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PTGI HOLDING, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis of our financial condition and results of operations together with the information in our consolidated annual audited financial statements and the notes thereto, each of which are contained in Item 8 entitled "Financial Statements and Supplementary Data," and other financial information incorporated by reference herein. Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section as well as the section below entitled "-Special Note Regarding Forward-Looking Statements" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Introduction and Overview of Operations We operate an extensive network of direct routes. We provide premium voice communication services for national telecom operators, mobile operators, wholesale carriers, prepaid operators, Voice over Internet Protocol ("VoIP") service operators and Internet service providers ("ISPs"). We provide a quality service via direct routes and by forming strong relationships with carefully selected partners. We classify our services into two categories: Traditional Services and International Carrier Services ("ICS"). We have provided these services from our two business units: North America Telecom and ICS. However, in the second quarter of 2013, the Company entered into a definitive purchase agreement to sell its North America Telecom segment and sought shareholder approval of such transaction. On July 31, 2013, the Company completed the initial closing of the sale of substantially all of its North America Telecom segment. The closing of the sale of the remainder of our North America Telecom segment, consisting of our subsidiary Primus Telecommunications, Inc. ("PTI"), has been deferred pending the receipt of regulatory approvals. As a result of the disposition of substantially all of our North America Telecom operations, and the pending disposition of the remainder of such operations, the North America Telecom segment no longer is a separate reportable business segment and we have applied retrospective adjustments to reflect such segment as a discontinued operation. During 2013, we also provided certain growth services through our BLACKIRON Data business unit, which operated our pure data center operations in Canada. On April 17, 2013, we consummated the divestiture of BLACKIRON Data, as a result of which we no longer operate a BLACKIRON Data business unit and have applied retrospective adjustments to reflect BLACKIRON Data as a discontinued operation. As a result of the foregoing, our reportable operating segment is ICS. Effective in the fourth quarter of 2013, we determined to reclassify ICS as a continuing operation. Since the second quarter of 2012, ICS had been reported as a discontinued operation as a result of being held for sale. Our focus is on expanding ICS and the continued evaluation of strategic initiatives to maximize shareholder value. Within ICS, we interconnect with major U.S. operators and route voice traffic to all 145,000+ NPA-NXX codes in the United States. We employ both LNP dipping and LRN capabilities to ensure that voice calls get to the termination point faster and more directly. This saves our customers money, and provides for a better end user experience. Destination networks are targeted dynamically for accurate routing, helping to eliminate incremental charges and reducing overall operating costs. We pride ourselves on a high quality of service with an emphasis on long-standing relationships with our customers and partners. We manage our Traditional Services, which includes our domestic and international long-distance voice, local landline, wireless, prepaid cards, and dial-up Internet services, and our International Carrier Services; particularly in our primary markets of Asia Pacific, Latin America, North America/Canada/Mexico and Europe/Middle East/Asia. Based on Schedule 13D filings of Harbinger Group Inc. ("HGI"), HGI and other HGI-affiliated entities purchased approximately 40.5% of PTGi in January 2014. 38 -------------------------------------------------------------------------------- Table of Contents Recent Developments Decision to Cease the Pursuit of Divestiture of ICS In December 2013, based on management's assessment of the requirements under ASC 360, it was determined that ICS no longer met the criteria of a held for sale asset. On February 11, 2014, the Board of Directors officially ratified management's December 2013 assessment, and reclassified ICS from held for sale to held and used, effective December 31, 2013. As a result, ICS became classified as a continuing operation. Accordingly, the Company has applied retrospective adjustments for the years ended December 31, 2012 and 2011 and revenue, costs and expenses of ICS are now included in the respective captions in the consolidated statements of operations. In addition, the assets and liabilities of ICS are now included in the respective captions in the consolidated balance sheets as of December 31, 2013. Redemption of 13% Notes, 10% Notes and 10% Exchange Notes and Satisfaction and Discharge of Related Indentures On August 30, 2013, PTGi International Holding, Inc. (f/k/a Primus Telecommunications Holding, Inc. "PTHI"), consummated the redemption of approximately $125.3 million of its 10% Senior Secured Notes due 2017 (the "10% Notes") and 10% Senior Secured Exchange Notes due 2017 (the "10% Exchange Notes"). The $125.3 million consisted of approximately $12.7 million in aggregate principal amount of its 10% Notes at a redemption price equal to 106.50% of the principal amount thereof and $112.6 million in aggregate principal amount of its 10% Exchange Notes at a redemption price equal to 100.00% of the principal amount thereof, plus accrued but unpaid interest to the date of redemption. PTHI thereby satisfied and discharged the indenture governing the 10% Notes and 10% Exchange Notes (the "10% Notes Indenture"), as a result of which all of the obligations of PTHI, as the issuer of the 10% Notes and 10% Exchange Notes, and the guarantors of the 10% Notes and 10% Exchange Notes (including PTGi) under the 10% Notes Indenture ceased to be of further effect (subject to certain exceptions) and the liens on collateral of PTHI and the guarantors of the 10% Notes and 10% Exchange Notes securing such notes were released. On August 30, 2013, PTHI and Primus Telecommunications Canada Inc. ("PTCI") consummated the redemption of approximately $2.4 million in aggregate principal amount of its 13% Senior Secured Notes due 2016 (the "13% Notes") at a redemption price equal to 106.50% of the principal amount thereof, plus accrued but unpaid interest to the date of redemption. PTHI and PTCI thereby satisfied and discharged the indenture governing the 13% Notes (the "13% Notes Indenture"), as a result of which all of the obligations of PTHI and PTCI, as the issuers of the 13% Notes, and the guarantors of the 13% Notes (including PTGi) under the 13% Notes Indenture ceased to be of further effect (subject to certain exceptions). Liens on collateral securing the 13% Notes had previously been released in connection with the amendment of the 13% Notes Indenture that became effective on July 7, 2011. Divestiture of North America Telecom On July 31, 2013, the Company completed the sale of Lingo, Inc., iPrimus, USA, Inc., 3620212 Canada Inc., PTCI, Telesonic Communications Inc., and Globility Communications Corporation, which constituted substantially all of our North America Telecom segment, to affiliates of York Capital Management, an investment firm for $129 million. The sale of PTI is also contemplated as part of this