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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-21-265
PRIMUS TELECOMMUNICATIONS GROUP,
INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 54-1708481
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2070 Chain Bridge Road Suite 425 22182
Vienna, VA (Zip Code)
(Address of principal executive offices)
(703) 902-2800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Non-affiliates of Primus Telecommunications Group, Inc. held 16,369,119
shares of Common Stock as of March 14, 1997. The fair market value of the
stock held by non-affiliates is $157,552,770 based on the sale price of the
shares on March 14, 1997.
As of March 14, 1997, 17,778,731 of Common Stock, par value $.01, were
outstanding.
Documents Incorporated by Reference:
Portions of the definitive Proxy Statement to be delivered to Stockholders
in connection with the Annual Meeting of Stockholders are incorporated by
reference into Part III.
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PART I
ITEM 1. Business
General
Primus Telecommunications Group, Inc. ("Primus" or the "Company") is a
multinational telecommunications company that focuses on the provision of
international and domestic long distance services. The Company seeks to
capitalize on the increasing business and consumer demand for international
telecommunications services generated by the globalization of the world's
economies and the worldwide trend toward deregulation of the telecommunications
sector. The Company has targeted North America, Asia-Pacific and Europe as its
primary service regions (the "Primary Service Regions"). The Company provides
services in the United States, Australia and the United Kingdom, which are the
most deregulated countries within the Primary Service Regions and which serve as
regional hubs (the "Regional Hubs") for expansion into additional markets within
the Primary Service Regions. The Company expects to expand into additional
markets as deregulation occurs and the Company is permitted to offer a full
range of switched public telephone services in such markets. To date, the
Company has established wholly owned subsidiaries in the United States and
Mexico, Australia and the United Kingdom.
The Company targets, on a retail basis, small- and medium-sized businesses with
significant international long distance traffic and ethnic residential consumers
and, on a wholesale basis, other telecommunications carriers and resellers with
international traffic. The Company provides a broad array of competitively
priced telecommunications services, including international long distance to
over 200 countries, domestic long distance, international and domestic private
networks, prepaid and calling cards and toll-free services, as well as local
switched and cellular services in Australia. The Company markets its services
through a variety of channels, including direct sales, independent agents,
direct marketing and associations.
United States
Primus began 1996 with one switch in the United States located in Washington,
D.C., and a small number of business customers. From this base, revenue has
grown from quarterly net revenue of $0.7 million in the fourth quarter of 1995
to $6.0 million in the fourth quarter of 1996.
Primus's network in the United States has expanded during the year through the
purchase of two new Northern Telecom international gateway switches which are
located in Los Angeles for calls to the Asia-Pacific region and the New York
City area for calls to Europe. These switches were interconnected via leased
fiber optic lines within the United States, and regional service started in New
York and Los Angeles. In the first quarter of 1997, the Los Angeles switch was
interconnected to Primus's network in Australia via the TPC-5 trans-Pacific
underseas fiber optic cable system. The New York switch is expected to be
connected to Primus's London switch during the second quarter of 1997 via both
the TAT-12/13 and CANTAT trans-Atlantic underseas fiber optic cable systems.
During the year, Primus created a direct sales organization to sell directly to
business customers and opened sales offices in Washington, D.C., New York City,
and Los Angeles. In addition, an agent sales channel was established for
business sales, including a small business telemarketing center in Tampa,
Florida.
To reach the residential consumer marketplace, a marketing campaign was launched
focused on ethnic residential customers who call internationally to their home
countries. Primus advertises nationally in ethnic newspapers and other
publications, and offers discounted rates for international calls to the
targeted countries. Both business and residential customers can access Primus
through "800" access numbers, and consequently do not have to change their
primary long distance carrier. A second campaign markets to higher volume repeat
customers located in the cities where the Company's switches are located to
obtain full time "dial 1" customers. Primus now offers dial 1 service in eight
different cities. Additionally, Primus offers "Dial Around" service using its
five digit code "10024". Customers in selected cities may dial 10024 as a prefix
before their international or domestic long distance call and the call will be
carried over the Primus network. The customer will be billed by their local
exchange carrier on their regular monthly
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bill. Customers do not have to "switch" from their existing long distance
carrier to use Primus service. Primus maintains a national Customer Service
Center open 24 hours per day, seven days per week. The Customer Service Center
is staffed with multilingual representatives.
Primus also began a wholesale sales channel during the year to sell
international switched voice service to other long distance carriers who do not
maintain their own international direct links and facilities. Other carriers
connect to Primus at one of the three domestic switches and direct international
calling traffic over the Primus network. Wholesale services are marketed to
customers through a direct sales force located in four offices.
United Kingdom
Primus began 1996 as a start-up operation in the United Kingdom with a small
number of customers. An office was opened in London, and sales and marketing
personnel were hired. Services were provided on a resale basis using a switch
operated by Telia, the dominant carrier in Sweden. By year end, Primus net
revenue had grown from $0.1 million in the first quarter of 1996 to $3.1 million
in the fourth quarter of 1996.
In December 1996, Primus was awarded a full facilities based telecommunication
license. Under the license, Primus may operate its own switches and lease or own
fiber optic cables, including the United Kingdom half of undersea international
fiber optic cable systems. In 1997, Primus expects to secure additional
international fiber capacity to the United States and other European countries.
Primus also purchased an AXE-10 telephone switch from Ericsson which is
currently being installed and is expected to carry commercial traffic beginning
in the second quarter of 1997.
Primus markets its services in the United Kingdom using a combination of direct
sales and agents to primarily ethnic customers who make a higher than average
percentage of international calls. Primus currently has approximately 20,000
residential customers using its services in the United Kingdom.
In 1997, Primus plans to expand sales to small and medium sized business
customers, by retaining agents for business sales, and other carrier wholesale
customers who would use Primus's network for completing international telephone
calls. Primus also plans to introduce international calling cards and prepaid
card services during the second quarter of 1997 using its own card "platform" in
conjunction with its London switch.
Primus intends to expand its services and network beyond the United Kingdom to
continental Europe to capitalize on the deregulation which is set to begin in
January, 1998.
Australia
Primus formed a subsidiary in Australia in late 1995 and began to apply for
licenses and build an organization to market domestic and international long
distance services in Australia's $10 billion per year telecommunications market.
Primus subsequently acquired Axicorp Pty., Ltd. ("Axicorp") on March 1, 1996.
Axicorp began operations in September 1993 and is the fourth largest
telecommunications provider in Australia providing domestic long distance
services to small and medium sized business customers as well as cellular and
local exchange services on a resale basis. The acquisition provided Primus with
early entry into the deregulating Australian telecommunications market, and will
provide Primus with a base of operations for further expansion into the Asia-
Pacific region.
Prior to the Company's acquisition, Axicorp pursued a strategy of selling long
distance, local switched and cellular services at a discount to the prices
charged by Telstra, the former monopoly telecommunications provider in
Australia. Axicorp originally marketed and sold its services through sales
agents to professional and trade associations. All of Axicorp's billing and
collection functions were conducted by Telstra.
Primus subsequently invested substantial resources to transform Axicorp's
strategy and operations to those of a facilities-based carrier focused on the
provision of international and domestic long distance services.
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The Company has acquired and installed five Northern Telecom switches for use in
Sydney, Melbourne, Perth, Adelaide, and Brisbane, which became operational
during the first quarter of 1997, and has been focusing on increasing the number
of higher-margin, higher-volume business customers with significant
international long distance traffic. The Company has increased Axicorp's direct
sales force and reduced its reliance on marketing through associations. In
addition, Axicorp's switch network has been integrated into the Company's United
States network through leased undersea trans-Pacific fiber circuits.
Additionally, the Company has expanded Axicorp's service offerings in Australia,
to include prepaid and calling cards. During the first quarter of 1997, the
Company initiated a new marketing program aimed at ethnic consumers living in
Australia who make high volumes of international calls. Media advertising to
selected publications, as well as radio advertising are being employed. To date,
the company has generated approximately 8,000 new residential customers from
this program.
Initial Public Offering
On November 7, 1996 the Company completed an initial public offering of 5
million shares of its Common Stock and on November 21, 1996 sold an additional
750,000 shares to satisfy the Underwriters overallotment. The net proceeds to
the Company (after deducting Underwriter discounts and offering expenses) was
$54.4 million.
Primus Strategy
The Company's objective is to become a leading provider of international and
domestic long distance voice, data and value-added services to its target
customers. The Company's strategy to achieve this objective is to focus on
providing a full range of competitively priced, high-quality services in the
Targeted Regions. Key elements in the Company's strategy include:
. Focus on Customers with Significant International Long Distance Usage. The
Company's primary focus is providing telecommunications services to small-
and medium-sized businesses with significant international long distance
traffic and to ethnic residential consumers and, on a wholesale basis, to
other telecommunications carriers and resellers with international traffic.
The Company believes that the international long distance market offers an
attractive business opportunity given its size and, as compared to the
domestic long distance market, its higher revenue per minute, gross margin
and expected growth rate.
. Pursue Early Entry into Selected Deregulating Markets. Primus seeks to be
an early entrant into selected deregulating telecommunications markets
where it believes there is significant demand for international long
distance services, substantial growth and profit potential, and the
opportunity to establish a customer base and achieve name recognition. The
Company intends to use each Regional Hub as a base to expand into
deregulating markets within the Targeted Regions and will focus its
expansion efforts on major metropolitan areas with a high concentration of
target customers with international traffic.
. Implement Intelligent International Network. The Company expects that the
continued strategic development of the Network will lead to reduced
transmission and other operating costs as a percentage of net revenue,
reduced reliance on other carriers and more efficient network utilization.
The Company initially obtains additional transmission capacity on a
variable-cost, per-minute basis, next acquires additional capacity on a
fixed-cost basis when traffic volume makes such a commitment cost-
effective, and ultimately purchases and operates its own facilities only
when traffic levels justify such investment.
. Deliver Quality Services at Competitive Prices. The Company intends to
continue to maintain a low-cost structure in order to offer its customers
international and domestic long distance services priced below that of its
major competitors. In addition, the Company intends to continue to maintain
strong customer relationships through the use of trained and experienced
service representatives and the provision of customized billing services.
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. Provide a Comprehensive Package of Services. The Company seeks to continue
to provide a comprehensive package of services to create "one-stop
shopping" for its targeted customers' telecommunications needs,
particularly for small-and medium-sized businesses and ethnic residential
consumers that prefer a full service telecommunications provider.
Services
Primus offers a broad array of telecommunications services through its own
global intelligent network and through interconnection with the networks of
other carriers. While over time the Company intends to offer a broad range of
bundled telecommunication services, the availability of services within a
particular market depends upon regulatory constraints and the availability of
services for resale.
