================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): October 20, 1997 PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED ----------------------------------------------- (Exact name of issuer as specified in charter) Delaware 0-29-092 54-1708481 (State or Other Jurisdiction (Commission (I.R.S. Employer of Incorporation) File Number) Identification No.) 2070 Chain Bridge Road Suite 425 Vienna, Virginia 22182 (Address of principal executive offices) (703) 902-2800 (Registrant's telephone number, including area code) ITEM 7. FINANCIAL STATEMENTS; PRO FORMA FINANCIAL INFORMATION AND EXHIBITS ---------------------------------- (a)(1) Financial Statements of Businesses Acquired. (a) Consolidated balance sheets of USFI, Inc. and Subsidiary as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' deficit and cash flows for the years ended December 31, 1996, and 1995. (b) Balance sheet of USFI, Inc. as of December 31, 1994 and the related consolidated statements of operations, stockholders' deficit and cash flows for the year ended December 31, 1994. (c) Unaudited consolidated balance sheet of USFI, Inc. and Subsidiary as of September 30, 1997 and the related consolidated statements of operations and cash flows for the nine months ended September 30, 1997 and 1996. (d) Unaudited balance sheet of Telepassport L.L.C. as of September 30, 1997 and the related statements of operations and cash flows for the nine months ended September 30, 1997. (b) Pro Forma Financial Information. (1) Unaudited pro forma consolidated statement of operations for the nine months ended September 30, 1997. (2) Unaudited pro forma consolidated statement of operations for the year ended December 31, 1996. (3) Unaudited pro forma balance sheet as of September 30, 1997. (c) Exhibits 2.1 Asset Purchase Agreement by and among USFI, Inc., Primus Telecommunications, Inc., Primus Telecommunications Group, Incorporated and U.S. Cable Corporation, dated as of October 20, 1997. (Previously filed) 2.2 Equity Purchase Agreement by and among Messrs. James D. Pearson, Stephen E. Myers, Michael C. Anderson, Primus Telecommunications International, Inc., and Primus Telecommunications Group, Incorporated dated as of October 20, 1997. (Previously filed) -3- SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED Date: January 5, 1998 By: /s/ Neil L. Hazard ----------------------------- Executive Vice President and Chief Financial Office -4- USFI, INC. AND SUBSIDIARY UNAUDITED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (IN THOUSANDS)
ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,024 Restricted cash and cash equivalents - Short term investments - Accounts receivable 7,141 Prepaid expenses and other current assets 690 ------- Total current assets 8,855 PROPERTY AND EQUIPMENT - Net 3,940 INTANGIBLES - Net 82 DEFERRED INCOME TAXES - OTHER ASSETS 188 ------- TOTAL ASSETS $13,065 ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $11,862 Accrued expenses and other current liabilities 5,770 Deferred income taxes Accrued Interest Current portion of long-term obligations ------- Total current liabilities 17,632 LONG-TERM OBLIGATIONS - ------- Total liabilities 17,632 ------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): (4,567) ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,065 ======= USFI, INC. AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 -------- -------- NET REVENUE $25,231 $27,764 COST OF REVENUE 19,508 22,475 ------- ------- GROSS MARGIN 5,723 5,289 OPERATING EXPENSES: Selling, general and administrative 10,434 8,677 Depreciation and amortization 629 502 ------ ------ Total operating Expenses 11,063 9,179 ------ ------ LOSS FROM OPERATIONS (5,340) (3,890) INTEREST EXPENSE - - INTEREST INCOME - - OTHER INCOME (EXPENSE) 23 (12) ------ ------ LOSS BEFORE INCOME TAXES (5,317) (3,902) INCOME TAXES - - ------ ------ NET LOSS $(5,317) $(3,902) ====== ====== USFI, INC. AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 --------- --------- OPERATING ACTIVITIES Net loss $ (5,317) $ (3,902) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 626 502 Provisions for losses on receivables 96 320 Changes in Operating assets and liabilities: Increase in accounts receivable from customers and affiliates (914) (2,601) Increase in other current assets (578) (276) Increase in deposits (27) (15) Increase in accounts payable and accrued expenses 589 3,872 (Decrease) increase in reseller deposits and deferred revenue (173) 62 (Decrease) increase in due to affiliates (1,412) 723 --------- --------- Net cash used in operating activities (7,110) (1,315) INVESTING ACTIVITIES Purchase of equipment (1,863) (2,052) Decrease in deferred costs 5 81 --------- --------- Net cash used in investing activities (1,858) (1,971) FINANCING ACTIVITIES Capital contributions 4,918 3,025 Advances from affiliates 4,193 - Repayment of capital lease obligation - (3) --------- --------- Net cash provided by financing activities 9,111 3,022 Effect of exchange rate changes on cash (3) 3 --------- --------- Increase (decrease) in cash 140 (261) Cash at beginning of period 884 420 --------- --------- Cash at end of period $ 1,024 $ 159 ========= ========= TELEPASSPORT L.L.C. UNAUDITED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (in thousands)