transaction. The closing of the sale of PTI, which constitutes the remainder of our North America Telecom segment, has been deferred pending the receipt of regulatory approvals. The Company recorded a $13.8 million gain from the sale of this segment during the year ended December 31, 2013. In addition, the purchase agreement contains customary indemnification obligations, representations, warranties and covenants for a transaction of this nature. Certain indemnification obligations are subject to a cap of $12.9 million. In addition, the purchase agreement provides that the Company must, for 14 months after the closing of the transaction, maintain a minimum balance of cash and cash equivalents necessary to satisfy potential indemnification obligations under the purchase agreement. The Company received $126.0 million, net of $15.25 million held in escrow as part of the initial closing, with an 39-------------------------------------------------------------------------------- Table of Contents additional $3.0 million held in escrow to be paid upon closing of the sale of PTI. The escrow has been recorded as part of prepaid expenses and other current assets as of December 31, 2013 in the condensed consolidated balance sheet. Pursuant to the terms of the purchase agreement, $6.45 million of the purchase price was placed in escrow to be released 14 months after the closing date, subject to any deductions required to satisfy indemnification obligations of PTGi under the purchase agreement. $4.0 million of the purchase price was placed in escrow to cover any payments required in connection with the post-closing working capital and cash adjustments, of which $3.2 million was disbursed to us and $0.8 million was disbursed to the purchaser upon the completion of such adjustments. Furthermore, $4.8 million of the purchase price was placed in escrow to cover certain tax liabilities, which escrow amount will be released after a positive ruling with respect to the underlying matter is received or 30 days after expiration of the applicable statute of limitations relating to the underlying matter. The $6.45 million and $4.0 million escrow deposits are recorded in prepaid expenses and other current assets, while the $4.8 million escrow deposit is recorded in other assets in the condensed consolidated balance sheet. Divestiture of BLACKIRON Data On April 17, 2013, the Company completed the sale of its BLACKIRON Data segment to Rogers Communications Inc., a Canadian telecommunications company, and its affiliates for CAD$200.0 million (or approximately USD$195.6 million giving effect to the currency exchange rate on the day of sale). The Company recorded a $135.0 million gain from the sale of this segment during the second quarter of 2013. The purchase price is subject to potential downward or upward post-closing adjustments based on net working capital and cash at closing. In addition, the purchase agreement contains customary indemnification obligations, representations, warranties and covenants for a transaction of this nature. In connection with the closing of the transaction, CAD$20.0 million (or approximately USD$19.5 million giving effect to the currency exchange rate on the day of sale) was retained from the purchase price and placed into escrow until July 17, 2014 for purposes of satisfying potential indemnification claims pursuant to the purchase agreement. Foreign Currency Foreign currency can impact our financial results. During the year ended December 31, 2013, approximately 53% of our net revenue from continuing operations was derived from sales and operations outside the U.S. The reporting currency for our consolidated financial statements is the United States dollar (the "USD"). The local currency of each country is the functional currency for each of our respective entities operating in that country. In the future, we expect to continue to derive a portion of our net revenue and incur a portion of our operating costs from outside the U.S., and therefore changes in exchange rates may continue to have a significant, and potentially adverse, effect on our results of operations. Our risk of loss regarding foreign currency exchange rate risk is caused primarily by fluctuations in the USD/British pound sterling ("GBP") exchange rate. Due to a percentage of our revenue derived outside of the U.S., changes in the USD relative to the GBP could have an adverse impact on our future results of operations. In addition, prior to the sale of the Company's Australia operations during the second quarter of 2012 and the sale of BLACKIRON Data and North America Telecom during the second and third quarters of 2013, respectively, we also experienced risk of loss regarding foreign currency exchange rates due to fluctuations in the USD/Australian dollar ("AUD") and USD/Canadian dollar ("CAD") exchange rates. We have agreements with certain subsidiaries for repayment of a portion of the investments and advances made to these subsidiaries. As we anticipate repayment in the foreseeable future, we recognize the unrealized gains and losses in foreign currency transaction gain (loss) on the condensed consolidated statements of operations. The exposure of our income from operations to fluctuations in foreign currency exchange rates is reduced in part because a majority of the costs that we incur in connection with our foreign operations are also denominated in local currencies. We are exposed to financial statement gains and losses as a result of translating the operating results and financial position of our international subsidiaries. We translate the local currency statements of operations of our foreign subsidiaries into USD using the average exchange rate during the reporting period. Changes in foreign 40-------------------------------------------------------------------------------- Table of Contents exchange rates affect the reported profits and losses and cash flows of our international subsidiaries and may distort comparisons from year to year. By way of example, when the USD strengthens compared to the GBP, there could be a negative or positive effect on the reported results for ICS, depending upon whether the business in ICS is operating profitably or at a loss. It takes more profits in GBP to generate the same amount of profits in USD and a greater loss in GBP to generate the same amount of loss in USD. The opposite is also true. For instance, when the USD weakens against the GBP, there is a positive effect on reported profits and a negative effect on the reported losses for ICS. For the year ended December 31, 2013, as compared to the year ended December 31, 2012, the USD was stronger on average as compared to the CAD and GBP. For the year ended December 31, 2012, as compared to the year ended December 31, 2011, the USD was stronger on average as compared to the CAD and GBP; the USD was weaker on average as compared to the AUD. The following tables demonstrate the impact of currency fluctuations on our net revenue for the years ended December 31, 2013, 2012 and 2011: Net Revenue by Location, including Discontinued Operations-in USD (in thousands) Years Ended December 31, 2013 vs 2012 2012 vs 2011 2013 2012 2011 Variance $ Variance % Variance $ Variance % Canada (1) $ 109,167 $ 223,301 $ 246,612 $ (114,134 ) -51.1 % $ (23,311 ) -9.5 % Australia (1) - 114,860 286,462 (114,860 ) -100.0 % (171,602 ) -59.9 % United Kingdom (1) 122,123 202,196 273,053 (80,073 ) -39.6 % (70,857 ) -25.9 % Brazil (1) - - 25,457 - 0 % (25,457 ) -100.0 % Net Revenue by Location, including Discontinued Operations-in Local Currencies (in thousands) Years Ended December 31, 2013 vs 2012 2012 vs 2011 2013 2012 