The Company offers the following services in the United States, Australia and
the United Kingdom:
International and Domestic Long Distance. The Company provides
international long distance voice services to over 200 countries and
provides domestic long distance voice services within each of the Regional
Hubs. On a market-by-market basis, access methods required to originate a
call vary according to regulatory requirements and the existing domestic
telecommunications infrastructure. In the United States, access methods
available to the Company's customers include "1+", toll-free, dedicated
(private line) and prefix code access. In Australia, the Company has
recently completed installation of its own five switch network which is
accessed through the use of dedicated and prefix code access. In Australia,
the Company also is a reseller of service provided by Telstra and Optus. In
the United Kingdom prefix code access is used to originate calls.
Private Network Services. For business customers, the Company designs and
implements international private network services that may be used for
voice, data and video applications. The Company's Mexican operations
consist exclusively of the provision of private network services to
selected multinational corporations.
In addition, on a market-by-market basis, the Company provides on a stand alone
and/or bundled basis the following services:
Prepaid and Calling Cards. The Company offers prepaid and calling cards
that may be used by customers for domestic and international telephone
calls within and from their home country. With the Company's prepaid card
service, a customer purchases a card that entitles the customer to make
phone calls on the card up to some monetary limit. With the Company's
calling card service, the customer selects a PIN. The account is then
billed by Primus on a monthly basis as calls are made using the card.
During 1996, the Company's calling cards were offered in the United States.
In early 1997, the Company introduced global calling cards that enable
customers to make telephone calls in most major countries while they are
outside their home country.
Cellular Services. The Company is one of four national dealers selling
Telstra analog and digital cellular services in Australia.
Local Switched Service. The Company intends to provide local service on a
resale basis as part of its "one-stop shopping" marketing approach,
subject to commercial feasibility and regulatory limitations. The Company
currently provides local service in Australia.
Toll-free Services. The Company currently provides domestic and
international toll-free services in the United States and intends to offer
such services in Australia and the United Kingdom.
The Company strives to provide personalized customer service and believes that
the quality of its customer service is one of its competitive advantages. The
Company's larger customers are actively covered by dedicated account and service
representatives who seek to identify, prevent and solve problems. The Company
provides toll-free, 24-hour a day customer service.
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Network
The Company believes that the continued strategic development of its global
intelligent Network (the "Network") will lead to reduced transmission and other
operating costs as a percentage of net revenue and reduced reliance on other
carriers. The Network consists of (i) a global backbone network connecting
intelligent gateway switches in the Primary Service Regions, (ii) a domestic
long distance network presence in each of the Regional Hubs and certain
additional countries within the Primary Service Regions, and (iii) a combination
of owned undersea fiber optic cable, leased facilities, resale arrangements, and
correspondent agreements.
The Company has targeted North America, Asia-Pacific and Europe for the
development of the Network. Within each of these Primary Service Regions, the
Company has selected the United States (North America), Australia (Asia-Pacific)
and the United Kingdom (Europe) as Regional Hubs for expansion into additional
markets within the Primary Service Regions. These countries were selected based
on their market size, potential growth and favorable regulatory environments.
The Company has a domestic presence within each of these countries, and has
interconnected the United States with Australia via leased circuits, and will
connect the United States and United Kingdom via the TAT-12/13 and CANTAT-3
trans-Atlantic cable systems upon completion of the Company's London switch
which is expected in the second quarter of 1997. The Company expects to expand
into additional markets as deregulation occurs and the Company is permitted to
offer a full range of switched public telephone services. The Company intends to
use its United Kingdom operations to coordinate efforts to enter other major
metropolitan European markets in the European Union, including those in France
and Germany, in conjunction with the scheduled deregulation of the
telecommunication industry in certain European Union countries in 1998.
The Network currently consists of international gateway switches in Washington,
D.C., New York, Los Angeles, Toronto and Sydney and additional domestic switches
in Melbourne, Brisbane, Perth and Adelaide. The Company is currently installing
an international gateway switch in London.
These international gateway switches are connected to the domestic and
international networks of both the Company and other carriers in a particular
market, allowing the Company to provide seamless service and to package and
market the voice services purchased from other carriers under the "Primus" brand
name.
Customers
The Company's primary focus is providing telecommunications services, on a
retail basis, to small- and medium-sized businesses with significant
international long distance traffic and ethnic residential consumers and, on a
wholesale basis, other carriers and resellers with international traffic.
Businesses. The Company's business sales and marketing efforts target small-
and medium-sized businesses with significant international long distance
traffic. The Company believes that these users are attracted to Primus primarily
due to its significant price savings compared to first-tier carriers and,
secondarily, its personalized approach to customer service and support,
including customized billing and bundled service offerings.
Residential Consumers. The Company's residential sales and marketing strategy
targets ethnic residential consumers who generate high international traffic
volumes. The Company believes that these consumers are attracted to Primus
because of its significant price savings as compared to first-tier carriers,
simplified pricing structure, multilingual customer service and support and
bundled service offerings.
Telecommunications Carriers and Resellers. The Company competes for the
business of other telecommunications carriers and resellers primarily on the
basis of price and, to a lesser extent, service quality. The Company believes
that long distance services, when sold to telecommunications carriers and other
resellers are, generally, a commodity product and therefore do not benefit from
special sales or promotional efforts. Sales to these other carriers and
resellers, however, help the Company maximize the utilization of the Network and
thereby reduce the Company's fixed costs per minute of use.
5
Sales and Marketing
The Company markets its services through a variety of sales channels as
summarized below:
Direct Sales Force. The Company's direct sales force is comprised of full-time
employees who focus on small- to medium-sized business customers with
substantial international traffic or traffic potential. The Company also employs
full-time direct sales representatives focused on ethnic residential consumers
and direct sales representatives who exclusively sell wholesale services to
other long-distance carriers and resellers. Direct sales personnel are
compensated with a base salary plus sales commissions.
The Company's direct sales efforts are organized into regional sales offices.
The Company currently has offices in Washington, D.C., New York, Los Angeles,
Houston, Tampa, Toronto, Mexico City, London, Melbourne, Sydney, Adelaide,
Brisbane and Perth. These targeted metropolitan areas have a large number of
small- and medium-sized businesses and significant ethnic populations.
Agents and Independent Sales Representatives. The Company supplements its
direct sales efforts with agents and independent sales representatives. These
agents and representatives, who typically focus on small- and medium-sized
businesses, as well as ethnic residential consumers, are paid commissions based
on long distance revenue generated. Within major metropolitan regions, the
Company usually grants nonexclusive sales rights and requires its agents and
representatives to maintain minimum quotas.
Telemarketing. The Company employs full-time telemarketing sales personnel to
supplement sales efforts to ethnic residential consumers and small- and medium-
sized business customers. From time to time, the Company also engages outside
telemarketing agents to supplement its internal telemarketing efforts.
Associations. Axicorp markets telecommunications services in Australia to
members of trade and professional associations. Axicorp develops tailored
marketing materials jointly with each association, attends meetings and trade
shows, sponsors events and advertises in newsletters. These associations receive
a fee based on revenue generated by sales to its members.
Media and Direct Mail. The Company uses a variety of print, television and radio
to increase name recognition in new markets. For example, the Company reaches
ethnic residential consumers by print, media advertising campaigns in ethnic
newspapers, and on ethnic radio and television programs.
Competition
The international telecommunications industry is highly competitive and
significantly affected by regulatory changes, marketing and pricing decisions of
the larger industry participants and the introduction of new services made
possible by technological advances. The Company believes that long distance
service providers compete on the basis of price, customer service, product
quality and breadth of services offered. The Company's Primary Service Regions
have numerous competitors and there are limited barriers to entry in these
markets. The Company believes that as international telecommunications markets
continue to deregulate, competition in these markets will increase, similar to
the competitive environment that has developed in the United States following
the AT&T divestiture in 1984. Prices for long-distance calls in several of the
markets in which the Company competes have declined recently and are likely to
continue to decrease.
Many of the competitors are significantly larger, have substantially greater
financial, technical and marketing resources and larger networks than the
Company. Additionally, many larger competitors have formed global alliances in
an attempt to capture market share on a global basis.
The following is a brief summary of the competitive environment in each of the
Company's Primary Service Regions:
United States. In the United States, which is the most competitive and among the
most deregulated long distance markets in the world, competition is based upon
pricing, customer service, network quality, and the ability to provide value-
added services. AT&T is the largest supplier of long distance services, with
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MCI and Sprint being the next largest providers. In the future, under provisions
of recently enacted federal legislation, the Company anticipates that it will
also compete with Regional Bell Operating Companies ("RBOCs"), Local Exchange
Carriers ("LECs") and Internet providers in providing domestic and international
long-distance services.
United Kingdom. The Company's principal competitors in the United Kingdom are
British Telecom, the dominant supplier of telecommunications services in the
United Kingdom, and Mercury, a subsidiary of Cable & Wireless. The Company also
faces competition from licensed public telephone operators (which are
constructing their own facilities-based networks), cable companies and switch-
based resellers.
Australia. Australia is one of the most deregulated and competitive
telecommunications markets in the Asia-Pacific region. The Company's principal
competitors in Australia are Telstra, the dominant carrier, Optus and AAPT and a
number of other switchless resellers. The Company believes that when carrier-
status regulations are modified, currently expected to occur in mid to late
1997, competition in Australia will increase.
Government Regulation
As a multinational telecommunications company, Primus is subject to varying
degrees of regulation in each of the jurisdictions in which it provides its
services.
United States
In the United States, the Company's services are subject to the provisions of
the Communications Act, the 1996 Telecommunications Act and the FCC regulations
thereunder, as well as the applicable laws and regulations of the various
states.
As a carrier offering services to the public, the Company must comply with the
requirements of common carriage under the Communications Act, including the
offering of service on a non-discriminatory basis at just and reasonable rates,
and obtaining FCC approval prior to any assignment of authorizations or any
transfer of de jure or de facto control of the Company. The Company is
classified as a non-dominant common carrier for domestic service and is not
required to obtain specific prior FCC approval to initiate or expand domestic
interstate services.
The FCC recently adopted an order in which it eliminated the requirement that
non-dominant interstate carriers such as the Company maintain tarrifs on file
with the FCC for Domestic interstate interexchange services. Should the appeals
fail and the FCC's order become effective, the Company may benefit from the
elimination of FCC tariffs by gaining more flexibility and speed in dealing with
marketplace changes. However, the absence of tariffs will also require that the
Company secure contractual agreements with its customers regarding many of the
terms of its existing tariffs or face possible claims arising because the rights
of the parities are no longer clearly defined.