ASSETS CURRENT ASSETS: Cash and cash equivalents $ 163 Restricted cash and cash equivalents - Short term investments - Accounts receivable 627 Prepaid expenses and other current assets 255 ------ Total current assets 1,044 PROPERTY AND EQUIPMENT - Net 663 INTANGIBLES - Net 157 DEFERRED INCOME TAXES - OTHER ASSETS 214 ------ TOTAL ASSETS $2,078 ====== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 375 Accrued expenses and other current liabilities 332 Deferred income taxes Accrued Interest Current portion of long-term obligations ------ Total current liabilities 707 LONG-TERM OBLIGATIONS 841 ------ Total liabilities 1,548 ------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): 530 ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,078 ====== TELEPASSPORT L.L.C. UNAUDITED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
NET REVENUE $2,900 COST OF REVENUE 2,523 ----- GROSS MARGIN 377 OPERATING EXPENSES: Selling, general, and administrative 1,296 Depreciation and amortization 69 ----- Total operating Expenses 1,365 ----- LOSS FROM OPERATIONS (988) INTEREST EXPENSE (17) INTEREST INCOME - OTHER INCOME (EXPENSE) 151 ----- LOSS BEFORE INCOME TAXES (854) INCOME TAXES - ----- NET LOSS $ (854) ===== TELEPASSPORT L.L.C UNAUDITED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
OPERATING ACTIVITIES Net loss $ (854) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 69 Changes in Operating assets and liabilities (545) ------- Net cash used in operating activities (1,330) INVESTING ACTIVITIES Purchase of equipment (732) ------- Net cash used in investing activities (732) FINANCING ACTIVITIES Capital contributions 1,384 Advances from affiliates 841 ------- Net cash provided by financing activities 2,225 Effect of exchange rate changes on cash - ------- Increase (decrease) in cash 163 Cash at beginning of period - ------- Cash at end of period $ 163 ======= PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - -------------------------------------------------------------------------------- The adjustments to the pro forma consolidated statement of operations for the nine months ended September 30, 1997 are as follows: (1) To record amortization expense associated with acquired customer list and the excess of purchase price over the fair value of net assets acquired. (2) The pro forma adjustment to the income tax provision is zero as a valuation reserve was applied in full to the tax benefit associated with the pro forma net loss before income taxes.
Primus Pro Forma Telecommunications USFI, Telepassport --------------------------- Group, Incorporated Inc. L.L.C. Adjustments Combined ------------------- -------- ------------ ----------- -------- NET REVENUE $202,099 $25,231 $2,900 $230,230 COST OF REVENUE 184,478 19,508 2,523 206,509 -------- ------- ------ ------ -------- GROSS MARGIN 17,621 5,723 377 - 23,721 OPERATING EXPENSES: Selling, general, and administrative 35,784 10,434 1,296 47,514 Depreciation and amortization 4,343 629 69 319 (1) 5,360 -------- ------- ------ ------ -------- Total Operating Expenses 40,127 11,063 1,365 319 52,874 -------- ------- ------ ------ -------- LOSS FROM OPERATIONS (22,506) (5,340) (988) (319) (29,153) INTEREST EXPENSE (5,570) - (17) (5,587) INTEREST INCOME 3,377 - - 3,377 OTHER INCOME (EXPENSE) 407 23 151 581 -------- ------- ------ ------ -------- LOSS BEFORE INCOME TAXES (24,292) (5,317) (854) (319) (30,782) INCOME TAXES 81 - - (2) 81 -------- ------- ------ ------ -------- NET LOSS $(24,373) $(5,317) $(854) $(319) $(30,863) ======== ======= ====== ===== ======== NET LOSS PER COMMON AND COMMON SHARE EQUIVALENTS $ (1.37) $ (1.74) ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARE EQUIVALENTS OUTSTANDING 17,780 17,780 ======== ======== PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - -------------------------------------------------------------------------------- The adjustments to the pro forma consolidated statement of operations for the year ended December 31, 1996 are as follows: (1) Represents the historical results of operations of Axicorp Pty., Ltd. For the months of January and February 1996 prior to the Company's acquisition on March 1, 1996. (2) To record amortization expense associated with acquired customer list and the excess of purchase price over the fair value of net assets acquired. (3) To record incremented interest expense related to the issuance of notes payable for the acquisition of Axicorp Pty., Ltd. (4) The pro forma adjustment to the income tax provision is zero as a valuation reserve was applied in full to the tax benefit associated with the pro forma net loss before income taxes.