2011 Variance $ Variance % Variance $ Variance % Canada (1) (in CAD) $ 111,090 $ 223,190 $ 243,656 $ (112,100 ) -50.2 % $ (20,466 ) -8.4 % Australia (1) (in AUD) - 110,408 277,461 (110,408 ) -100.0 % (167,053 ) -60.2 % United Kingdom (1) (in GBP) 78,371 127,726 170,124 (49,355 ) -38.6 % (42,398 ) -24.9 % Brazil (1) (in BRL) - - 42,049 - 0 % (42,049 ) -100.0 % (1) Table includes revenues from discontinued operations which are subject to currency risk. Critical Accounting Policies To aid in the understanding of our financial reporting, our most critical accounting policies are described below. These policies have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature. Revenue Recognition and Deferred Revenue-Net revenue is derived from carrying a mix of business, residential and carrier long-distance traffic, data and Internet traffic. For certain voice services, net revenue is earned based on the number of minutes during a call, and are recorded upon completion of a call. Revenue for a period is calculated from information received through the Company's network switches. Customized software has been designed to track the information from the switch and analyze the call detail records against stored detailed information about revenue rates. This software provides the Company the ability to do a timely and accurate analysis of revenue earned in a period. Separate prepaid services software is used to track additional information related to prepaid service usage such as activation date, monthly usage amounts and expiration date. 41 -------------------------------------------------------------------------------- Table of Contents Revenue on these prepaid services is recognized as service is provided until expiration, when all unused minutes, which are no longer available to the customers, are recognized as revenue. Net revenue is also earned on a fixed monthly fee basis for unlimited local and long-distance voice plans and for the provision of data/Internet services (including retail VoIP), hosting, and colocation. In the United States, we charge customers Federal Universal Service Fund ("USF") fees. We recognize revenue on a gross basis for USF and related fees. We record these fees as revenue when billed. Net revenue represents gross revenue, net of allowance for doubtful accounts receivable, service credits and service adjustments. Presentation of Taxes Collected-The Company reports any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between the Company and a customer (including sales, use, value-added and some excise taxes) on a net basis (excluded from revenues). Cost of Revenue-Cost of revenue includes network costs that consist of access, transport and termination costs. The majority of the Company's cost of revenue is variable, primarily based upon minutes of use, with transmission and termination costs being the most significant expense. Cost of revenue also includes fees such as Federal USF fees. Such costs are recognized when incurred in connection with the provision of telecommunications services. Goodwill and Other Intangible Assets-Under ASC No. 350, "Intangibles-Goodwill and Other" ("ASC 350"), goodwill and indefinite lived intangible assets are not amortized but are reviewed annually for impairment, or more frequently, if impairment indicators arise. Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to the provisions of ASC 360. Goodwill impairment is tested at least annually (October 1st) or when factors indicate potential impairment using a two-step process that begins with an estimation of the fair value of each reporting unit. Step 1 is a screen for potential impairment pursuant to which the estimated fair value of each reporting unit is compared to its carrying value. The Company estimates the fair values of each reporting unit by an estimation of the discounted cash flows of each of the reporting units based on projected earnings in the future (the income approach). If there is a deficiency (the estimated fair value of a reporting unit is less than its carrying value), a Step 2 test is required. Step 2 measures the amount of impairment loss, if any, by comparing the implied fair value of the reporting unit's goodwill with its carrying amount. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined; i.e., through an allocation of the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The Company also may utilize the provisions of Accounting Standards Update ("ASU") No. 2011-08, "Testing Goodwill for Impairment" ("ASU 2011-08"), which allows the Company to use qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company's reporting units in 2011 were Australia, Canada and US/ICS. In May 2012, the Australian reporting unit was sold, and the reporting units were Canada and US/ICS. Subsequent to classifying ICS as a discontinued operation in the second quarter of 2012 and its goodwill being classified as a held for sale asset, the reporting units were Canada and US. Subsequent to the sale of North America Telecom (which included the Canada reporting unit) in the third quarter of 2013, the Company had no goodwill attributable to the remaining US reporting unit. The US reporting unit goodwill was attributable to PTI, the unsold portion of North America 42 -------------------------------------------------------------------------------- Table of Contents Telecom, and was included in assets held for sale. As a result of the decision to cease the sale process of ICS as of December 31, 2013, ICS became a reporting unit and its goodwill was reclassified as a held and used asset. Estimating the fair value of a reporting unit requires various assumptions including projections of future cash flows, perpetual growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the Company's assessment of a number of factors, including the reporting unit's recent performance against budget, performance in the market that the reporting unit serves, and industry and general economic data from third party sources. Discount rate assumptions are based on an assessment of the risk inherent in those future cash flows. Changes to the underlying businesses could affect the future cash flows, which in turn could affect the fair value of the reporting unit. Intangible assets not subject to amortization consisted of certain trade names. Such indefinite lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test shall consist of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to the excess. Intangible assets subject to amortization consisted of certain trade names and customer relationships. These finite lived intangible assets are amortized based on their estimated useful lives. Such assets are subject to the impairment provisions of ASC 360, wherein impairment is recognized and measured only if there are events and circumstances that indicate that the carrying amount may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset group. An impairment loss is recorded if after determining that it is not recoverable, the carrying amount exceeds the fair value of the asset. In addition to the foregoing, the Company reviews its goodwill and intangible assets for possible impairment whenever events or circumstances indicate that the carrying amounts of assets may not be recoverable. The factors that the Company considers important, and which could trigger an impairment review, include, but are not limited to: a more than likely than not expectation of selling or disposing all, or a portion, of a reporting unit; a significant decline in the market value of our common stock or debt securities for a sustained period; a material adverse change in economic, financial market, industry