Domestic Service Regulation. The 1996 Telecommunications Act is intended to
increase competition in the United States telecommunications markets. The
legislation opens the local services markets by requiring LECs to permit
interconnection to their networks and by establishing LEC obligations with
respect to unbundled access, resale, number portability, dialing parity, access
to rights-of-way, mutual compensation and other matters. In addition, the
legislation codifies the LECs' equal access and nondiscrimination obligations
and preempts inconsistent state regulation. The legislation also contains
special provisions that eliminate the restrictions on the RBOCs and the GTE
Operating Companies (the "GTOCs") from providing long distance services. The
1996 Telecommunications Act also addresses a wide range of other
telecommunications issues that may potentially impact the Company's operations.
It is unknown at this time precisely the nature and extent of the impact that
the legislation will have on the Company.
On August 1, 1996, the FCC adopted the Interconnection Decision to implement the
interconnection, resale and number portability provisions of the
Telecommunications Act. Certain provisions of these rules have been appealed to
various U.S. Courts of Appeals, which have been consolidated into proceedings
currently
7
pending before the U.S. Court of Appeals for the Eighth Circuit ("Eighth
Circuit"). The Eighth Circuit has granted a temporary stay of certain provisions
of the Interconnection Decision, including the pricing rules and rules that
would have permitted new entrants to "pick and choose" among various provisions
of existing interconnection agreements, pending a decision on the merits. All
other provisions of existing interconnection agreements remain in effect pending
resolution of the appeal on the merits.
State Regulation. The Company's intrastate long distance operations are subject
to various state laws and regulations including, in most jurisdictions,
certification and tariff filing requirements. The Company has received the
necessary certificate and tariff approvals or has sought authority to provide
intrastate long distance service in 48 states. The Company is subject to a
variety of tariffing, filing, and reporting requirements imposed on authorized
carriers by state PSC's. PSCs also regulate access charges and other pricing for
telecommunications services within each state. The RBOCs and other local
exchange carriers have been seeking reduction of state regulatory requirements,
including greater pricing flexibility which, if granted, could subject the
Company to increased price competition.
International Service Regulation. International common carriers, such as the
Company, are required to obtain authority under Section 214 of the
Communications Act and file a tariff containing the rates, terms, and conditions
applicable to their services prior to initiating their international
telecommunications services. The Company has obtained all required
authorizations from the FCC to use, on a facilities and resale basis, various
transmission media for the provision of international switched services and
international private line services.
In addition to the general common carrier principles, the Company must conduct
its international business in compliance with the FCC's international
settlements policy ("ISP") the rules that establishes the permissible
boundaries for U.S.-based carriers and their foreign correspondents to settle
the cost of terminating each other's traffic over their respective networks.
As a U.S.-based international carrier, the Company is also subject to the FCC's
uniform settlements policy designed to eliminate foreign carriers' incentives
and opportunities to discriminate in their correspondent agreements among
different U.S.-based carriers. To implement this policy, the FCC also adopted
the principle of proportionate return to ensure that competing U.S.-based
carriers have roughly equitable opportunities to receive the return traffic that
reduces the marginal cost of providing international service. The FCC recently
revised its rules to permit more flexibility in its international settlements
policy as a method of achieving lower cost-based accounting rates as more
competition is introduced in foreign markets and proposed new rules to lower the
price of providing international services. These and other changes may provide
more flexibility to the Company and its competitors to respond more rapidly to
changes in the global telecommunications market. The Company intends, where
possible, to take advantage of lowered accounting rates and flexible
arrangements. The Company cannot predict how the FCC will resolve pending
international policy issues or how such resolutions will affect its
international business.
Changing Regulations. Regulation of the telecommunications industry is changing
rapidly both domestically and globally. The FCC is considering a number of
international service issues in the context of several policy rulemaking
proceedings and in response to specific petitions and applications filed by
other international carriers. The Company is unable to predict how the FCC will
resolve the pending international policy issues or how such resolution will
affect its international business. In addition, the World Trade Organization
recently reached a 68-nation agreement on communications services, which
reflects efforts to dismantle government-owned telecommunications monopolies
throughout Europe, Asia and India. Although the Company believes that these
deregulation efforts will create opportunities for new entrants in the
telecommunications service industry, there can be no assurance that the
agreement will be implemented in a manner that would benefit the Company.
United Kingdom
In the United Kingdom, the provision of the Company's services is subject to the
provisions of the U.K. Telecommunications Act. The Secretary of State for Trade
and Industry, acting on the advice of the U.K. Department of Trade and Industry
(the "DTI") is responsible for granting UK telecommunications licenses,
8
while the Director General of Telecommunications (the "Director General") and
Oftel are responsible for enforcing the terms of such licenses. Oftel attempts
to promote effective competition both in networks and in services to redress
anticompetitive behavior. The Company is also subject to general European Union
law.
Until 1981, British Telecom was virtually the sole provider of public
telecommunications services throughout the United Kingdom. This virtual monopoly
ended when, in 1981, the British government granted Mercury a license to run its
own telecommunications system under the British Telecommunications Act 1981.
Both British Telecom and Mercury are licensed under the subsequent U.K.
Telecommunications Act to run transmission facilities-based telecommunications
systems and provide telecommunications services. In 1991, the British government
established a "multi-operator" policy to replace the duopoly that had existed
between British Telecom and Mercury. Under the multi-operator policy, the DTI
will recommend the grant of a license to operate a telecommunications network to
any applicant that the DTI believes has a reasonable business plan and where
there are no other overriding considerations not to grant such license. All
public telecommunications operators and international simple resellers operate
under individual licenses granted by the Secretary of State for Trade and
Industry pursuant to the U.K. Telecommunications Act. Any telecommunications
system with compatible equipment that is authorized to be run under an
individual license is permitted to interconnect to British Telecom's network.
Under the terms of British Telecom's license, it is required to allow any such
licensed operator to interconnect its system to British Telecom's system, unless
it is not reasonably practicable to do so (e.g., due to incompatible equipment).
The Company's subsidiary, Primus Telecommunications, Inc., holds an ISR license
that authorizes it to provide switched voice services over leased private lines
to all international points. In addition, the Company recently received a
license to provide international facilities-based voice services.
Australia.
In Australia, the provision of the Company's services is subject to federal
regulation pursuant to the Telecom Act and federal regulation of anti-
competitive practices pursuant to the Trade Practices Act 1974. In addition,
other federal legislation, various regulations pursuant to delegated authority
and legislation, ministerial declarations, codes, directions, licenses,
statements of the Commonwealth Government policy and court decisions affecting
telecommunications carriers also apply to the Company.
The Australian market is undergoing deregulation in two phases. The first phase
of the deregulation process commenced in 1991 and continued in 1992 with (1) the
enactment of the Telecom Act, (2) the corporatization of the local PTT, Telecom
Australia, into the corporation now known as Telstra, (3) the creation and
licensing of a second general carrier, Optus, (4) an agreement by the Australian
Government with Optus not to grant another general carrier license before
July 1, 1997, (5) the creation of a system to enable service providers to
compete with the carriers in the provision of telecommunications services from
1992, (6) the licensing of Vodafone as a third digital mobile carrier, and (7) a
declared Government policy of achieving full competition by July 1, 1997,
subject to regulation by the Australian Government and the telecommunications
regulatory authority (at the present time, AUSTEL), and also by the competition
regulatory authority, the Australian Competition and Consumer Commission, which
is expected to be given new jurisdiction over competition aspects of the
Australian telecommunications industry. These regulatory authorities will have
responsibility for economic and technical regulation of the telecommunications
industry as well as promoting competition and protecting consumers.
Axicorp Acquisition
On March 1, 1996, the Company acquired Axicorp Pty., Ltd. for $5.7 million in
cash, including transaction costs, 455,000 shares of Series A Stock
(subsequently converted into 1,538,355 shares of Common Stock on November 7,
1996, the date of the Company's Initial Public Offering) and $8.1 million of
seller financing recorded on a discounted basis. As security for payment of the
seller financing, the sellers have collateral security interests in all of the
outstanding Axicorp shares, 27% as registered owner, which will be registered in
the Company's name upon payment of the seller financing, and 73% pursuant to
share mortgage. In turn, the Company is holding 839,617 shares of common stock
issued to the
9
individual sellers as collateral for the 27% of the Axicorp shares registered in
their names. These shares of common stock will be released to the sellers once
the remaining Axicorp shares are received.
Employees
The following table summarizes the number of full-time employees of the Company
as of December 31, 1996, by region and classification:
Asia- United Kingdom/
North America Pacific Europe Total
------------- ------- --------------- -----
Management and Administrative 11 22 20 53
Sales and Marketing 39 60 40 139
Customer Service and Support 18 28 9 55
Technical 14 50 4 68
--- --- --- ---
Total 82 160 73 315
=== === === ===
The Company has never experienced a work stoppage, and none of its employees is
represented by a labor union or covered by a collective bargaining agreement.
The Company considers its employee relations to be excellent.
ITEM 2. Properties
The Company currently leases its corporate headquarters which is located in
Vienna, Virginia. Additionally, the Company also leases administrative and sales
office space in Washington D.C., New York, Los Angeles, Tampa, Mexico City,
Toronto, Melbourne, Sydney, Bisbane, Perth, Adelaide, and London. Total leased
space approximates 110,000 square feet and the total annual lease costs are
approximately $1.7 million. The operating leases expire at various times through
2006.
Certain communications equipment which includes network switches and
transmission lines are leased through operating and capital leases.
Management believes that the Company's present administrative and sales office
facilities are adequate for its anticipated operations, and that similar space
can readily be obtained as needed. The Company believes the current leased
facilities to house the communications equipment is adequate. However, as the
Company's network of switches grows, the Company will have to lease additional
locations to house the new equipment.
ITEM 3. Legal Proceedings
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company believes the outcome of pending legal
proceedings to which the Company is a party will not have a material adverse
effect on the Company's business, financial condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
By written consent of the Company's stockholders effective October 4, 1996, the
Company's stockholders resolved:
1. To amend the Company's Certificate of Incorporation, effective immediately
prior to the effectiveness of the Company's Registration Statement filed with
the Securities and Exchange Commission (the "Registration Statement") in
connection with the Company's initial public offering (the "Offering"), in order
to (i) amend the Certificate of Incorporation of the Company to increase the
authorized number of shares of common stock of the Company to 40,000,000 shares,
and (ii) amend the Employee Stock Option Plan and the Director Stock Option Plan
of the Company to increase the number of shares common stock issuable thereunder
to account for the proportional increase in the number of shares which will be
issued upon the exercise of options granted and grantable under each plan;
10
2. To amend and restate the Company's By-Laws in their entitety, effective
immediately prior to the completion of the Offering; and
3. To classify the Board of Directors upon completion of the Offering into
three classes serving for staggered three-year terms, and to elect the following
directors as a member of the class indicated next to each nominee's name below,
effective upon completion of the Offering, to serve until the annual meeting of
stockholders indicated next to each nominee's name:
Year of Annual Meeting
at which Class will
Name Class next be Elected
---- ----- ---------------
Herman Fialkov I 1997
David E. Hershberg I 1997
John Puente II 1998
K. Paul Singh III 1999
John F. DePodesta III 1999
The Registration Statement became effective on November 7, 1996 and the Offering
was completed on November 21, 1996. The action was approved by written consent
of a majority of the holders of the outstanding shares of common stock of the
Company. There were no votes against any of the matters presented and no
abstentions.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock
The Company's Common Stock, par value $.01 per share (the "Common Stock"),
commenced trading on the Nasdaq Stock Market on November 7, 1996 under the
symbol "PRTL". Prior to that date there was no established public trading market
for the Common Stock. The following table sets forth, for the period indicated,
the high and low sales prices of the Company's Common Stock.