Primus Pro Forma Telecommunications Axicorp USFI ------------------------------ Group, Incorporated Pty., Ltd. (1) Inc. Adjustments Combined --------------------- ---------------- -------- --------------- ---------- NET REVENUE $ 172,972 $ 26,388 $ 38,550 $ 235,890 COST OF REVENUE 158,845 23,756 30,205 212,806 --------- -------- -------- --------- ---------- GROSS MARGIN 14,127 2,612 6,345 - 23,084 OPERATING EXPENSES: Selling, general, and administrative 20,114 2,054 12,524 34,722 Depreciation and amortization 2,164 48 679 677 (2) 3,568 --------- -------- -------- --------- ---------- Total operating Expenses 22,278 2,132 13,203 677 38,290 --------- -------- -------- --------- ---------- LOSS FROM OPERATIONS (8,151) 480 (8,858) (677) (15,206) INTEREST EXPENSE (857) - (138) (3) (996) INTEREST INCOME 785 124 909 OTHER INCOME (EXPENSE) (345) - 17 (4) (328) --------- -------- -------- --------- ---------- LOSS BEFORE INCOME TAXES (8,568) 604 (8,841) (815) (15,620) INCOME TAXES 196 281 - 477 --------- -------- -------- --------- ---------- NET LOSS $ (8,754) $ 323 $ (8,841) $ (815) $ (16,097) ========= ======== ======== ========= ========== NET LOSS PER COMMON AND COMMON SHARE EQUIVALENTS $ (0.63) $ (1.15) ========= ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARE EQUIVALENTS EQUIVALENTS OUTSTANDING 13,869 13,963 ========= ========== PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (IN THOUSANDS) - ------------------------------------------------------------------------------- The adjustments to the pro forma consolidated balance sheet as of September 30, 1997 are as follows: (1) Reflects the payment of purchase price of $11.5 million and the elimination of USFI, Inc. cash balances which were not purchased. (2) Reflects the elimination of USFI, Inc.'s accounts receivable which were not purchased. (3) To adjust the property and equipment - net to the fair market value. (4) To record $8.25 million of value of customer list and excess of purchase price over far value of net assets acquired and to eliminate $0.239 million of previously reflected intangible deemed worthless. (5) Reflects the elimination of USFI, Inc.'s accounts payable which were not purchased. (6) Reflects the elimination of selected USFI, Inc.'s accrued expenses which were not purchased. (7) To eliminate Telepassport L.L.C. debt which was not purchased. (8) To eliminate the equity of the purchased entities.
