------------------ -----------------
TOTAL ASSETS $ 842,794 $ 132,140 $ (38,170) $ 936,764
=============== ================= ================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (deficit)
CURRENT LIABILITIES
Accounts payable $ 89,045 $ 81,538 $ (45,379) (3) $ 120,964
(4,240) (4)
Accrued expenses and other current liabilities 42,658 10,758 1,234 (2) 54,650
Accrued interest 14,288 1,809 (1,809) (9) 14,288
Notes payable - 25,234 (25,234) (8) -
Current portion of long-term obligations 5,204 113,255 4,592 (2) 9,796
(113,255) (9)
--------------- ----------------- ------------------ -----------------
Total current liabilities 151,195 232,594 (184,091) 199,698
LONG-TERM OBLIGATIONS 596,505 138 45,467 (2) 641,972
(138) (9)
OTHER LIABILITIES 25 - - 25
--------------- ----------------- ------------------ -----------------
Total liabilities 747,725 232,732 (138,762) 841,695
--------------- ----------------- ------------------ -----------------
COMMITMENTS AND CONTINGENCIES
TOTAL STOCKHOLDERS' EQUITY 95,069 (100,592) 100,592 (10) 95,069
--------------- ----------------- ------------------ -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 842,794 $ 132,140 $ (38,170) $ 936,764
=============== ================= ================== =================
</TABLE>
(1) Reflects March 31, 1999 historical balance sheet.
(2) To record the purchase entries to reflect the cash paid, short-term and
long-term notes issued, and other acquisition expenses accrued.
(3) To eliminate cash and accounts payable related to Telegroup that were not
purchased by Primus.
(4) To eliminate accounts receivable and payable related to the wholesale
business that were not purchased by Primus.
(5) To reflect the write down of property, plant, and equimpment to
estimated fair value, and removal of non-purchased assets.
(6) To eliminate the goodwill on Telegroup's balance sheet prior to
acquisition.
(7) To eliminate the debt issuance costs on Telegroup's balance sheet.
(8) To eliminate the notes payable on Telegroup's balance sheet not assumed by
Primus.
(9) To eliminate the long-term obligations (including the current portion and
accrued interest) were not assumed by Primus.
(10) To eliminate Telegroup's stockholders' equity.
(11) To record the excess purchase price over the estimated fair value of net
assets acquired.
F-32
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Adjustments
---------------------------
Pro Forma as
Primus(1) Telegroup(2) Telegroup Offerings Adjusted
-------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net revenue $131,228 $ 64,554 $ (4,947) (3) $ - $ 188,182
(2,653) (4)
Cost of revenue 104,596 43,448 (4,725) (3) - 143,319
-------- ---------- ---------- ---------- -----------
Gross margin 26,632 21,106 (2,875) - 44,863
Operating expenses:
Selling, general, and administrative 29,296 21,228 (99) (3) - 47,772
(2,653) (4)
Depreciation and amortization 8,976 3,499 (414) (6) - 13,478
1,417 (7)
-------- ---------- ---------- ---------- -----------
Total operating expenses 38,272 24,727 (1,749) - 61,250
-------- ---------- ---------- ---------- -----------
Gain/(loss) from operations (11,640) (3,621) (1,126) - (16,387)
Interest expense (16,770) (3,910) 3,910 (5) (1,279) (8) (18,049)
Other income (expense) 3,255 145 - - 3,400
215 215
-------- ---------- ---------- ---------- -----------
Gain/(loss) before income taxes (25,155) (7,171) 2,784 (1,279) (30,821)
Income taxes - (117) - - (117)
-------- ---------- ---------- ---------- -----------
Net loss $(25,155) $ (7,288) $ 2,784 $ (1,279) $ (30,938)
======== ========== ========== ========== ===========
Basis & diluted net loss per share $ (0.89) $ (1.09)
======== ===========
Weighted average number of shares 28,317 28,317
======== ===========
</TABLE>
(1) Represents the historical results of operations of Primus for the three
months ended March 31, 1999.
(2) Reflects the historical results of operations of Telegroup for the three
months ended March 31, 1999.
Telegroup Adjustments:
(3) To eliminate wholesale net revenue, cost of revenue, and selling, general
and administrative expenses, as this component of the Telegroup business
had been substantially eliminated prior to the purchase by Primus.
(4) To reflect the reclassification of bad debt expenses from selling, general
and administrative expenses to a reduction of net revenue to conform to
Primus's accounting policies.
(5) To eliminate interest expense on non-purchased obligations.
(6) To reverse amortization expense associated with Telegroup's previously
acquired customer list, the excess of purchase price over the fair value of
net assets acquired, depreciation and amortization of non-purchased fixed
and cable assets, and amortization expense related to debt financing costs.
(7) To record amortization expense associated with acquired customer list and
the excess of purchase price over the fair value of net assets acquired.