Period High Low
- ------ ---- ---
November 7, 1996 through December 31,1996 $14 5/8 $10 1/2
Dividend Policy
The Company has not paid any cash dividends on its Common Stock to date. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition, and may be restricted by future credit
arrangements entered into by the Company. It is the present intention of the
Board of Directors to retain all earnings, if any, for use in the Company's
business operations and accordingly, the Board of Directors does not expect to
declare or pay any dividends in the foreseeable future.
Holders
As of March 14, 1997, the Company had approximately 366 holders of record of its
Common Stock.
Recent Sales of Unregistered Securities
On February 15, 1996, Teleglobe USA, Inc. invested in the Company by purchasing
410,808 shares of the Company's Common Stock for $1,458,060. On March 1, 1996,
in connection with the Company's
11
purchase of Axicorp, former stockholders of Axicorp received 455,000 shares of
the Company's Series A Convertible Preferred Stock, par value $.01 per share.
In addition, on July 31, 1996, Primus completed the sale of 965,999 shares of
Common Stock to the (i) Quantum Industrial Partners LDC, the principal operating
subsidiary of Quantum Industrial Holdings Ltd., an investment fund advised by
Soros Fund Management, a private investment firm owned by Mr. George Soros,
(ii) Winston Partners II LDC, the principal operating subsidiary of Winston
Partners II Offshore Ltd., an investment fund advised by Chatterjee Management
Company, a private entity owned by Dr. Purnendu Chatterjee, (iii) Winston
Partners II LLC, an investment fund advised by Chatterjee Management Company and
(iv) S-C Phoenix Holdings, L.L.C., an investment vehicle owned by affiliates of
Mr. Soros and Dr. Chatterjee (collectively, the "Soros/Chatterjee Group"), for
an aggregate purchase price of approximately $8.0 million. The Soros/Chaterjee
Group also purchased, for an additional $8.0 million, warrants
("Soros/Chatterjee Warrants") which afford the Soros/Chatterjee Group the right
to receive, upon exercise, an indeterminate number of shares of Common Stock
with a fair market value of $10.0 million as of the date of exercise, plus up to
627,899 additional shares of Common Stock. Except for 338,100 shares which are
currently exercisable, the Soros/Chatterjee Warrants are exercisable on or after
July 31, 1997 and until July 31, 1999. The Soros/Chatterjee Warrants are
entitled to certain customary antidilution protection in the event of stock
splits, stock dividends, reorganizations and other similar events.
No underwriter or placement agent participated in any of the foregoing issuances
of securities and no commission were paid.
The Company believes that the transactions described above were exempt from
registration under Section 4 (2) of the Securities Act because the subject
securities were, respectively sold to a limited group of persons, each of whom
was believed to have been a sophisticated investor or to have had a preexisting
business or personal relationship with the Company or its management and was
purchasing for investment without a view to further distribution.
ITEM 6. Selected Financial Data
The following sets forth selected financial data of the Company from inception
through December 31, 1996. The historical selected financial data as of
December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and
the period from February 4, 1994 to December 31, 1994 have been derived from the
historical financial statements of the Company.
Statement of Operations Data:
(For the Period Ended) 1996 1995 1994
--------- -------- -------
(in thousands except per share data)
Net revenue $172,972 $ 1,167 $ 0
Gross margin $ 14,127 $ (217) $ 0
Selling, general, administrative $ 20,114 $ 2,024 $ 557
expenses
Loss from operations $ (8,151) $(2,401) $ (569)
Net loss $ (8,764) $(2,425) $ (577)
Net loss per common and common share
equivalents $(0.63) $(0.22) $(0.07)
Balance Sheet Data:
(As of December 31,)
Total assets $140,560 $ 5,042 $ 487
Total long term obligations $ 17,248 $ 528 $ 13
Total Stockholders' equity (deficit) $ 76,440 $ 2,562 $ (71)
12
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations Overview
Primus is a multinational telecommunications company that focuses on the
provision of international and domestic long distance services. The Company has
targeted North America, Asia-Pacific and Europe as its Primary Service Regions.
The Company currently provides services in the United States, Australia and the
United Kingdom. The Company was founded in February 1994 and through the first
half of 1995 was a development stage enterprise involved in various start-up
activities including raising capital, obtaining licenses, acquiring equipment,
leasing space, developing markets and recruiting and training personnel. The
Company began generating revenue during March 1995. The Australian operations
are the result of the Company's March 1, 1996 acquisition of Axicorp.
The Company has generated net revenue from internal growth through focused sales
and marketing efforts on a retail basis toward small- and medium-sized
businesses with significant international long distance traffic and ethnic
residential consumers and, on a wholesale basis, to other telecommunications
carriers and resellers with international traffic.
Net revenue is earned based on the number of minutes billed by the Company and
is recorded upon completion of a call. The Company generally prices its services
at a savings compared to the major carriers operating in the Company's Primary
Service Regions. The Company's net revenue in the United States is derived from
carrying a mix of business, consumer and wholesale carrier long distance
traffic. In Australia, net revenue is currently derived from the provision of
long distance services and from the provision of local and cellular services,
primarily to small- and medium- sized businesses. In the United Kingdom, net
revenue is derived from the provision of long distance services, primarily to
ethnic residential consumers, as well as to small- and medium-sized businesses.
Cost of revenue is primarily comprised of costs incurred from other domestic and
foreign telecommunications carriers to access, transport and terminate calls.
The majority of the Company's cost of revenue is variable, based upon the number
of minutes of use, with transmission and termination costs being the Company's
most significant expense. As the Company increases the portion of traffic
transmitted over its own facilities, cost of revenue increasingly will reflect
lease, ownership and maintenance costs of the network.
Although the Company's functional currency is the U.S. dollar, a significant
portion of the Company's net revenue is derived from its sales and operations
outside the United States. In the future, the Company expects to continue to
derive a significant portion of its net revenue and incur a significant portion
of its operating costs outside the United States and changes in exchange rates
may have a significant effect on the Company's results of operations. The
Company historically has not engaged in hedging transactions.
Other Operating Data
The following information for the three months ended December 31, 1996 and
September 30, 1996 is provided for informational purposes and should be read in
conjunction with the Consolidated Financial Statements and Notes. Net revenue is
comprised of domestic and international long distance for all geographical
regions. Additionally, Australian net revenue includes local, cellular, access
and other services and dealership income.
13
(in thousands)
Three months ended December 31, 1996:
Minutes of Long Distance Use
Net ---------------------------------
Revenue International Domestic Total
--------- -------------- ---------- ------
North America $ 5,991 12,160 5,533 17,693
Australia 46,647 1,876 58,336 60,212
United Kingdom 3,100 3,192 3,051 6,243
--------- --------- -------- --------
Total $55,738 17,228 66,920 84,148
========= ========= ======== ========
Three months ended September 30, 1996:
Minutes of Long Distance Use
Net ---------------------------------
Revenue International Domestic Total
--------- -------------- ---------- ------
North America $ 4,895 9,199 3,972 13,171
Australia 45,351 1,967 56,932 58,899
United Kingdom 1,573 1,713 1,512 3,225
--------- --------- -------- --------
Total $51,819 12,879 62,416 75,295
========= ========= ======== ========
Results of operations for the year ended December 31, 1996 as compared to the
year ended December 31, 1995
Net revenue increased $171.8 million, from $1.2 million for the year ended
December 31, 1995 to $173.0 million for the year ended December 31, 1996. Of
the increase, $151.3 million was associated with the Company's Australian
operations, which were acquired March 1, 1996, while the remaining $20.5 million
of net revenue growth was associated primarily with the commencement and
expansion of the Company's operations in the United States and the United
Kingdom.
Cost of revenue increased $157.4 million, from $1.4 million for the year ended
December 31, 1995 to $158.8 million for the year ended December 31, 1996 as a
direct result of the increased net revenue. Most of the Company's cost of
revenue are variable, since the Company had limited Network during this period
and functioned primarily as a switchless reseller. The cost of revenue in the
United States reflects the start-up nature of the network operations and traffic
being carried on more expensive carriers until adequate capacity on lower cost
carriers could be established.
Selling, general and administrative expenses increased $18.1 million, from $2.0
million to $20.1 million for the year ended December 31, 1996 as compared to the
year ended December 31, 1995. Approximately $11.4 million of the increase was
attributable to the ten months of activity associated with the Australian
operations and the remaining $6.7 million related to the non-Australia
operations as a result of increased staffing levels, increased sales and
marketing activity and network operations costs. The non-Australian selling,
general and administrative costs as a percentage of non-Australian net revenue
for the year ended December 31, 1996 was 40% which is reflective of the growth
in the infrastructure necessary to support future non-Australian net revenues.
The Australian selling, general and administrative expense as a percentage of
Australian net revenue was 7.5% for the ten months ended December 31, 1996.
Depreciation and amortization increased from $0.2 million for the year ended
December 31, 1995 to $2.2 million for the year ended December 31, 1996. The
majority of the increase is a result of the acquisition of Axicorp and is
comprised of amortization of goodwill and the customer list which totaled $1.3
million. The remaining depreciation is related primarily to Axicorp's assets and
increased depreciation expense for the Company as a result of additional capital
expenditures for switching and network related equipment.
14
Other income (expense) for the year ended December 31, 1996 related to foreign
currency transaction losses on the Australian dollar-denominated debt incurred
by the Company payable to the sellers for its acquisition of Axicorp as a result
of the appreciation of the Australian dollar against the U.S. dollar during the
period.
Income taxes were primarily attributable to the operations of Axicorp for the
ten months from the date of purchase, and represents the amount of expense for
Australian taxes.
Results of operations for the year ended December 31, 1995 compared to the
period from inception (February 4, 1994) to December 31, 1994
Net revenue and cost of revenue in 1995 were $1.2 million and $1.4 million,
respectively. During the period ended December 31, 1994, the Company did not
have net revenue or cost of revenue as it was in the development stage and
involved in various start-up activities including raising capital, obtaining
licenses, acquiring equipment, leasing space, developing markets, and recruiting
and training personnel. In March 1995, the Company began generating net revenue
and associated cost of revenue.