Primus Telecommunications USFI, Telepassport Pro Forma ---------------------------- Group, Incorporated Inc. L.L.C. Adjustments Combined ------------------- ---------- ------------ ----------- -------- ASSETS CURRENTS ASSETS Cash and cash equivalents $150,187 $ 1,024 $ 163 $(12,524) (1) $138,850 Restricted cash and cash equivalents 72,521 - - 72,521 Short term investments - - - - Accounts receivable 58,974 7,141 627 (7,141) (2) 59,601 Prepaid expenses and other current assets 2,299 690 255 3,244 -------- ------- ------ -------- -------- Total current Assets 283,981 8,855 1,044 (19,665) 274,215 PROPERTY AND EQUIPMENT - Net 48,375 3,940 663 (815) (3) 52,163 INTANGIBLES - Net 24,259 82 157 8,011 (4) 32,509 DEFERRED INCOME TAXES 4,521 - - 4,521 OTHER ASSETS 10,874 188 214 11,276 -------- ------- ------ -------- -------- TOTAL ASSETS $372,010 $13,065 $2,078 $(12,469) $374,684 ======== ======= ====== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 75,035 $11,862 $ 375 $(11,862) (5) $75,410 Accrued expenses and other current liabilities 8,447 5,770 332 (3,803) (6) 10,746 Deferred income taxes 4,406 4,406 Accrued Interest 4,949 4,949 Current portion of long-term obligations 1,114 1,114 -------- ------- ------ -------- -------- Total liabilities 93,951 17,632 707 (15,665) 96,625 LONG-TERM OBLIGATIONS 224,063 - 841 (841) (7) 224,063 -------- ------- ------ -------- -------- Total liabilities 318,014 17,632 1,548 (16,506) 320,688 -------- ------- ------ -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) 53,996 (4,567) 530 4,037 (8) 53,996 -------- ------- ------ -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $372,010 $13,065 $2,078 $(12,469) $374,684 ======== ======= ====== ======== ======== [LETTERHEAD OF ERNST & YOUNG LLP] Report of Independent Auditors Board of Directors and Stockholders USFI, Inc. We have audited the accompanying consolidated balance sheets of USFI, Inc. and subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of USFI, Inc. and subsidiary at December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that USFI, Inc. will continue as a going concern. As more fully described in Note 2, the Company has incurred recurring operating losses and has a working capital deficiency and a deficit in stockholders' equity. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP September 30, 1997 1 USFI, Inc. and Subsidiary Consolidated Balance Sheets (In thousands, except share information) See accompanying notes. 2
DECEMBER 31 1996 1995 ----------------- ASSETS Current assets: Cash $ 884 $ 420 Accounts receivable: Customers, less allowance of $790 in 1996 and $683 in 1995 4,620 3,852 Affiliates 1,703 304 Prepaid expenses and other current assets 112 75 ------------------ Total current assets 7,319 4,651 Property and equipment, net (Note 4) 2,702 1,974 Deferred costs, net of accumulated amortization of $22 in 1996 and $4 in 1995 88 77 Goodwill, net of accumulated amortization of $5 in 1995 122 Deposits 161 123 ------------------ Total assets $10,270 $ 6,947 ================== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $10,885 $ 4,624 Accrued liabilities and other current liabilities 1,828 1,844 Reseller deposits and deferred revenue 310 263 Capital lease obligations 3 Due to affiliates (Note 7) 1,412 1,523 ------------------ Total current liabilities 14,435 8,257 Commitments and contingencies (Note 5) Stockholders' deficit: Common stock, no par value, authorized 5,000 shares in 1996 and 2,500 shares in 1995; issued and outstanding 536 shares in 1996 and 100 shares in 1995 Additional paid-in capital 9,126 5,126 Accumulated deficit (13,275) (6,434) Foreign currency translation adjustment (16) (2) ------------------ Total stockholders' deficit (4,165) (1,310) ------------------ Total liabilities and stockholders' deficit $10,270 $ 6,947 ================== USFI, Inc. and Subsidiary Consolidated Statements of Operations (In thousands) See accompanying notes. 3
YEAR ENDED DECEMBER 31 1996 1995 ------------------ Telecommunications revenue $36,550 $27,643 Costs and expenses: Costs of telecommunications services (Note 6) 30,205 19,901 Selling, general and administrative 12,524 7,917 Depreciation and amortization (Note 3) 679 379 ------------------ Total costs and expenses 43,408 28,197 ------------------ Loss from operations (6,858) (554) Other income 17 19 ------------------ Loss before minority interest (6,841) (535) Minority interest 19 ------------------ Net loss $(6,841) $ (516) ================== USFI, Inc. and Subsidiary Consolidated Statements of Stockholders' Deficit (In thousands) Years ended December 31, 1996 and 1995 See accompanying notes.
FOREIGN ADDITIONAL CURRENCY PAID-IN ACCUMULATED TRANSLATION CAPITAL DEFICIT ADJUSTMENT TOTAL -------------------------------------------- Balance at January 1, 1995 $4,325 $(5,918) $(1,593) Capital contributions 801 801 Net loss for 1995 (516) (516) Foreign currency translation $ (2) (2) -------------------------------------------- Balance at December 31, 1995 5,126 (6,434) (2) (1,310) Capital contributions 4,000 4,000 Net loss for 1996 (6,841) (6,841) Foreign currency translation (14) (14) -------------------------------------------- Balance at December 31, 1996 $9,126 $(13,275) $(16) $(4,165) ============================================ USFI, Inc. and Subsidiary Consolidated Statements of Cash Flows (In thousands) 5 See accompanying notes.