or sector trends; a material failure to achieve operating results relative to historical levels or projected future levels; and significant changes in operations or business strategy. The current carrying values by reporting unit of the goodwill and other indefinite-lived intangible assets are disclosed in Note 4-"Goodwill and Other Intangible Assets." Valuation of Long-lived Assets (Held for Sale)-In conjunction with the Company's entry into definitive agreements with respect to the sale of North America Telecom, which was substantially completed on July 31, 2013, at December 31, 2013, the Company classified the net assets of the remaining portion of North America Telecom, PTI, as held for sale and is required to measure them at the lower of carrying value or fair value less costs to sell. Prior to December 31, 2013, ICS was included in held for sale assets. Under ASC 360, when a long-lived asset previously classified as held for sale is reclassified as held and used, the assets and liabilities are measured individually at the lower of the (1) carrying value prior to its held for sale classification, adjusted for any depreciation and amortization that would have been recognized and (2) the fair value as of the date of the decision not to sell. The Company has determined that the carrying value of the current assets and current liabilities of ICS approximate fair value. With respect to the carrying value of the property and equipment of ICS, the Company first recorded depreciation for the period July 1, 2012 through December 31, 2013 and subsequently impaired any assets that had no future benefit. The resulting adjusted carrying value of ICS was lower than its fair value. The goodwill of ICS was tested for impairment under ASC 350 using a Step 1 and Step 2 approach. Because the fair value of ICS exceeded its adjusted carrying value under Step 1, no further analysis was required. 43-------------------------------------------------------------------------------- Table of Contents The Company makes significant assumptions and estimates in the process of determining fair value regarding matters that are inherently uncertain, such as estimating future cash flows, discount rates and growth rates. The resulting cash flows are projected over an extended period of time, which subjects those assumptions and estimates to an even larger degree of uncertainty. While the Company believes that its estimates are reasonable, different assumptions could materially affect the valuation of the net assets. The current year analysis of carrying value and fair value less costs to sell is disclosed in Note 15-"Discontinued Operations." Accounting for Income Taxes-We recognize deferred tax assets and liabilities for the expected future tax consequences of transactions and events. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement bases and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. If necessary, deferred tax assets are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable. We must make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount of the valuation allowance. The additional guidance provided by ASC No. 740, "Income Taxes" ("ASC 740"), clarifies the accounting for uncertainty in income taxes recognized in the financial statements. Expected outcomes of current or anticipated tax examinations, refund claims and tax-related litigation and estimates regarding additional tax liability (including interest and penalties thereon) or refunds resulting therefrom will be recorded based on the guidance provided by ASC 740 to the extent applicable. At present, our subsidiaries in the major jurisdictions in which we operate have significant deferred tax assets resulting from tax loss carryforwards. These deferred tax assets are fully offset with valuation allowances. The appropriateness and amount of these valuation allowances are based on our assumptions about the future taxable income of each affiliate or available tax planning strategies. If our assumptions have significantly underestimated future taxable income with respect to a particular affiliate, all or part of the valuation allowance for the affiliate would be reversed and additional income could result. Financial Presentation Background In the following presentations and narratives within this Management's Discussion and Analysis of Financial Condition and Results of Operations, we compare, pursuant to accounting principles generally accepted in the United States of America ("US GAAP") and SEC disclosure rules, the Company's results of operations for the year ended December 31, 2013 as compared to the year ended December 31, 2012 and the year ended December 31, 2012 as compared to the year ended December 31, 2011. We also present detailed changes in results, excluding currency impacts, since a portion of our revenues is derived outside of the United States, and currency changes can influence or mask underlying changes in foreign operating unit performance. For purposes of calculating constant currency rates between periods in connection with presentations that describe changes in values "excluding currency effects" herein, we have taken results from foreign operations for a given year (that were computed in accordance with US GAAP using local currency) and converted such amounts utilizing the same USD to applicable local currency exchange rates that were used for purposes of calculating corresponding preceding period US GAAP presentations. We believe that the comparison of the combined financial results provides management and investors with a meaningful analysis of our performance and trends for comparative purposes. Discontinued Operations 2013 Developments- In the second quarter of 2013, the Company sold its BLACKIRON Data segment. In addition, in the second quarter of 2013, the Company entered into a definitive purchase agreement to sell its North America Telecom segment and sought shareholder approval of such transaction. On July 31, 2013, the Company completed the initial closing of the sale of its North America Telecom segment (see Note 15-"Discontinued Operations"). In conjunction with the initial closing of the sale of the North America Telecom segment, the Company redeemed its outstanding debt issued by PTHI on August 30, 2013. Because the debt was 44 -------------------------------------------------------------------------------- Table of Contents required to be repaid as a result of the sale of North America Telecom, the interest expense and loss on early extinguishment or restructuring of debt of PTHI has been allocated to discontinued operations. In December 2013, based on management's assessment of the requirements under ASC 360, it was determined that ICS no longer met the criteria of a held for sale asset. On February 11, 2014, the Board of Directors officially ratified management's December 2013 assessment, and reclassified ICS from held for sale to held and used, effective December 31, 2013. As a result, ICS became classified as a continuing operation. ICS had been classified as a discontinued operation since the second quarter of 2012 as a result of being held for sale. 2012 Developments-During the second quarter of 2012, the Company sold its Australian segment. 