Gross deficit for 1995 was $0.2 million. As the Company began generating revenue
in 1995, there were fixed network costs that were not offset by the net revenue
generated.
Selling, general and administrative expenses increased from $0.6 million in 1994
to $2.0 million in 1995. The increase was primarily due to additional costs
incurred to support the formation of the Company's administrative, management,
sales and operations personnel.
Depreciation and amortization was $0.2 million in 1995. The depreciation and
amortization expense was directly related to the purchase of Network equipment,
including the Company's switch in Washington, D.C.
Liquidity and Capital Resources
The Company's liquidity requirements arise from net cash used in operating
activities; purchases of network equipment including switches, related
equipment, and international fiber cable capacity; and interest and principal
payments on outstanding indebtedness, including capital leases. The Company has
financed its growth through private placements, the initial public offering of
its common stock and capital lease financing. Net cash provided by financing
activities was $79.5 million for the year ended December 31, 1996 and $4.5
million for the year ended December 31, 1995. In January 1996 and July 1996, the
Company completed private placements of common stock generating net proceeds of
approximately $4.7 million and $15.8 million, respectively. In November 1996,
the Company completed an initial public offering of its common stock which
generated net proceeds of approximately $54.4 million (after deducting
Underwriters discounts and offering expenses).
Net cash used in operating activities was $6.9 million for the year ended
December 31, 1996 and $2.0 million for the year ended December 31, 1995. The
increased cash usage was the result of an increase in the net loss partially
offset by increases in accounts payable and accrued expenses.
Net cash used in investing activities was $39.6 million for the year ended
December 31, 1996 and $0.4 million for the year ended December 31, 1995. The
cash utilized during the year ended December 31, 1996 includes $12.7 million for
capital expenditures to expand the Network and $1.7 million for the purchase of
Axicorp net of cash acquired.
The Company believes that the net proceeds from the initial public offering,
together with the net proceeds from the July 1996 private placement and future
capital lease financing, will be sufficient to fund the Company's net cash used
in operating activities, capital expenditures and other cash needs for the next
twelve months.
The Company expects to seek additional long term financing in the near term,
which if sought and obtained, would extend the period of time before which the
Company reasonably believes it would require
15
additional financing. No assurance can be given that such long term financing
will be sought, or, if sought, will be obtained on commercially reasonable terms
or at all.
Special Note Regarding Forward Looking Statements
Statements in this annual report on Form 10-K, including those concerning the
Company's expectations of future sales, net revenue, gross profit, net income,
network development, traffic development, capital expenditures, selling, general
and administrative expenses, service introductions and cash requirements include
certain forward-looking statements. As such, actual results may vary materially
from such expectations. Factors which could cause results to differ from
expectations include risks associated with:
Limited Operating History; Entry into Developing Markets. The Company was
founded in February 1994, began generating revenue in March 1995 and acquired
its current principle operating subsidiary, Axicorp, in March 1996. The
Company's prospects should be considered in light of risks, expenses, problems
and delays inherent in establishing a new business in a rapidly changing
industry.
Managing Rapid Growth. The Company's strategy is to grow rapidly which has
placed, and is expected to continue to place, a significant strain on the
Company. In order to manage its growth effectively, the Company must continue to
implement and improve its operational and financial systems and controls,
purchase and utilize other transmission facilities, and expand, train and manage
its employees, all within a rapidly-changing regulatory environment.
Inaccuracies in the Company's forecast of traffic could result in insufficient
or excessive transmission facilities and disproportionate fixed expenses.
Need for Additional Financing. In order to achieve future growth to, among
other things, continue the construction of its Network, expand its service
offerings and its customer base, and capitalize upon unanticipated
opportunities, the Company expects to require financing beyond that which its
current capital resources will permit. To obtain such financing, the Company
will have to raise additional capital from public or private equity or debt
sources. There can be no assurance that such additional capital will be
available to the Company on commercially-reasonable terms or at all.
Intense Competition. The long distance telecommunications industry is
intensely competitive and is significantly influenced by the marketing and
pricing decisions of the larger industry participants. Competition in all of the
Company's markets is likely to increase and, as deregulatory influences are
experienced in markets outside the United States, competition in non-United
States markets is more likely to become more similar to the intense competition
in the United States. Many of the Company's competitors are significantly
larger, have substantially greater financial, technical and marketing resources
and larger networks than the Company, a broader portfolio of service offerings,
greater control over transmission lines, and have stronger name recognition and
customer loyalty, as well as long-standing relationships with the Company's
target customers. In addition, many of the Company's competitors enjoy economies
of scale that result in a lower cost structure for transmission and related
costs which could cause significant pricing pressures within the industry.
Dependence on Transmission Facilities-Based Carriers. The Company's
ability to maintain and expand its business is dependent upon whether the
Company continues to maintain favorable relationships with the transmission
facilities based carriers from which the Company leases transmission lines.
International Operations. In many international markets, the existing
carrier will control access to the local networks, enjoy better brand
recognition and brand and customer loyalty, and have significant operational
economies, including a larger backbone network and correspondent agreements.
Moreover, the existing carrier may take many months to allow competitors,
including the Company, to interconnect to its switches within its territory.
There can be no assurance that the Company will be able to obtain the permits
and operating licenses required for it to operate, obtain access to local
transmission facilities or to market services in international markets. In
addition, operating in international markets generally involves additional
risks, including: unexpected changes in regulatory requirements, tariffs,
customs, duties and other trade barriers; difficulties in staffing and managing
foreign operations; problems in collecting accounts receivables; political
risks; fluctuations in currency exchange rates; foreign exchange controls
16
which restrict repatriation of funds; technology export and import restrictions;
seasonal reductions in business activity during the summer months; and
potentially adverse tax consequences.
Dependence on Effective Information Systems: The Company's management
information systems will have to grow as the Company's business expands and will
have to change as new technological developments occur. There can be no
assurance that the Company will not encounter delays or cost-overruns or suffer
adverse consequences in implementing new systems when required.
Industry Changes. The international telecommunications industry is
changing rapidly due to deregulation, privatization, technological improvements,
expansion of infrastructure and the globalization of the world's economies. In
order to compete effectively, the Company will have to adjust its contemplated
plan of development to meet changing market conditions. The telecommunications
industry is marked by the introduction of new product and service offerings,
increased satellite transmission capacity for use by competitors and other
technological improvements. The Company's profitability will depend on its
ability to anticipate, access and adapt to rapid technological changes and its
ability to offer, on a timely and cost-effective basis, services that meet
evolving industry standards.
Network Development. The long-term success of the Company is dependent
upon its ability to design, implement, operate, manage and maintain the Network,
activities in which the Company has limited experience. The Company could
experience delays or cost overruns in the implementation of the Network which
could have a material adverse effect on the Company.
Dependence on Key Personnel. The loss of the services of K. Paul Singh,
the Company's Chairman and Chief Executive Officer, or the services of its other
key personnel, or the inability of the Company to attract and retain additional
key management, technical and sales personnel (for which competition is intense
in the telecommunications industry), could have a material adverse effect upon
the Company.
Government Regulation. The Company's operations are subject to constantly
changing regulation. There can be no assurance that future regulatory changes
will not have a material adverse effect on the Company, or that regulators or
third parties will not raise material issues with regard to the Company's
compliance or non-compliance with applicable regulations, any of which could
have a material adverse effect upon the company.
ITEM 8. Financial Statements and Supplementary Data
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 and for the period February 4, 1994
to December 31, 1994 F-3
Consolidated Balance Sheets - December 31, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 1996 and 1995 and for the
period February 4, 1994 to December 31, 1994 F-5
Consolidated Statements of Cash Flows for the years ended
December 31,1996 and 1995 and for the period February 4,
1994 to December 31, 1994 F-6
Notes to the Consolidated Financial Statements F-7
17
PART III
The information required by Part III will be provided in the Company's
definitive proxy statement for the Company's 1996 annual meeting of shareholders
(involving the election of directors), which definitive proxy statement will be
filed pursuant to Regulation 14A not later than April 30, 1997, and is
incorporated herein by this reference to the following extent.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
ITEM 10. Directors and Executive Officers of the Registrant
Information relating to directors of the Company is set forth under the caption
entitled "Election of Directors" in the Company's 1996 Proxy Statement and is
incorporated herein by reference. Information relating to the executive officers
of the Company is set forth in the Company's 1996 Proxy Statement under the
caption "Executive Officers, Directors and Key Employees" and is incorporated
herein by reference.
ITEM 11. Executive Compensation
The information regarding compensation of officers and directors of the Company
is set forth under the caption entitled "Executive Compensation" in the
Company's 1996 Proxy Statement and is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding ownership of certain of the Company's securities is set
forth under the captions entitled "Security Ownership of Certain Beneficial
Owners" and "Security Ownership of Management" in the Company's 1996 Proxy
Statement and is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions with the
Company is set forth under the caption entitled "Certain Relationships and
Related Transactions" in the Company's 1996 Proxy Statement and is incorporated
herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
a) Financial Statements and Schedules
The financial statements as set forth under Item 8 of this report on
Form 10-K are incorporated herein by reference.
Financial statement schedules have been omitted since they are either
not required, not applicable, or the information is otherwise included.
b) Reports on 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1996
18
c) Exhibit listing
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Certificate of Incorporation, Incorporated
by reference - Exhibit 3.1 of the Company's Registration
Statement of Form S-1 (No. 333-10875).
3.2 Certificate of Amendment of Certificate of Incorporation
3.3 Amended and Restated By-Laws , Incorporated by reference -
Exhibit 3.2 of the Company's Registration Statement of Form S-1
(No. 333-10875).
4.1 Specimen Certificate of the Company's Common Stock, par value
$.01 per share, Incorporated by reference - Exhibit 4.1 of the
Company's Registration Statement of Form S-1 (No. 333-10875).
10.1 Share Acquisition Deed, dated March 1, 1996, between the Company
and the shareholders of Axicorp Pty., Ltd. Incorporated by
reference - Exhibit 10.1 of the Company's Registration Statement
of Form S-1 (No. 333-10875).
10.2 Switched Transit Agreement, dated June 5, 1995, between Teleglobe
USA, Inc. and the Company for the provision of services to India.
Incorporated by reference - Exhibit 10.2 of the Company's
Registration Statement of Form S-1 (No. 333-10875).
10.3 Hardpatch Transit Agreement, dated February 29, 1996, between
Teleglobe USA, Inc. and the Company for the provision of services
to Iran. Incorporated by reference - Exhibit 10.3 of the
Company's Registration Statement of Form S-1 (No. 333-10875).