YEAR ENDED DECEMBER 31 1996 1995 --------------------- OPERATING ACTIVITIES Net loss $(6,841) $ (516) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 679 379 Write-off of goodwill 113 Provisions for losses on receivables 352 184 Minority interest (19) Changes in operating assets and liabilities: Increase in accounts receivable from customers and affiliates (2,519) (2,788) (Increase) decrease in other current assets (37) 28 Increase in deposits (38) (76) Increase in accounts payable and accrued expenses 6,245 2,471 Increase (decrease) in reseller deposits and deferred revenue 47 (6) Increase in due to affiliates 1,147 201 ---------------------- Net cash used in operating activities (852) (142) INVESTING ACTIVITIES Purchase of interest in Mastercall (net of cash acquired) (70) Purchase of equipment (1,380) (1,654) Increase in deferred costs (29) (67) ---------------------- Net cash used in investing activities (1,409) (1,791) FINANCING ACTIVITIES Capital contributions 2,742 801 Advances from affiliates 1,258 Repayment of capital lease obligation (3) (22) ---------------------- Net cash provided by financing activities 2,739 2,037 Effect of exchange rate changes on cash (14) (2) ---------------------- Increase in cash 464 102 Cash at beginning of year 420 318 ---------------------- Cash at end of year $ 884 $ 420 ====================== USFI, Inc. and Subsidiary Notes to Consolidated Financial Statements December 31, 1996 1. ORGANIZATION AND NATURE OF BUSINESS USFI. Inc. (the "Company") which was incorporated in New York on February 12, 1993, provides least cost routing for international long distance telecommunication services, which primarily originate and terminate outside of the United States. Substantially, all billings for service are denominated in U.S. currency. Customers are principally located in Western Europe, Japan and South Africa. No individual customer represents a significant percentage of revenues, however, the Company utilizes outside agents to sell its services in certain geographic areas, with agents in Germany and South Africa representing customers with revenues aggregating 18% and 15%, and 13% and 10%, respectively, of total 1996 and 1995 revenues. The Company performs a credit evaluation of all new customers and requires certain customers to provide collateral in the form of a cash deposit or letter of credit. At December 31, 1996 and 1995, the Company had letters of credit issued on its behalf from customers in the amount of approximately $327,000 and $525,000, respectively. On May 15, 1995 the Company acquired a 51% interest in Mastercall, Ltd. ("Mastercall"), a joint venture that resells the Company's international telecommunications services in the United Kingdom, for a purchase price of approximately $148,000. The acquisition was accounted for using the purchase method of accounting and the results of operations have been included in the financial statements of the Company from the date of acquisition. 2. BASIS OF PRESENTATION The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception and has a working capital deficiency and a deficit in stockholders' equity as of December 31, 1996. All of these matters raise substantial doubt about the Company's ability to continue as a going concern. The Company plans on selling its assets and ceasing its operations (see Note 10) and, on September 11, 1997, the Company entered into a letter of intent to sell all of its assets, except for cash and accounts and notes receivable. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts or classifications of liabilities that may result from the outcome of this uncertainty. 6 USFI, Inc. and Subsidiary Notes To Consolidated Financial Statements (continued) 2. BASIS OF PRESENTATION (CONTINUED) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. SIGNIFICANT ACCOUNTING POLICIES DEPRECIATION Furniture and equipment are recorded at cost and are depreciated over the estimated useful lives of three to five years, utilizing the straight-line method. Assets acquired pursuant to capital lease arrangements and leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the terms of the leases. Depreciation expense for the years ended December 31, 1996 and 1995 was $652,000 and $371,000, respectively. DEFERRED COSTS AND GOODWILL Deferred costs include costs to obtain trademarks and certain organizational costs. Goodwill includes approximately $127,000 relating to the 1995 acquisition of Mastercall (see Note 1). Such deferred costs are amortized on the straight- line basis generally as follows: The carrying amount of goodwill is reviewed if facts and circumstances suggest that it may be impaired. Due to recurring losses of Mastercall, the Company evaluated the ongoing value of goodwill, as determined based on the estimated undiscounted cash flows of the entity over the remaining amortization period and determined that goodwill with a carrying value of $113,000 is impaired. As a result, the Company has recorded a charge in 1996 to write-off the full amount of goodwill associated with Mastercall, which is included in selling, general and administrative expenses. 7