Offering Adjustments:
(8) To reflect the interest expense related to the issuance of $45.5 million
of senior notes due 2009 in connection with the acquisition of certain
Telegroup assets.
F-33
<PAGE>
<TABLE>
<CAPTION>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands, except per share amounts)
Adjustments
----------------------
Primus(1) TresCom(2) Telegroup(3) TresCom
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Net revenue $ 421,628 $ 71,342 $ 359,932 $ (1,817) (4)
(5,957) (5)
Cost of revenue 353,016 60,632 299,651 (5,957) (5)
---------------- ---------------- ----------------- -----------------
Gross margin 68,612 10,710 60,281 (1,817)
Operating expenses:
Selling, general, and administrative 79,532 16,050 106,628 (1,817) (4)
Depreciation and amortization 24,185 3,215 10,940 (1,046) (6)
4,333 (7)
Impairment of long-lived asset - - 14,799 -
---------------- ---------------- ----------------- -----------------
Total operating expenses 103,717 19,265 132,367 1,470
---------------- ---------------- ----------------- -----------------
Gain/(loss) from operations (35,105) (8,555) (72,086) (3,287)
Interest expense (40,047) (754) (11,069) -
Interest income 11,504 - 2,406 -
Other income (expense) - 288 (548) -
---------------- ---------------- ----------------- -----------------
Gain/(loss) before income taxes (63,648) (9,021) (81,297) (3,287)
Income taxes - - (30) -
---------------- ---------------- ----------------- -----------------
Net loss $(63,648) $ (9,021) $(81,327) $ (3,287)
================ ================ ================= =================
Basic & diluted net loss per share $ (2.61)
================
Weighted average number of shares 24,432 3,414
================ =================
</TABLE>
<TABLE>
<CAPTION>
Adjustments
----------------------------------------
Telegroup Offerings Pro Forma
---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net revenue $ (125,269) (8) $ - $ 704,260
(9,369) (9)
(6,230) (10)
Cost of revenue (119,632) (8) - 582,158
(5,552) (10)
---------------- ----------------- ----------------
Gross margin (15,684) - 122,102
Operating expenses:
Selling, general, and administrative (5,152) (8) - 182,547
(9,369) (9)
(3,325) (13)
Depreciation and amortization (1,701) (14) - 45,593
5,667 (15)
Impairment of long-lived asset (14,799) (11) - -
---------------- ----------------- ----------------
Total operating expenses (28,679) - 228,140
---------------- ----------------- ----------------
Gain/(loss) from operations 12,995 - (106,038)
Interest expense 11,069 (12) (5,115) (16) (45,916)
Interest income - - 13,910
Other income (expense) - - (260)
---------------- ----------------- ----------------
Gain/(loss) before income taxes 24,064 (5,115) (138,304)
Income taxes - - (30)
---------------- ----------------- ----------------
Net loss $ 24,064 $ (5,115) $(138,334)
================ ================= ================
Basic & diluted net loss per share $ (4.97)
================
Weighted average number of shares 27,846
================
(1) Reflects the historical results of operations of Primus for the year ended December 31, 1998.
(2) Reflects the historical results of operations of TresCom from January 1,1998 through June 9, 1998 (acquisition date).
(3) Reflects the historical results of operations of Telegroup for the year ended December 31, 1998.
TresCom Adjustments:
(4) To reflect the reclassification of bad debt expense from selling, general and administrative expenses to a reduction of net
revenue to conform to Primus's accounting policies.
(5) To eliminate the effects of intercompany transactions between Primus and TresCom.
(6) To reverse amortization expense associated with TresCom's previously acquired customer list and the excess of purchase price
over the fair value of net assets acquired.
(7) To record amortization expense associated with acquired customer list and the excess of purchase price over the fair value of
net assets acquired.
Telegroup Adjustments:
(8) To eliminate wholesale net revenue, cost of revenue, and selling, general and administrative expenses, as this component of the
Telegroup business had been substantially eliminated prior to the purchase by Primus.
(9) To reflect the reclassification of bad debt expenses from selling, general and administrative expenses to a reduction of net
revenue to conform to Primus's accounting policies.
(10) To eliminate the effects of intercompany transactions between Telegroup, Primus, and TresCom.
(11) To eliminate the write-down of non-purchased assets.
(12) To eliminate interest expense on non-purchased obligations.
(13) To eliminate restructuring expenses and losses on non-purchased assets held for disposal.
(14) To reverse amortization expense associated with Telegroup's previously acquired customer list, the excess of purchase price
over the fair value of net assets acquired, depreciation and amortization of non-purchased fixed and cable assets, and
amortization expense related to debt financing costs.
(15) To record amortization expense associated with acquired customer list and the excess of purchase price over the fair value of
net assets acquired.
Offerings Adjustments:
(16) To reflect the interest expense related to the issuance of $45.5 million of senior notes due 2009 in connection with the
acquisition of certain Telegroup assets.
</TABLE>
F-34