2011 Developments-During the fourth quarter of 2011, the Company sold its Brazilian segment. As a result of these events, the Company's consolidated financial statements reflect the BLACKIRON Data, North America Telecom, Australian and Brazilian segments, as well as PTHI's interest expense and loss on early extinguishment or restructuring of debt as discontinued operations for the years ended December 31, 2013, 2012 and 2011. Accordingly, revenue, costs and expenses of the discontinued operations have been excluded from the respective captions in the consolidated statements of operations. The net operating results of the discontinued operations have been reported, net of applicable income taxes as income or loss (where applicable) from discontinued operations. Additionally, the assets and liabilities of the remaining portion of North America Telecom, PTI, have been classified as held for sale assets and liabilities as of December 31, 2013 and the assets and liabilities of ICS have been classified as held for sale assets and liabilities as of December 31, 2012. The held for sale assets and liabilities were removed from the specific line items on the consolidated balance sheets as of December 31, 2013 and 2012. Summarized operating results of the discontinued operations are as follows (in thousands): Years Ended December 31, 2013 2012 2011 Net revenue $ 132,515 $ 375,264 $ 602,647 Operating expenses 119,392 343,263 549,217 Income (loss) from operations 13,123 32,001 53,430 Interest expense (11,362 ) (24,621 ) (32,702 ) Gain (loss) on early extinguishment or restructuring of debt (21,124 ) (21,682 ) (7,346 ) Interest income and other income (expense) (51 ) 283 189 Foreign currency transaction gain (loss) (378 ) (2,550 ) 1,539 Income (loss) before income tax (19,792 ) (16,569 ) 15,110 Income tax (expense) benefit 171 (4,956 ) (41 ) Income (loss) from discontinued operations $ (19,621 ) $ (21,525 ) $ 15,069 Results of Operations Results of operations for the year ended December 31, 2013 as compared to the year ended December 31, 2012 Inclusive of Exclusive of Currency Effect Currency Effect Year Ended Year-over-Year Year Ended December 31, 2013 December 31, 2012 December 31, 2013 Net % of Net % of Currency Net % of (in thousands) Revenue Total Revenue Total Variance Variance % Effect Revenue Total International Carrier Services 232,505 100.0 % 302,959 100.0 % (70,454 ) -23.3 % (1,819 ) 230,686 100.0 % Total Net Revenue 232,505 100.0 % 302,959 100.0 % (70,454 ) -23.3 % (1,819 ) 230,686 100.0 % 45 -------------------------------------------------------------------------------- Table of Contents Net revenue: Net revenue, exclusive of the currency effect, decreased $70.5 million, or 23.3%, to $232.5 million for the year ended December 31, 2013 from $303.0 million for the year ended December 31, 2012. Inclusive of the currency effect which accounted for a decrease of $1.8 million, net revenue decreased $72.3 million to $230.7 million for the year ended December 31, 2013 from $303.0 million for the year ended December 31, 2012. The decrease is primarily due to a significant decline in both domestic and international terminations year over year. Inclusive of Exclusive of Currency Effect Currency Effect Year Ended Year-over-Year Year Ended December 31, 2013 December 31, 2012 December 31, 2013 Cost of % of Net Cost of % of Net Currency Cost of % of Net (in thousands) Revenue Revenue Revenue Revenue Variance Variance % Effect Revenue Revenue International Carrier Services 222,066 95.5 % 285,631 94.3 % (63,565 ) -22.3 % (1,751 ) 220,315 95.5 % Total Cost of Revenue 222,066 95.5 % 285,631 94.3 % (63,565 ) -22.3 % (1,751 ) 220,315 95.5 % Cost of revenue: Cost of revenue, exclusive of the currency effect, decreased $63.6 million to $222.1 million, or 95.5% of net revenue, for the year ended December 31, 2013 from $285.6 million, or 94.3% of net revenue, for the year ended December 31, 2012. Inclusive of the currency effect, which accounted for a $1.7 million decrease, cost of revenue decreased $65.3 million to $220.3 million for the year ended December 31, 2013 from $285.6 million for the year ended December 31, 2012. The decrease is primarily due to the decrease in net revenue. While there have been significant declines in both net revenue and cost of revenue, exclusive of currency, cost of revenue as a percentage of net revenue remained flat; and inclusive of currency, decreased only 120 basis points year over year. Inclusive of Exclusive of Currency Effect Currency Effect Year Ended Year-over-Year Year Ended December 31, 2013 December 31, 2012 December 31, 2013 % of Net % of Net Currency % of Net (in thousands) SG&A Revenue SG&A Revenue Variance Variance % Effect SG&A Revenue International Carrier Services 16,312 7.0 % 20,536 6.8 % (4,224 ) -20.6 % (40 ) 16,272 7.1 % Corporate 18,420 0.0 % 24,666 0.0 % (6,246 ) -25.3 % - 18,420 0.0 % Total SG & A 34,732 14.9 % 45,202 14.9 % (10,470 ) -23.2 % (40 ) 34,692 15.0 % Selling, general and administrative expenses: Selling, general and administrative expenses, exclusive of the currency effect, decreased $10.5 million to $34.7 million, or 14.9% of net revenue, for the year ended December 31, 2013 from $45.2 million, or 14.9% of net revenue, for the year ended December 31, 2012. The currency effect was immaterial. The decrease is primarily due to a $3.8 million decrease in salaries and benefits, a $3.2 million decrease in general and administrative expenses, a $2.5 million decrease in professional fees, a $0.6 million decrease in occupancy costs and a $0.4 million decrease in travel and entertainment expenses. Depreciation and amortization expense: Depreciation and amortization expense increased $8.8 million to $12.0 million for the year ended December 31, 2013 from $3.2 million for the year ended December 31, 2012. Depreciation and amortization expense in 2013 includes depreciation and amortization for the period July 1, 2012 - December 31, 2013, when the property and equipment of ICS was included in assets held for sale. In accordance with US GAAP, held for sale assets are not depreciated. When ICS was no longer considered to be held for sale, we were required to record all unrecorded depreciation in the fourth quarter of 2013. 46 -------------------------------------------------------------------------------- Table of Contents Asset impairment expense: Asset impairment expense decreased $17.5 million to $2.8 million for the year ended December 31, 2013 from $20.3 million for the year ended December 31, 2012. For the year ended December 31, 2013, asset impairment expense primarily includes $2.0 million related to the impairment of property and equipment as a result of reclassifying ICS from held for sale to held and used. For the year ended December 31, 2012, asset impairment expense includes $10.3 million related to the write down of carrying value of ICS when it was classified as a held for sale asset in the second quarter of 2012 and $10.0 million related to the impairment of our U.S. trade name, "Primus Telecommunications." Gain (loss) from contingent rights valuation: The gain from the change in fair value of the CVRs increased $13.6 million to a $14.9 million gain for the year ended December 31, 2013 from a $1.3 million gain for the year ended December 31, 2012. Estimates of fair value represent the Company's best estimates based on a pricing model and have historically been correlated to and reflective of our common stock trends. Generally, as the fair value of our common stock increased/decreased, the fair value of the CVRs increased/decreased and a loss/gain from CVR valuation was recorded. As a result of the pending sale of North America Telecom during the second quarter of 2013, which would constitute a change of control under the CVR Agreement and likely result in the expiration of the CVRs and termination of the CVR Agreement absent any required distribution of shares of our common stock with respect to the CVRs, the fair value of the CVRs was marked at zero as of June 30, 2013. See Note 9-"Stockholders' Equity" and Note 11-"Fair Value of Financial