PERIOD OF ASSET AMORTIZATION ------------------ ------------- Trademarks 5 years Organization costs 5 years Goodwill 15 years USFI, Inc. and Subsidiary Notes to Consolidated Financial Statements (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION The Company recognizes revenue from services and the related costs at the time the services are rendered. INCOME TAX Income taxes are accounted for under the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and Mastercall. All significant intercompany accounts and transactions have been eliminated. BASIS OF PRESENTATION Certain amounts in the 1995 financial statements have been reclassified to conform with the 1996 presentation. 4. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following at December 31, 1996 and 1995: 8
1996 1995 ------------------ (in thousands) Furniture and equipment $1,131 $ 892 Switching equipment 2,888 1,717 Leasehold improvements 60 89 ------------------ 4,079 2,698 Less accumulated depreciation and amortization 1,377 724 ------------------ $2,702 $1,974 ================== USFI, Inc. and Subsidiary Notes to Consolidated Financial Statements (continued) 5. COMMITMENTS AND CONTINGENCIES LEASES The Company leases office and switch site space under noncancellable operating leases. The future minimum annual rental commitments under leases having terms in excess of one year are as follows: Rent expense for the years ended December 31, 1996 and 1995 was $284,000 and $256,000, respectively. LITIGATION During 1994, the Company was involved in a contract dispute which was presented to an arbitrator and, in August 1995, an award in the amount of $333,450 representing damages and administrative fees and costs was determined to be payable by the Company. The award amount was recorded as an expense in 1994 and was paid in 1996. The Company is involved in litigation in the normal course of business. In the opinion of management, such litigation will not have a material effect on the Company's cash flows, financial condition or results of operations. INCENTIVE PLANS The Company maintains incentive plans which entitle certain key employees to participate in certain distributions, if any, by the Company of cash or property to two of the Company's principal stockholders. Participation commences when the amount of distributions paid exceeds certain stipulated amounts. No such distributions have been made or are expected. 6. MAJOR SUPPLIERS During 1996 and 1995, MCI, World Com, Inc. (formerly IDB) and Cable and Wireless International, Inc. provided the Company with a majority of its international telecommunications network services. Charges for such services are included in cost of telecommunications services in the accompanying statement of operations. 9
1997 $346,000 1998 399,000 1999 399,000 2000 213,000 2001 116,000 USFI, Inc. and Subsidiary Notes to Consolidated Financial Statements (continued) 7. RELATED PARTIES In March 1995, the Company entered into an agreement with TelePassport Japan Co., Ltd. ("TelePassport Japan"), an affiliated joint venture formed in 1995, to provide international telecommunication services and to lease switching equipment to TelePassport Japan. Telecommunication revenue for 1996 and 1995 includes $3,400,000 and $371,000, respectively, for services provided to TelePassport Japan. The equipment under lease has a net book value of $140,000 and $186,000 at December 31, 1996 and 1995, respectively, and is included in property and equipment. The joint venture was terminated in 1997 and the equipment was transferred to an affiliate. Included in due to affiliates at December 31, 1995 is a $1,258,000 note due to US Cable Corporation ("US Cable"), an affiliate of certain stockholders. During 1996, US Cable transferred the note to such stockholders who contributed the outstanding balance to capital. Included in due to affiliates at December 31, 1996 and 1995 are amounts due to TelePassport Japan for carrier charges paid by TelePassport Japan on behalf of the Company and amounts due to US Cable for expenses paid on behalf of the Company. 8. EMPLOYEE BENEFIT PLAN The Company sponsors a defined contribution plan that qualifies as a deferred salary arrangement under Section 401(a) of the Internal Revenue Code. All full-time employees meeting minimum service requirements are eligible to participate and may contribute up to 18% of their pre-tax earnings subject to certain Internal Revenue Code restrictions. The Company matches 50% of each employee's contribution up to an annual maximum of $500 per employee. Total Company contributions for 1996 and 1995 of $16,000 and $14,000, respectively, are included in selling, general and administrative expenses. 