10.4 Agreement for Billing and Related Services, dated February 23,
1995, between the Company and Electronic Data System Inc.
Incorporated by reference - Exhibit 10.4 of the Company's
Registration Statement of Form S-1 (No. 333-10875).
10.5 Employment Agreement, dated June 1, 1994, between the Company and
K. Paul Singh, Incorporated by reference - Exhibit 10.5 of the
Company's Registration Statement of Form S-1 (No. 333-10875).
10.6 Primus Telecommunications Group, Incorporated 1995 Stock Option
Plan, Incorporated by reference - Exhibit 10.6 of the Company's
Registration Statement of Form S-1 (No. 333-10875).
10.7 Primus Telecommunications Group, Incorporated 1995 Director Stock
Option Plan, Incorporated by reference - Exhibit 10.7 of the
Company's Registration Statement of Form S-1 (No. 333-10875).
10.8 International Correspondent Agreement between the Honduras
Telecommunications Company and the Company dated November 30,
1995, Incorporated by reference - Exhibit 10.8 of the Company's
Registration Statement of Form S-1 (No. 333-10875).
19
Exhibit
Number Description
------ -----------
10.9 Shareholders Agreement dated February 22, 1996, among Teleglobe
USA, Inc., K. Paul Singh and the Company, Incorporated by
reference - Exhibit 10.9 of the Company's Registration Statement
of Form S-1 (No. 333-10875).
10.10 Securityholders' Agreement, dated July 31, 1996, among the
Company, K. Paul Singh, Quantum Industrial Partners LDC, S-C
Phoenix Holdings, L.L.C., Winston Partners II LDC and Winston
Partners LLC, Incorporated by reference - Exhibit 10.10 of the
Company's Registration Statement of Form S-1 (No. 333-10875).
10.11 Registration Rights Agreement, dated July 31, 1996, among the
Company, Quantum Industrial Partners LDC, S-C Phoenix Holdings,
L.L.C., Winston Partners II LDC and Winston Partners LLC,
Incorporated by reference - Exhibit 10.11 of the Company's
Registration Statement of Form S-1 (No. 333-10875).
10.12 Service Provider Agreement between Telstra Corporation Limited
and Axicorp Pty., Ltd. dated May 3, 1995, Incorporated by
reference - Exhibit 10.12 of the Company's Registration Statement
of Form S-1 (No. 333-10875).
10.13 Dealer Agreement between Telstra Corporation Limited and Axicorp
Pty., Ltd. dated January 8, 1996, Incorporated by reference -
Exhibit 10.13 of the Company's Registration Statement of Form S-1
(No. 333-10875).
10.14 Hardpatch Transit Agreement dated October 5, 1995 between
Teleglobe USA, Inc. and the Company for the provision of services
to India, Incorporated by reference - Exhibit 10.14 of the
Company's Registration Statement of Form S-1 (No. 333-10875).
10.15 Securities Purchase Agreement dated as of July 31, 1996 among the
Company, Quantum Industrial Partners LDC, S-C Phoenix Holdings
L.L.C, Winston Partners II LLC, and Winston Partners II, LDC,
Incorporated by reference - Exhibit 10.15 of the Company's
Registration Statement of Form S-1 (No. 333-10875).
11.1 Statement re: Computation of Earnings Per Share
21.1 Subsidiaries of the Registrant, Incorporated by reference -
Exhibit 22.1 of the Company's Registration Statement of Form S-1
(No. 333-10875).
24.1 Power of Attorney (included on page 21 of this 10-K)
27.1 Financial Data Schedule for the Company for the year ended
December 31, 1996
20
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized.
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
By: /s/ K. Paul Singh Chairman of the Board, President and
----------------- Chief Executive Officer
K. Paul Singh
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints K. Paul Singh and Neil L. Hazard, and each of them, his
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities to sign any and all amendments to this Form 10-K of the Securities
and Exchange Commission for the fiscal year of Primus Telecommunications Group,
Incorporated ended December 31, 1996, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ K. Paul Singh Chairman, President and Chief Executive March 27, 1997
- -------------------------- Officer (principal executive officer) and
K. Paul Singh Director
/s/ Neil L. Hazard Executive Vice President and Chief Financial March 27, 1997
- -------------------------- Officer (principal financial officer and principal
Neil L. Hazard accounting officer)
/s/ John F. DePodesta Executive Vice President, Law and Regulatory March 27, 1997
- -------------------------- Affairs and Director
John F. DePodesta
/s/ Herman Fialkov Director March 27, 1997
- --------------------------
Herman Fialkov
/s/ David E. Hershberg Director March 27, 1997
- --------------------------
David E. Hershberg
/s/ John Puente Director March 27, 1997
- --------------------------
John Puente
21
INDEX TO FINANCIAL STATEMENTS AND
EXHIBITS
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Statements of Operations for the
years ended December 31, 1996 and 1995
and for the period February 4, 1994 to
December 31, 1994 F-3
Consolidated Balance Sheets -December 31, 1996
and 1995 F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996 and 1995
and for the period February 4, 1994 to
December 31, 1994 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1996 and 1995
and for the period February 4, 1994 to
December 31, 1994 F-6
Notes to Consolidated Financial Statements F-7
Exhibits:
Exhibit 11 - Computations of Earnings per Share E-1
Exhibit 27 - Financial Data Schedule E-2
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Primus Telecommunications Group, Incorporated
We have audited the accompanying consolidated balance sheets of Primus
Telecommunications Group, Incorporated and subsidiaries (the "Company") as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the years ended
December 31, 1996 and 1995, and the period from February 4, 1994 (date of
incorporation) to December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1996
and 1995, and the results of their operations and their cash flows for the years
ended December 31, 1996 and 1995, and the period from February 4, 1994 (date of
incorporation) to December 31, 1994, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Washington, D.C.
February 5, 1997
F-2
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Period from
For the Year Ended February 4,
December 31, 1994 to
---------------------- December 31,
1996 1995 1994
----------- ---------- -------------
NET REVENUE $172,972 $1,167 $ -
COST OF REVENUE 158,845 1,384 -
---------- --------- ------------
GROSS MARGIN (DEFICIT) 14,127 (217) -
---------- --------- ------------
OPERATING EXPENSES
Selling, general and administrative 20,114 2,024 557
Depreciation and amortization 2,164 160 12
---------- --------- ------------
Total operating expenses 22,278 2,184 569
---------- --------- ------------
LOSS FROM OPERATIONS (8,151) (2,401) (569)
INTEREST EXPENSE (857) (59) (13)
INTEREST INCOME 785 35 5
OTHER INCOME (EXPENSE) (345) - -
---------- --------- ------------
LOSS BEFORE INCOME TAXES (8,568) (2,425) (577)
INCOME TAXES (196) - -
---------- --------- ------------
NET LOSS ($8,764) ($2,425) ($577)
========== ========= ============
NET LOSS PER COMMON AND
COMMON SHARE EQUIVALENT ($0.63) ($0.22) ($0.07)
========== ========= ============
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING 13,869 10,892 8,560
=========== ========== ============
See notes to consolidated financial statements.
F-3
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
1996 1995
----------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................... $35,474 $2,296
Short term investments....................................................... 25,125 --
Accounts receivable (net of allowance of $2,585 and $132).................... 35,217 665
Prepaid expenses and other current assets.................................... 910 388
-------- -------
Total current assets................................................. 96,726 3,349
PROPERTY AND EQUIPMENT - Net.................................................... 16,596 949
INTANGIBLES - Net............................................................... 21,246 --
DEFERRED INCOME TAXES........................................................... 4,951 --
OTHER ASSETS.................................................................... 1,041 744
-------- -------
TOTAL ASSETS................................................................. $140,560 $ 5,042
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................................. $ 32,675 $1,284
Accrued expenses and other current liabilities............................... 8,778 668
Deferred income taxes........................................................ 5,419 --
Current portion of long-term obligations..................................... 10,572 102
-------- -------
Total current liabilities............................................ 57,444 2,054
LONG TERM OBLIGATIONS........................................................... 6,676 426
-------- -------
Total liabilities......................................................... 64,120 2,480
-------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value - authorized 2,455,000 shares;
none issued and outstanding.............................................. -- --
Common stock, $.01 par value - authorized 40,000,000 and
16,905,000 shares; issued and outstanding, 17,778,731 and
7,063,491 shares......................................................... 178 71
Additional paid-in capital.................................................. 88,106 5,496
Accumulated deficit......................................................... (11,766) (3,002)
Cumulative translation adjustment........................................... (78) (3)
-------- -------
Total stockholders' equity............................................... 76,440 2,562
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $140,560 $ 5,042
======== =======
See notes to consolidated financial statements.
F-4
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
Preferred Stock Common Stock Additional Cumulative Stockholders'
--------------- --------------- Paid-In Accumulated Translation Equity
Shares Amount Shares Amount Capital Deficit Adjustment (Deficit)
------- -------- ------- ------- --------- ----------- ---------- -------------
BALANCE, FEBRUARY 4, 1994
(DATE OF
INCORPORATION) - $ - - $ - $ - $ - $ - $ -
Issuance of "founder's stock" to
the Company's incorporator - - 179 2 (1) - - 1
Investment made by Chairman
and Chief Executive Officer - - 3,393 34 216 - - 250
Common shares issued for
services performed - - 71 1 4 - - 5
Shares sold to outside
investors - - 397 4 246 - - 250
Net loss - - - - - (577) - (577)
-----------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 - - 4,040 41 465 (577) - (71)
Common shares sold through
private placement, net of
transaction costs - - 2,234 22 3,996 - - 4,018
Conversion of related party debt
to common stock - - 556 6 344 - - 350
Common shares issued for
services performed - - 234 2 691 - - 693
Foreign currency translation
adjustment - - - - - - (3) (3)
Net loss (2,425) (2,425)
-----------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 - - 7,064 71 5,496 (3,002) (3) 2,562
Common shares sold through
private placement, net of
transaction costs - - 3,148 31 21,837 - - 21,868
Common shares issued for
services performed - - 279 3 987 - - 990
Preferred shares issued for
Axicorp Pty., Ltd. acquisition 455 5 - - 5,455 - - 5,460
Common shares sold through
initial public offering, net of
transaction costs - - 5,750 58 54,341 - - 54,399
Conversion of preferred
shares to common shares (455) (5) 1,538 15 (10) - - -
Foreign currency translation
adjustment - - - - - - (75) (75)
Net loss - - - - - (8,764) - (8,764)
-----------------------------------------------------------------------------------------
- $ - 17,779 $178 $88,106 ($11,766) ($78) $76,440
======= ======= ======== ======== ========= =========== ========== =============
See notes to consolidated financial statements.