Instruments and Derivatives" for a further discussion of the valuation and expiration of the CVRs in connection with the North America Telecom transaction. Interest income and other income (expense), net: Interest income and other income (expense), net decreased $0.3 million to expense of $0.2 million for the year ended December 31, 2013 from income of $0.1 million for the year ended December 31, 2012. Foreign currency transaction gain (loss): Foreign currency transaction gain decreased $3.1 million to a $0.6 million loss for the year ended December 31, 2013 from a gain of $2.5 million for the year ended December 31, 2012. The gains and losses are attributable to the impact of foreign currency exchange rate changes on intercompany debt balances and on receivables and payables denominated in a currency other than the subsidiaries' functional currency. We incurred a foreign currency translation loss on the intercompany payable balances that our Canadian subsidiaries had with our U.S. subsidiaries due to a decrease in the exchange rate in the first quarter of 2013. We incurred a foreign currency translation gain on the intercompany payable balances that our Canadian subsidiaries had with our U.S. subsidiaries due to an increase in the exchange rate in the first and third quarters of 2012. Income tax benefit (expense): Income tax benefit increased $4.3 million to $7.4 million for the year ended December 31, 2013 from $3.1 million for the year ended December 31, 2012. Included in the benefit for the year ended December 31, 2013 is a benefit from reversing foreign withholding tax, expiration of the statute of limitations and state tax refunds. Included in the benefit for the year ended December 31, 2012 is a benefit from the release of a liability on our U.S. trade name, "Primus Telecommunications," and certain ASC 740 liabilities as a result of the expiration of the statute of limitations, partially offset by expenses consisting of a provision for foreign income taxes and foreign withholding tax on intercompany interest. Results of operations for the year ended December 31, 2012 as compared to the year ended December 31, 2011 Inclusive of Exclusive of Currency Effect Currency Effect Year Ended Year-over-Year Year Ended December 31, 2012 December 31, 2011 December 31, 2012 Net % of Net % of Currency Net % of (in thousands) Revenue Total Revenue Total Variance Variance % Effect Revenue Total International Carrier Services 305,499 100.0 % 411,983 100.0 % (106,484 ) -25.8 % (2,540 ) 302,959 100.0 % Total Net Revenue 305,499 100.0 % 411,983 100.0 % (106,484 ) -25.8 % (2,540 ) 302,959 100.0 % 47 -------------------------------------------------------------------------------- Table of Contents Net revenue: Net revenue, exclusive of the currency effect, decreased $106.5 million, or 25.8%, to $305.5 million for the year ended December 31, 2012 from $412.0 million for the year ended December 31, 2011. Inclusive of the currency effect which accounted for a decrease of $2.5 million, net revenue decreased $109.0 million to $303.0 million for the year ended December 31, 2012 from $412.0 million for the year ended December 31, 2011. The decrease is primarily due to a significant decline in both domestic and international terminations year over year. Inclusive of Exclusive of Currency Effect Currency Effect Year Ended Year-over-Year Year Ended December 31, 2012 December 31, 2011 December 31, 2012 Cost of % of Net Cost of % of Net Currency Cost of % of Net (in thousands) Revenue Revenue Revenue Revenue Variance Variance % Effect Revenue Revenue International Carrier Services 288,055 94.3 % 389,412 94.5 % (101,357 ) -26.0 % (2,424 ) 285,631 94.3 % Total Cost of Revenue 288,055 94.3 % 389,412 94.5 % (101,357 ) -26.0 % (2,424 ) 285,631 94.3 % Cost of revenue: Cost of revenue, exclusive of the currency effect, decreased $101.4 million to $288.0 million, or 94.3% of net revenue, for the year ended December 31, 2012 from $389.4 million, or 94.5% of net revenue, for the year ended December 31, 2011. Inclusive of the currency effect, which accounted for a $2.4 million decrease, cost of revenue decreased $103.8 million to $285.6 million for the year ended December 31, 2012 from $389.4 million for the year ended December 31, 2011. The decrease is primarily due to the decrease in net revenue. While there have been significant declines in both net revenue and cost of revenue, exclusive of currency, cost of revenue as a percentage of net revenue remained flat; and inclusive of currency, decreased only 20 basis points year over year. Inclusive of Exclusive of Currency Effect Currency Effect Year Ended Year-over-Year Year Ended December 31, 2012 December 31, 2011 December 31, 2012 % of Net % of Net Currency % of Net (in thousands) SG&A Revenue SG&A Revenue Variance Variance % Effect SG&A Revenue International Carrier Services 20,599 6.7 % 21,275 5.2 % (676 ) -3.2 % (62 ) 20,537 6.8 % Corporate 24,665 0.0 % 21,024 0.0 % 3,641 17.3 % - 24,665 0.0 % Total SG & A 45,264 14.8 % 42,299 10.3 % 2,965 7.0 % (62 ) 45,202 14.9 % Selling, general and administrative expenses: Selling, general and administrative expenses, exclusive of the currency effect, increased $3.0 million to $45.3 million, or 14.8% of net revenue, for the year ended December 31, 2012 from $42.3 million, or 10.3% of net revenue, for the year ended December 31, 2011. Inclusive of the currency effect, which accounted for a $0.1 million decrease, selling, general and administrative expenses decreased $2.9 million to $45.2 million for the year ended December 31, 2012 from $42.3 million for the year ended December 31, 2011. The increase is primarily due to a $3.4 million increase in salaries and benefits, and a $0.9 million increase in professional fees, partially offset by a $1.3 million decrease in general and administrative expenses. Depreciation and amortization expense: Depreciation and amortization expense decreased $3.4 million to $3.2 million for the year ended December 31, 2012 from $6.6 million for the year ended December 31, 2011. Depreciation and amortization expense in 2012 included depreciation and amortization for only the period January 1, 2012 - June 30, 2012 as the property and equipment of ICS was reclassified to assets held for sale on June 30, 2012 and depreciation ceased. 48 -------------------------------------------------------------------------------- Table of Contents Asset impairment expense: Asset impairment expense increased $5.6 million to $20.3 million for the year ended December 31, 2012 from $14.7 million for the year ended December 31, 2011. For the year ended December 31, 2012, asset impairment expense includes $10.3 million related to the write down of carrying value of ICS when it was classified as a held for sale asset in the second quarter of 2012 and $10.0 million related to the impairment of our U.S. trade name, "Primus Telecommunications". For the year ended December 31, 2011, asset impairment expense includes $14.7 million related to the impairment of goodwill associated with the acquisition of Arbinet Corporation in the first quarter of 2011. Gain (loss) from contingent value rights valuation: The gain from the change in fair value of the contingent value rights decreased $1.6 million to a gain of $1.3 million for the year ended December 31, 2012 from a gain of $2.9 million for the year ended December 31, 2011. Estimates of fair value represent the Company's best estimates based on a pricing model and are correlated to and reflective of our common stock trends. As the fair value of our common stock increases/decreases, the fair value of the contingent value rights increases/decreases and a