9. INCOME TAXES The Company has elected to be taxed as an "S" Corporation for federal income tax purposes. For New York City income tax purposes, the Company is taxed as a "C" corporation and at December 31, 1996 the Company has available New York City net operating loss carryforwards of $8,488,000, which principally expire in the year 2011. At December 31, 1996, the Company had deferred city income tax assets of $1,132,000, which are primarily attributable to temporary differences which are not currently USFI, Inc., and Subsidiary Notes to Consolidated Financial Statements (continued) 9. INCOME TAXES (CONTINUED) deductible for income tax purposes, including net operating loss carryforwards, accrued liabilities and certain other reserves. The Company has recorded a full valuation allowance against its deferred tax assets at December 31, 1996. 10. SUBSEQUENT EVENTS On March 10, 1997, the Company acquired the remaining 49% interest in Mastercall for a purchase price of approximately $15,000. During 1997, the Company and certain affiliates planned an initial public offering of common stock. The initial public offering was postponed in April 1997 and subsequently abandoned, and accordingly, the initial public offering was not completed. Costs incurred as of December 31, 1996 related to the initial public offering of $284,000 are included in 1996 selling, general and administrative expenses. On September 11, 1997, the Company entered into a letter of intent to sell all of its assets, except for cash and accounts and notes receivable to Primus Telecommunications Group, Incorporated. Subsequent to the sale, the Company intends to cease operations. Report of Independent Auditors Board of Directors and Stockholders USFI, Inc. We have audited the accompanying balance sheets of USFI, Inc. as of December 31, 1994 and 1993, and the related statements of operations, stockholders' deficit and cash flows for the year ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of USFI, Inc. at December 31, 1994 and 1993, and the results of its operations and its cash flows for the year ended December 31, 1994 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP January 31, 1996 USFI, Inc. Balance Sheets [CAPTION] DECEMBER 31 1994 1993 ---------------------
See accompanying notes. 2ASSETS Current Assets: Cash $ 318,384 $ 52,672 Accounts receivable, less allowance of $500,000 in 1994 and $320,000 in 1993 1,496,020 450,486 Prepaid expenses and other current assets 95,355 51,150 ---------- ---------- Total current assets 1,909,759 554,308 Property and equipment, net (Note 3) 644,122 261,086 Deferred costs, net of accumulated amortization 12,686 Deposits 47,133 7,000 ----------- ---------- Total Assets $2,613,700 $ 822,394 Accounts payable Accrued liabilities and other current liabilities 1,242,905 317,644 Reseller deposits and deferred revenue 269,278 116,793 Capital lease obligations 24,376 Due to affiliates 63,600 480,300 ---------- ---------- Total current liabilities 4,206,418 1,938,328 Commitments and contingencies (Note 4) Stockholders' deficit Common stock, no par value, authorized 2,500 shares; issued and outstanding 100 shares in 1994 and 1993 100 100 Additional paid-in capital 4,325,275 1,395,350 Accumulated deficit (5,918,093) (2,511,384) ---------- ---------- Total stockholders' deficit (1,592,718) (1,115,934) ---------- --------- Total liabilities and stockholders' deficit $2,613,700 $ 822,394 ========== ========== USFI, Inc. Statement of Operations Year ended December 31, 1994 See accompanying notes. 3
Net sales $ 12,774,803 Costs and expenses: Direct costs (Note 5) (8,906,908) Selling, general and administrative (6,960,279) ------------ Total costs and expenses (15,867,187) ------------ Loss from operations (3,092,384) Other income (expense) (Note 4) (314,325) ------------ Net loss $ (3,406,709) ============= Statement of Stockholders' Deficit Year ended December 31, 1994 See accompanying notes. 4
ADDITIONAL COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ---------------------------------------------------------------- Balance at December 31, 1993 $100 $1,395,350 $(2,511,384) $(1,115,934) Cash contributions 1,885,000 1,885,000 Contribution of USFN net assets 1,044,925 1,044,925 Net loss for 1994 (3,406,709) (3,406,709) ---------------------------------------------------------------- Balance at December 31, 1994 $100 $4,325,275 $(5,918,093) $(1,592,718) ================================================================ USFI, Inc. Statement of Cash Flows Year ended December 31, 1994 See accompanying notes. 5