F-5
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
( in thousands )
Period from
For The Year Ended February 4,
December 31, 1994 to
------------------ December 31,
1996 1995 1994
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($8,764) ($2,425) (577)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,164 160 12
Sales allowance 1,960 132 -
Foreign currency transaction loss 345 - -
Deferred income taxes 196 - -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (19,405) (797) -
(Increase) decrease in prepaid expenses and
other current assets (227) (62) (68)
(Increase) decrease in other assets (1,621) (533) (81)
Increase (decrease) in accounts payable 11,729 1,195 92
Increase (decrease) in accrued expense and
other liabilities 6,683 322 136
-------- ------- ------
Net cash used in operating activities (6,940) (2,008) (486)
-------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (12,745) (396) (106)
Purchase of investments (25,125) - -
Cash used in business acquisition, net of cash acquired (1,701) - -
-------- ------- ------
Net cash used in investing activities (39,571) (396) (106)
-------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease (112) (64) (2)
Principal payments on long-term obligations (396) - -
Principal borrowed from Chairman and Chief Executive
Officer - - 315
Sale of common stock, net of transaction costs 77,576 4,543 500
Proceeds from notes payable 2,407 - -
-------- ------- ------
Net cash provided by financing activities 79,475 4,479 813
-------- ------- ------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 214 - -
-------- ------- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 33,178 2,075 221
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 2,296 221 0
-------- ------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $35,474 $2,296 $221
======== ======= ======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $149 $36 -
Non-cash investing and financing activities
Common stock issued for services $990 $693 $5
Conversion of related party debt to common stock - $350 -
Increase in capital lease liability for acquisition of
equipment $388 $578 $15
Increase in notes payable for acquisition of
equipment $2,826 - -
See notes to consolidated financial statements.
F-6
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Primus Telecommunications Group, Incorporated (the "Company") is a
multinational telecommunications company providing domestic and international
long-distance switched voice, private network and value-added services.
Incorporated in Delaware in February 1994, the Company's customers include,
small-and medium-sized businesses, residential consumers and other
telecommunication carriers in North America, Europe and the Pacific Rim. The
company operates as a holding company and has wholly-owned subsidiaries in the
United States, United Kingdom, Australia, and Mexico.
In 1994, the Company, as a development stage enterprise, was involved in
various start-up activities including raising capital, obtaining licenses,
acquiring equipment, leasing space, developing markets, and recruiting and
training personnel. During 1995, the Company began revenue generating operations
and is no longer in the development stage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated.
Revenue Recognition--Revenues from long distance telecommunications services
are recognized when the services are provided.
Cost of Revenue--Cost of revenue includes network costs which consist of
access, transport, and termination costs. Such costs are recognized when
incurred in connection with the provision of telecommunications services.
Foreign Currency Translation--The assets and liabilities of the Company's
foreign subsidiaries are translated at the exchange rates in effect on the
reporting date, and income and expenses are translated at the average exchange
rate during the period. The net effect of such translation gains and losses are
accumulated as a separate component of stockholders' equity. Foreign currency
transaction gains and losses are included in Other Income (Expense) in the
consolidated statements of operations.
Cash and Cash Equivalents--The Company considers cash on hand, deposits in
banks, certificates of deposit, and overnight repurchase agreements with
original maturities of three months or less to be cash and cash equivalents.
Short Term Investments --Highly liquid investments in U.S. Federal Government
backed obligations with original maturitites in excess of three months are
classified as available-for-sale and reported at fair value. Cost approximates
fair value for all components of short-term investments; unrealized gains and
losses are reflected in stockholders' equity and are not material.
F-7
Property and Equipment--Property and equipment, which consists of furniture,
leasehold improvements, purchased software, fiber optic cable and
telecommunications equipment, is stated at cost less accumulated depreciation
and amortization. Expenditures for maintenance and repairs that do not
materially extend the useful lives of the assets are charged to expense.
Depreciation and amortization are computed using the straight-line method over
estimated useful lives of the assets, less their net salvage value, which range
from three to twenty-five years, or for leasehold improvements and leased
equipment, over the terms of the leases, whichever is shorter.
Intangible Assets--At December 31, 1996, intangible assets, net of accumulated
amortization, consist of goodwill of $17,434,000 and customer list of
$3,812,000. Goodwill is being amortized over 30 years on a straight-line basis
and customer list over the estimated run-off of the customer base not to exceed
five years. Accumulated amortization at December 31, 1996, was $498,000 and
$762,000 related to goodwill and customer list, respectively. The Company
periodically evaluates the realizability of intangible assets. In making such
evaluations, the Company compares certain financial indicators such as expected
undiscounted future revenues and cash flows to the carrying amount of goodwill.
The Company believes that no impairments of intangible assets existed at
December 31, 1996.
Stock-Based Compensation - In 1996, the Company adopted Statement of Financial
Accounting Standard No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation. Upon adoption of SFAS 123, the Company continues to measure
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and has provided in Note 10 pro forma
disclosures of the effect on net loss and loss per share as if the fair value-
based method prescribed by SFAS 123 had been applied in measuring compensation
expense.
Use of 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 net revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentration of credit risk principally consists of trade
accounts receivable. The Company's six largest customer receivables account for
approximately 6% and 52% of gross accounts receivable as of December 31, 1996
and 1995, respectively. The Company performs ongoing credit evaluations of its
customers but generally does not require collateral to support customer
receivables.
Income Taxes--The Company recognizes income tax expense for book purposes
following the asset and liability approach for computing deferred income taxes.
Under this method, the deferred tax asset and liability are determined based on
the difference between financial reporting and tax basis of assets and
liabilities based on enacted tax rates. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Net Loss Per Share--Net loss per common and common share equivalent has been
computed based upon the weighted average number of common and common share
equivalents outstanding during each period. Common share equivalents consist of
stock options and warrants calculated using the treasury stock method. Primary
and fully diluted loss per share are approximately the same. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock and options to purchase common stock issued within one year prior to the
original filing of the initial public offering Registration Statement at prices
below the initial public offering price will be included as outstanding for all
periods presented, using the treasury stock method at the initial public
offering price per share even though the effect is to reduce the net loss per
share.
F-8
3. ACQUISITION OF AXICORP
On March 1, 1996, the Company completed the acquisition of the outstanding
capital stock of Axicorp Pty., Ltd. ("Axicorp"), the fourth largest
telecommunications carrier in Australia. The purchase price consisted of cash,
Company stock, and seller financing. The Company paid $5.7 million cash,
including transaction costs, and issued 455,000 shares of its Series A
Convertible Preferred Stock which were subsequently converted to 1,538,355
common shares. The Company also issued two notes to the sellers. One note is for
$4.1 million due in February 1997, and the other note is for a total of $4.0
million due in two equal installments in February 1997, and February 1998. These
notes have been recorded at their discounted value at the date of acquisition at
an interest rate of 10.18%. As security for payment of the seller financing, the
sellers have collateral security interests in the outstanding Axicorp shares.
For accounting purposes, the Company has treated the acquisition as a
purchase. Accordingly, the results of Axicorp's operations are included in the
consolidated results of operations of the Company beginning March 1, 1996.
Pro forma operating results for the years ended December 31, 1996 and 1995, as
if Axicorp had been acquired as of January 1, 1995, are as follows (in
thousands, except per share amounts):
Year Ended Year Ended
December 31, December 31,
1996 1995
------------- -------------
Net revenue $199,340 $125,628
Net loss $ (8,832) $ (4,685)
Loss per share $ (0.63) $ (0.43)
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the acquisition been consummated as of the above dates, nor are
they necessarily indicative of future operations.
The following summarizes the allocation of the purchase price to the major
categories of assets acquired and liabilities assumed (in thousands):
Current assets $ 20,136
Customer lists 4,574
Goodwill 17,932
Other assets 1,506
--------
44,148
Liabilities assumed (24,863)
Notes payable (8,110)
--------
Cash paid and preferred shares issued $ 11,175
========
F-9
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
December 31,
------------
1996 1995
---- ----
Network equipment $ 4,109 $ 849
Furniture and equipment 1,272 161
Leasehold improvements 508 89
Construction in progress 12,008 -
-------- ------
17,897 1,099
Less: Accumulated depreciation and amortization ( 1,301) (150)
-------- ------
$ 16,596 $ 949
======== ======
Equipment under capital leases totaled $966,000 and $578,000 with accumulated
depreciation of $207,000 and $76,000 at December 31, 1996 and 1995,
respectively.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
December 31,
------------
1996 1995
---- ----
Obligations under capital leases $ 788 $ 528
Note payable - equipment financing 2,826 --
Note payable - stockholder 2,000 --
Notes payable relating to Axicorp acquisition 8,455 --
Settlement obligation 3,179
-------- -----
Subtotal 17,248 528
Less: Current portion of long-term (10,572) (102)
obligations -------- -----
$ 6,676 $ 426
======== =====
At December 31, 1996, the following describes the components of long-term
obligations :
Notes payable-equipment financing represents vendor financing of network
switching equipment for use in the Company's Australian network. Beginning in
January 1997, sixteen monthly payments of approximately $100,000 are due to the
vendor. In addition, a payment of approximately $1.3 million is due in May 1998.
Interest will accrue at the Corporate Overdraft Reference Rate plus 1%. At
December 31, 1996, the Corporate Overdraft Reference Rate was 10.75%. The debt
is secured by all of the assets of the Company's Australian subsidiary.
In connection with an investment agreement, in February 1996 the Company
issued a $2.0 million note payable to Teleglobe, due February 9, 1998 which
bears interest at 6.9% per annum payable quarterly. The debt is secured by all
the assets of the Company.
In connection with the acquisition of Axicorp on March 1, 1996, the
Company issued two notes to the sellers for a total of $8.5 million which have
been recorded on a discounted basis at a rate of 10.18%.
In addition, in conjunction with the Axicorp acquisition, the Company
accrued approximately $3.5 million to settle a pre-acquisition contingency
between Axicorp and one of its competitors. Payments of $400,000 and $1,583,000
were made in December 1996 and January 1997, respectively. The remaining
balance is due in 12 equal monthly payments beginning in February 1997.
F-10
6. INCOME TAXES
The tax expense recorded of $196,000 for the year ended December 31, 1996
results from foreign taxes on earnings at the Company's Australian and United
Kingdom subsidiaries.