loss/gain from contingent rights valuation is recorded. Interest income and other income (expense), net: Interest income and other income (expense), net decreased $0.1 million to income of $0.1 million for the year ended December 31, 2012 from $0.2 million for the year ended December 31, 2011. Foreign currency transaction gain (loss): Foreign currency transaction loss decreased $6.8 million to a gain of $2.5 million for the year ended December 31, 2012 from a loss of $4.3 million for the year ended December 31, 2011. The gains and losses are attributable to the impact of foreign currency exchange rate changes on intercompany debt balances and on receivables and payables denominated in a currency other than the subsidiaries' functional currency. We incurred a foreign currency translation gain on the intercompany payable balances that our Canadian subsidiaries had with our U.S. subsidiaries due to an increase in the exchange rate in the first and third quarters of 2012. We incurred a foreign currency loss on the intercompany balances that our Canadian and Australian subsidiaries had with our U.S. subsidiaries due to decreases in the exchange rate in the third quarter of 2011. Income tax benefit (expense): Income tax benefit (expense) is a $3.1 million benefit for the year ended December 31, 2012 compared to a $1.1 million expense for the year ended December 31, 2011. Included in the benefit for the year ended December 31, 2012 is a benefit from the release of a liability on our U.S. trade name, "Primus Telecommunications," and certain ASC 740 liabilities as a result of the expiration of the statute of limitations, partially offset by expenses consisting of a provision for foreign income taxes and foreign withholding tax on intercompany interest. Included in the expense for the year ended December 31, 2011 is a provision for foreign withholding and state taxes. Liquidity and Capital Resources Important Long-Term Liquidity and Capital Structure Developments: Special Dividend In August 2013, PTGi's Board of Directors declared and paid a special cash dividend with respect to PTGi's issued and outstanding common stock. The special dividend of $8.50 per share was paid on August 27, 2013 to holders of record of PTGi common stock as of August 20, 2013, which resulted in a payment of an aggregate of approximately $119.8 million to PTGi stockholders. See Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Dividends." Divestiture of North America Telecom and Related Redemption of 13% Notes, 10% Notes and 10% Exchange Notes and Satisfaction and Discharge of Related Indentures On July 31, 2013, the Company completed the initial sale of its North America Telecom segment to affiliates of York Capital Management, an investment firm. The sale of PTI, which constitutes the remainder of 49-------------------------------------------------------------------------------- Table of Contents the North America Telecom segment, has been deferred pending the receipt of regulatory approval. See "-Recent Developments-Divestiture of North America Telecom." In connection with the closing of the initial sale of our North America Telecom segment, PTHI and PTCI, as applicable, consummated the redemption of the 10% Notes, 10% Exchange Notes and 13% Notes and attendant satisfaction and discharge of the governing indentures on August 30, 2013. See "-Recent Developments-Redemption of 13% Notes, 10% Notes and 10% Exchange Notes and Satisfaction and Discharge of Related Indentures." Divestiture of BLACKIRON On April 17, 2013, the Company completed the sale of its BLACKIRON Data segment to Rogers Communications Inc. and its affiliates. See "-Recent Developments-Divestiture of BLACKIRON Data." Changes in Cash Flows Our principal liquidity requirements arise from cash used in operating activities, purchases of network equipment, including switches, related transmission equipment and capacity, development of back-office systems and income taxes. We have financed our growth and operations to date through public offerings and private placements of debt and equity securities, vendor financing, capital lease financing and other financing arrangements. Net cash used in operating activities was $20.3 million for the year ended December 31, 2013 as compared to net cash provided by operating activities of $23.6 million for the year ended December 31, 2012. For the year ended December 31, 2013, net income, net of non-cash operating activity, used $1.3 million of cash. Other major drivers included a decrease in accrued expenses, deferred revenue, other current liabilities and other liabilities, net of $7.8 million, a decrease in accrued income taxes of $7.4 million, an increase in prepaid expenses and other current assets of $4.8 million, an increase in accounts receivable of $2.9 million, a decrease in accounts payable of $2.0 million and a decrease in accrued interest of $1.7 million, partially offset by an increase in accrued interconnection costs of $4.4 million and a decrease in other assets of $3.2 million. Net cash provided by operating activities was $23.6 million for the year ended December 31, 2012 as compared to $42.9 million for the year ended December 31, 2011. For the year ended December 31, 2012, net income, net of non-cash operating activity, provided $28.6 million of cash. Other major drivers included a decrease in accounts receivable of $16.4 million, partially offset by a decrease in accrued expenses, deferred revenue, other current liabilities and other liabilities, net of $9.4 million, a decrease in accounts payable of $8.4 million and a decrease in accrued interest of $3.9 million. Net cash provided by investing activities was $258.1 million for the year ended December 31, 2013 as compared to $149.7 million for the year ended December 31, 2012. Net cash provided by investing activities during the year ended December 31, 2013 included $270.6 million of net proceeds from the sale of our BLACKIRON Data and North America Telecom segments and a decrease in restricted cash of $0.5 million, partially offset by $12.6 million of capital expenditures and $0.4 million used in the acquisition of businesses. Net cash provided by investing activities was $149.7 million for the year ended December 31, 2012 as compared to net cash used in investing activities of $2.3 million for the year ended December 31, 2011. Net cash provided by investing activities during the year ended December 31, 2012 included $183.1 million of net proceeds from the sale of Primus Australia, partially offset by $31.7 million of capital expenditures and $1.7 million used in the acquisition of businesses. Net cash used in financing activities was $250.1 million for the year ended December 31, 2013 as compared to $191.1 million for the year ended December 31, 2012. Net cash used in financing activities during the year ended December 31, 2013 included $127.7 million used in the redemption of the 13% Notes, 10% Notes and 10% 50 -------------------------------------------------------------------------------- Table of Contents Exchange Notes, $119.8 million used to pay a special cash dividend to our shareholders, $1.2 million used to pay fees on the redemption of the 13% Notes, 10% Notes and 10% Exchange Notes, $1.2 million used to pay dividend equivalents to our shareholders, $1.0 million used to satisfy the tax obligations for shares issued under equity-based compensation arrangements and $0.3 million used to reduce the principal amounts outstanding on capital leases, partially offset by $1.1 million in proceeds from the sale of common stock. Net cash used in financing activities was $191.1 million for the year ended December 31, 2012 as compared