OPERATING ACTIVITIES Net loss $(3,406,709) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 99,529 Provisions for losses on receivables 645,570 Changes in operating assets and liabilities: Increase in accounts receivable (1,691,104) Increase in other current assets (37,205) Increase in accounts payable and accrued expenses 2,505,648 Increase in reseller deposits and deferred revenue 152,485 Decrease in due to affiliates 396,738 ----------- Net cash used in operating activities (1,335,048) INVESTING ACTIVITIES Purchase of equipment (304,438) Increase in deferred costs (14,096) ----------- Net cash used in investing activities (318,534) FINANCING ACTIVITIES Capital contributions (including $34,294 of cash of USFN) 1,919,294 ----------- Net cash provided by financing activities 1,919,294 ----------- Increase in cash 265,712 Cash at beginning of year 52,672 ----------- Cash at end of year $ 318,384 =========== USFI, Inc. Notes to Financial Statements December 31, 1994 1. ORGANIZATION AND NATURE OF BUSINESS USFI, Inc. (the "Company") was incorporated in New York on February 12, 1993. The Company provides least cost routing for international long distance telecommunication services, which primarily originate and terminate outside of the United States. All billings for service are denominated in U.S. currency. Customers are principally located in Western Europe, the Middle East and Japan. No individual customer represents a significant percentage of sales. The Company performs a credit evaluation of all new customers and requires certain customers to provide collateral in the form of a cash deposit or letter of credit. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. SIGNIFICANT ACCOUNTING POLICIES DEPRECIATION Furniture and equipment are recorded at cost and are depreciated over the estimated useful lives of three to five years, utilizing the straight-line method. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the terms of the leases. Depreciation expense for the year ended December 31, 1994 was $98,000. REVENUE RECOGNITION The Company recognizes revenue from services and the related costs in the period in which the services are rendered. INCOME TAX The Company has elected to be taxed as an "S" Corporation and, as such, any income of the Corporation will be taxable directly to the shareholders and not to the corporate entity. 6 USFI, Inc. Notes to Financial Statements (continued) 3. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following at December 31, 1994 and 1993: 4. COMMITMENTS AND CONTINGENCIES LEASES The Company leases office and switch site space under noncancellable operating leases. The future minimum annual rental commitments under leases having terms in excess of one year are as follows:
1994 1993 ---------------------- Furniture and equipment $ 482,834 $ 60,071 Switching equipment 412,628 212,273 Leasehold improvements 65,044 Leased assets 155,763 20,334 ---------------------- 1,116,269 292,678 Less accumulated depreciation 472,147 31,592 ---------------------- $ 644,122 $261,086 ====================== Rent expense for the year ended December 31, 1994 was $253,000. LITIGATION During 1994, the Company was involved in a contract dispute which was presented to an arbitrator and, in August 1995, an award in the amount of $333,450 representing damages and administrative fees and costs was determined to be payable by the Company. The Company has appealed the decision. The award amount has been included in other income (expense). LETTERS OF CREDIT At December 31, 1994, the Company had letters of credit outstanding amounting to $400,000 on behalf of certain telecommunications carriers. 7
1995 $262,000 1996 262,000 1997 262,000 1998 283,000 1999 283,000 2000 131,000 Notes to Financial Statements (continued) 5. MAJOR SUPPLIERS During 1994, MCI and World Com, Inc. (formerly IDB) provided the Company with a majority of its international telecommunications network services. Charges for such services are included in direct costs in the accompanying statement of operations. 6. RELATED PARTIES On December 27, 1994 the net assets of US FiberCom Network, Inc. ("USFN"), an inactive affiliate under common control, were merged into the Company, with the net assets recorded at their historical carrying value by the Company. Net assets, primarily consisting of property and equipment and amounts due from the Company, had a net historical carrying value of $1,045,000, resulting in an increase to additional paid-in capital of this amount. Prior to the merger, the Company utilized the fixed assets of USFN and was charged certain expenses amounting to $86,000, which is included in 1994 selling, general and administrative expenses. Included in due to affiliates at December 31, 1994 are amounts due to US Cable Corporation, an affiliate, for expenses paid on behalf of the Company. Included in due to affiliates at December 31, 1993 are charges for common operating expenses provided by USFN, which were allocated based on the Company's usage of such items. 7. EMPLOYEE BENEFIT PLAN The Company sponsors a defined contribution plan that qualifies as a deferred salary arrangement under Section 401(a) of the Internal Revenue Code. All full-time employees meeting minimum service requirements are eligible to participate and may contribute up to 18% of their pre-tax earnings. The Company matches 50% of each employee's contribution up to an annual maximum of $390 per employee. Total Company contributions for 1994 were $7,000 and are included in selling, general and administrative expenses. 8. SUBSEQUENT EVENT In May 1995, the Company acquired a 51% interest in Mastercall, Ltd., a joint venture that resells the Company's international telecommunications services in the United Kingdom, for a purchase price of $140,000. 8