The differences between the tax provision (benefit) calculated at the
statutory federal income tax rate and the actual tax provision (benefit) for
each period is shown in the table below (in thousands):
Period Ended
December 31,
-----------------------------
1996 1995 1994
-------- -------- --------
Tax benefit at federal statutory rate (2,913) $ (825) (196)
State income tax, net of federal benefit (491) (91) (23)
Foreign taxes 196 -- --
Unrecognized benefit of net operating losses 3,387 911 219
Other 17 5 --
------- ------- -------
Income taxes $ 196 $ -- $ --
======= ======= =======
The significant components of the Company's deferred tax asset and liability
are as follows (in thousands) :
December 31,
------------------
1996 1995
------- -------
Deferred tax asset (non-current):
Cash to accrual basis adjustments (U.S.) $ 168 $ 367
Accrued expenses 1,456 --
Net operating loss carryforward 6,055 720
Valuation allowance (2,728) (1,087)
------- -------
$ 4,951 $ --
======= =======
Deferred tax liability (current):
Accrued income $ 4,934 $ --
Other 139 --
Depreciation 346 --
------- -------
$ 5,419 $ --
======= =======
At December 31, 1996 and 1995, the Company had a U.S. Federal net operating
loss carryforward of approximately $6.4 million and $2.0 million, respectively,
that may be applied against future U.S. taxable income until it expires between
the years 2009 and 2011. The Company also has an Australian Federal net
operating loss carryforward of approximately $12.2 million at December 31, 1996.
Due to a deemed "ownership change" of the Company as a result of the
Company's initial public offering and private placements, pursuant to Section
382 of the Internal Revenue Code, the utilization of the net operating loss
carryforwards of approximately $4.0 million that expire in the year 2009 will be
limited to approximately $1.3 million per year during the carryforward period.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets for cash and cash
equivalents, investments, accounts receivable, accounts payable and long term
obligations approximates fair value.
F-11
8. COMMITMENTS AND CONTINGENCIES
The Company has entered into an employment contract with its Chairman and
Chief Executive Officer through May 30, 1999. Total minimum payments over the
remaining period approximate $604,000 as of December 31, 1996.
Future minimum lease payments under capital lease obligations and operating
leases as of December 31, 1996, are as follows (in thousands) :
Year Ending December 31, Capital Operating
- ----------------------------
Leases Leases
-------- --------
1997 $ 303 $1,685
1998 297 1,570
1999 291 1,479
2000 53 485
2001 - 326
Thereafter - 986
----- ------
Total minimum lease payments 944 $6,531
======
Less: Amount representing interest (156)
-----
$ 788
=====
Rent expense under operating leases was $1,050,000, $215,000 and $38,000 for
the periods ended December 31, 1996, 1995 and 1994, respectively.
9. STOCKHOLDERS' EQUITY
On November 7, 1996, the Company completed an initial public offering of
5,000,000 shares of its Common Stock and on November 21, 1996 sold an additional
750,000 shares to satisfy the Underwriter's overallotment. The net proceeds to
the Company (after deducting Underwriter discounts and offering expenses) was
$54.4 million.
In connection with the Company's initial public offering, the Board approved a
split of all shares of Common Stock at a ratio of 3.381 to one as of November 7,
1996 and amended the Company's Amended and Restated Certificate of Incorporation
(the "Certificate") to increase the authorized Common Stock to 40,000,000
shares.
In February 1996, the Company's Certificate was amended to authorize 2,455,000
shares of Preferred Stock (nonvoting) with a par value of $0.01 per share. On
March 1, 1996, 455,000 shares of Series A Convertible Preferred Stock were
issued in connection with the purchase of Axicorp. The outstanding Preferred
Stock was converted to Common Stock prior to the date of the Company's initial
public offering.
In January 1996, the Company raised approximately $4.7 million net of
transaction costs, in a private placement. This placement included the sale of
1,771,194 shares of common stock to numerous investors. The Company also issued
278,899 shares of common stock for services rendered in conjunction with this
offering.
Also, in January 1996, the Company entered into an agreement with Teleglobe
USA, Inc., sold 410,808 shares of Common Stock for approximately $1.4 million
and borrowed $2.0 million (see Note 5).
In December 1995, $359,000 was committed to the Company in exchange for
121,209 shares of the Company's common stock in conjunction with a private
placement. The shares were sold in December 1995 and the physical certificates
were issued in January 1996. This amount, net of transaction costs, is recorded
in Prepaid Expenses and Other Current Assets at December 31, 1995.
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Effective March 13, 1995, the Company's Certificate was amended to increase
the number of authorized shares of the Company's common stock from 1,000,000
shares to 5,000,000 shares and to split each share of common stock outstanding
on March 13, 1995, into 2.1126709 shares of common stock.
All share amounts have been restated to give effect to the November 7, 1996 and
the March 13, 1995 stock splits.
10. STOCK-BASED COMPENSATION
During 1995, the Company established an Employee Stock Option Plan (the
"Employee Plan"). The total number of shares of common stock authorized to be
issued under the Employee Plan is 1,690,500. Under the Employee Plan, awards may
be granted to key employees of the Company and its subsidiaries in the form of
Incentive Stock Options or Nonqualified Stock Options. The Employee Plan allows
the granting of options at an exercise price of no less than 100% (110% in the
case of Incentive Stock Options granted to employees holding more than ten
percent of the voting stock of the Company at the date of grant) of the stock's
fair value at the date of grant. The options vest over a period of up to three
years, and no option will be exercisable more than ten years from the date it is
granted.
During 1995, the Board of Directors authorized the Director Stock Option Plan
(the "Director Plan") for nonemployee directors. Under the Director Plan, an
option is automatically granted to each nonemployee director to purchase 50,715
shares of common stock, which vests over a two-year period. The option price per
share is the fair market value of a share of common stock on the date the option
is granted. No option will be exercisable more than ten years from the date of
grant. An aggregate of 338,100 shares of common stock were reserved for issuance
under the Director Plan.
A summary of stock option activity during the years ended December 31, 1996
and 1995 is as follows:
-------------------------------------------
1996 1995
--------------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------------------- -----------------
Options outstanding -
beginning of year 722,013 $2.64 - $ -
Exercised during the year - - - -
Forfeitures during the year (51,898) 3.55 - -
Granted during the year 913,546 3.35 722,013 2.64
--------------------- -----------------
Outstanding - end of year 1,583,661 $3.14 722,013 $2.64
===================== =================
Eligible for exercise-
end of year 511,149 $2.81 219,765 $2.96
===================== =================
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The following table summarizes information about stock options outstanding at
December 31, 1996 :
------------------------------------ -------------------------
Options Outstanding Options Exercisable
------------------------------------ -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Total Life Exercise Total Exercise
Outstanding in years Price Exercisable Price
------------------------------------ -------------------------
Exercise Prices
- ---------------
$0.67 101,430 3.0 $0.67 33,810 $0.67
$2.96 924,873 4.0 $2.96 477,339 $2.96
$3.55 557,358 4.3 $3.55 -- $3.55
----------- -----------
Total 1,583,661 511,149
=========== ===========
If compensation cost for the Company's 1996 and 1995 grants for stock-based
compensation had been determined consistent with the fair value-based method of
accounting per SFAS 123, the Company's pro forma net loss, and pro forma net
loss per share for the years ending December 31, would be as follows:
1996 1995
---- ----
Net loss (amounts in thousands)
As reported ($8,764) ($2,425)
Pro forma ($9,242) ($2,702)
Net loss per share
As reported ($0.63) ($0.22)
Pro forma ($0.67) ($0.25)
The weighted average fair value at date of grant for options granted during 1996
and 1995 was $1.38 and $1.04 per option, respectively. The fair value of the
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions:
1996 1995
---- ----
Expected dividend yield 0% 0%
Expected stock price volatility 49% 49%
Risk-free interest rate 6.0% 5.8%
Expected option term 4 years 4 years
11. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) employee benefit plan (the "401(k) Plan") that
covers substantially all U.S. based employees. The 401(k) Plan provides that
employees may contribute amounts not to exceed statutory limitations. No
employer contributions were made during 1996 or 1995.
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12. RELATED PARTIES
In connection with the Company's private placements, a former director of the
Company received 71,430 shares of common stock during 1994 for services
rendered. During 1995, the former director received commissions of 110,944
shares of common stock and was paid $542,000 in connection with the Company's
first private placement. Commissions due to the former director under the first
private placement was $41,000 at December 31, 1995. Consulting fees earned under
this placement equal $169,000. During early 1996, the same former director
received 82,774 shares of common stock and fees equal to $425,000 which relate
to a second private placement. Consulting fees earned in connection with this
second placement equal $157,000. Total consulting fees due the former director
are $220,000 and $145,000 at December 31, 1996 and 1995, respectively. The
stock and cash commissions and consulting fees relate to services provided in
conjunction with the private placements and, as such, have been netted against
the proceeds of the respective placements.
Debt owed to the Company's Chairman and Chief Executive Officer of $331,000 at
December 31, 1994 was converted into 555,559 shares of the Company's common
stock at $0.63 per share in March 1995, for a balance due at the time of
conversion of $350,000.
At December 31, 1995, deferred salary owed to the Company's Chairman and Chief
Executive Officer was $201,000. This was subsequently paid in 1996.
Deferred salary of $40,000 owed to an officer of the Company for services
performed during 1995 was accrued at December 31, 1995. This balance was paid in
early 1996.
13. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance accounts for the year ended December 31,
1996 and 1995 were as follows (in thousands) :
Doubtful Accounts
- ----------------------------------------------------------------------------------------
Balance at Charged to Balance at
Period Beginning of Period Costs and Expenses Deductions Other(1) End of Period
------ ------------------- ------------------ ----------- -------- -------------
1995 $ - $ 132 $ - $ - $ 132
1996 $ 132 $ 1,960 $(377) $870 $ 2,585
Deferred Tax Asset Valuation
- ----------------------------------------------------------------------------------------
Balance at Charged to Balance at
Period Beginning of Period Costs and Expenses Deductions Other End of Period
------ ------------------- ------------------ ----------- --------- -------------
1995 $ - $ 1,087 $ - $ - $ 1,087
1996 $ 1,087 $ 1,641 $ - $ - $ 2,728
(1) Other additions represent the balance of Axicorp's allowance for doubtful
accounts, which was recorded March 1, 1996 in conjunction with the acquisition.
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14. GEOGRAPHIC DATA
The company has subsidiaries in various foreign countries that provide domestic
and international long-distance operations in these regions. Summary
information with respect to the Company's geographic operations in 1996, 1995
and 1994 follows:
Period Ended December 31,
-------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------
Net Revenue
North America $ 16,573 $ 1,167 $ ---
Europe 5,146 --- ---
Pacific Rim 151,253 --- ---
-------------------------------
Total $172,972 $ 1,167 $ ---
===============================
Operating Income (Loss)
North America ($6,364) ($2,276) ($569)
Europe (2,312) ($125) ---
Pacific Rim 525 --- ---
-------------------------------
Total ($8,151) ($2,401) ($569)
===============================
Assets
North America $ 72,526 $ 4,996 $ 487
Europe 5,211 46 ---
Pacific Rim 62,823 --- ---
-------------------------------
Total $140,560 $ 5,042 $ 487
===============================
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