to $38.8 million for the year ended December 31, 2011. Net cash used in financing activities during the year ended December 31, 2012 included $119.0 million used to repurchase a portion of the 10% Notes, $55.3 million used to pay special cash dividends to our shareholders, $13.5 million used to pay fees related to the repurchase of a portion of the 10% Notes, the subsequent November and December note exchanges for a portion of the 10% Notes and the exchange offers and consent solicitation that was consummated in July 2011, $1.7 million used to reduce the principal amounts outstanding on capital leases and $1.7 million used to satisfy the tax obligations for shares issued under share-based compensation arrangements, partially offset by $0.1 million in proceeds from the sale of common stock. Short- and Long-Term Liquidity Considerations and Risks; Contractual Obligations As of December 31, 2013, we had $9.0 million of cash and cash equivalents. We believe that our existing cash and cash equivalents will be sufficient to fund our fixed obligations (such as operating leases), and other cash needs for our operations for at least the next twelve months. As of December 31, 2013, we have $13.9 million in future operating lease payments. The obligations set forth in the table below reflect the contractual payments of principal and interest that existed as of December 31, 2013: Payments Due By Period Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years Operating leases $ 13,941 $ 3,655 $ 5,171 $ 2,988 $ 2,127 Total minimum principal & interest payments 13,941 3,655 5,171 2,988 2,127 Less: Amount representing interest - - - - - Total contractual obligations $ 13,941 $ 3,655 $ 5,171 $ 2,988 $ 2,127 We have contractual obligations to utilize network facilities from certain carriers with terms greater than one year. We generally do not purchase or commit to purchase quantities in excess of normal usage or amounts that cannot be used within the contract term. New Accounting Pronouncements For a discussion of our "New Accounting Pronouncements," refer to Note 2-"Summary of Significant Accounting Policies" to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Related Party Transactions For a discussion of our "Related Party Transactions," refer to Note 12-"Related Parties" to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Special Note Regarding Forward-Looking Statements This Annual Report on Form 10-K contains or incorporates a number of "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based on current expectations, and are not strictly 51 -------------------------------------------------------------------------------- Table of Contents historical statements. In some cases, you can identify forward-looking statements by terminology such as "if," "may," "should," "believe," "anticipate," "future," "forward," "potential," "estimate," "opportunity," "goal," "objective," "growth," "outcome," "could," "expect," "intend," "plan," "strategy," "provide," "commitment," "result," "seek," "pursue," "ongoing," "include" or in the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties and are not guarantees of performance, results, or the creation of shareholder value, although they are based on our current plans or assessments which we believe to be reasonable as of the date hereof. Factors or risks that could cause our actual results to differ materially from the results we anticipate include, but are not limited to: • the outcome of purchase price adjustments related to divested businesses or the possibility of indemnification claims arising out of such divestitures; • continuing uncertain global economic conditions; • significant changes in the competitive environment, including as a result of industry consolidation, and the effect of competition in our markets, including our pricing policies; • the ability of ICS to generate sufficient revenue and cash flow to fund our ongoing operations; • our ability to complete the sale of the remaining portion of our North America Telecom segment; • our possible inability to generate sufficient liquidity, margins, earnings per share, cash flow and working capital; • our ability to attract and retain customers; • our expectations regarding increased competition, pricing pressures and usage patterns with respect to our product offerings; • our compliance with complex laws and regulations in the U.S. and internationally; • further changes in the telecommunications industry, including rapid technological, regulatory and pricing changes in our principal markets; • our expectations regarding the timing, extent and effectiveness of our cost reduction initiatives and management's ability to moderate or control discretionary spending; • management's plans, goals, forecasts, expectations, guidance, objectives, strategies and timing for future operations, acquisitions, synergies, asset dispositions, fixed asset and goodwill impairment charges, tax and withholding expense, selling, general and administrative expenses, product plans, performance and results; • management's assessment of market factors and competitive developments, including pricing actions and regulatory rulings; • limitations on our ability to successfully identify any strategic acquisitions or business opportunities and to compete for these opportunities with others who have greater resources; • the impact of additional material charges associated with our oversight of acquired or target businesses and the integration of our financial reporting; • the impact of expending significant resources in considering acquisition targets or business opportunities that are not consummated; • tax consequences associated with our acquisition, holding and disposition of target companies and assets; • our dependence on distributions from our subsidiaries to fund our operations and payments on our obligations; • the impact on the holders of PTGi's common stock if we issue additional shares of PTGi common stock or preferred stock; 52 -------------------------------------------------------------------------------- Table of Contents • the impact of decisions by PTGi's significant stockholders, whose interest may differ from those of PTGi's other stockholders, or their ceasing to remain significant stockholders; • the effect any interests of our officers, directors, stockholders and their respective affiliates may have in certain transactions in which we are involved; • our dependence on certain key personnel; • our ability to effectively increase the size of our organization, if needed, and manage our growth; • the impact of a determination that we are an investment company or personal holding company; • the impact of delays or difficulty in satisfying the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 or negative reports concerning our internal controls; • the impact of the relatively low market liquidity for PTGi's common stock as a result of our delisting from the NYSE or other conditions, and the failure of PTGi to subsequently relist its common stock on a national securities exchange; • our possible inability to raise additional capital when needed, on attractive terms, or at all; and • our possible inability to hire and retain qualified executive management, sales, technical and other personnel. Other unknown or unpredictable factors could also affect our business, financial condition and results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that any of the estimated or projected results will be realized. You should not place undue reliance on these forward-looking statements, which apply only as of the date hereof. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. |