SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
COMMISSION FILE NUMBER: 0-27778
PREMIERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
GEORGIA
(State or other jurisdiction of incorporation or organization)
59-3074176
(I.R.S. Employer Identification No.)
3399 PEACHTREE ROAD NE
THE LENOX BUILDING, SUITE 600 ATLANTA, GEORGIA 30326
(Address of principal executive offices, including zip code)
(404) 262-8400
(Registrant's telephone number including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes [X] No [_] (2) Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 14, 2000
----- -------------------------------
Common Stock, $0.01 par value 46,977,566 shares
Explanatory Note
----------------
This Form 10-Q/A is filed by Premiere Technologies, Inc. to amend certain
portions of its Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, as filed with the Commission on August 16, 1999, in response to comments
from the Commission.
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q/A
PART I. FINANCIAL INFORMATION Page
----
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998................................................................. 3
Condensed Consolidated Statements of Operations
for the Three and Six Month Periods ended June 30, 1999 and 1998...................... 4
Condensed Consolidated Statements of Cash Flows
for the Six Months ended June 30, 1999 and 1998....................................... 5
Notes to Condensed Consolidated Financial Statements.................................. 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 14
SIGNATURES...................................................................................... 23
EXHIBIT INDEX
2
ITEM 1. FINANCIAL STATEMENTS
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
1999 1998
---------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and equivalents................................... $ 14,141 $ 19,226
Marketable securities.................................. 162 20,769
Accounts receivable, net............................... 62,307 55,660
Prepaid expenses and other............................. 13,015 7,940
Deferred income taxes, net............................. 20,977 20,977
--------- ----------
Total current assets............................... 110,602 124,572
PROPERTY AND EQUIPMENT, NET............................. 127,125 137,311
OTHER ASSETS
Strategic alliances and investments, net.............. 31,720 28,510
Intangibles, net...................................... 476,387 492,185
Deferred income taxes, net............................ 7,994 -
Other assets.......................................... 12,478 20,173
--------- ----------
$ 766,306 $ 802,751
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable...................................... $ 27,359 $ 24,270
Accrued liabilities................................... 53,073 48,817
Accrued taxes......................................... 22,906 16,279
Revolving loan........................................ 126,064 118,082
Current maturities of long-term debt and
capital lease obligations......................... 1,418 3,370
Accrued restructuring, merger costs
and other special charges......................... 6,099 7,545
--------- ----------
Total current liabilities......................... 236,919 218,363
--------- ----------
LONG-TERM LIABILITIES
Convertible subordinated notes........................ 172,500 172,500
Long-term debt and capital lease obligations.......... 5,521 5,721
Other accrued liabilities............................. 877 1,111
Deferred income taxes, net ........................... - 4,162
--------- ----------
Total long-term liabilities....................... 178,898 183,494
--------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10) - -
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value; 150,000,000 shares
authorized, 47,351,337 and 46,894,148 shares
issued in 1999 and 1998, respectively, and
46,254,337 and 45,797,148 shares
outstanding in 1999 and 1998, respectively........ 474 469
Additional paid-in capital............................ 562,653 562,106
Treasury stock, at cost .............................. (9,133) (9,133)
Note receivable, shareholder ......................... (973) (973)
Cumulative translation adjustment..................... 1,221 1,269
Accumulated deficit................................... (203,753) (152,844)
--------- ----------
Total shareholders' equity........................ 350,489 400,894
--------- ----------
$ 766,306 $ 802,751
========= ==========
Accompanying notes are integral to these condensed consolidated
financial statements.
3
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------- -------- -------- -------
(unaudited) (unaudited)
REVENUE.................................................. $114,444 $121,435 $227,253 $206,336
TELECOMMUNICATIONS COSTS ................................ 32,204 35,778 64,660 62,148
--------- -------- -------- --------
GROSS PROFIT............................................. 82,240 85,657 162,593 144,188
DIRECT OPERATING COSTS................................... 17,472 15,062 33,214 21,049
--------- -------- -------- --------
CONTRIBUTION MARGIN...................................... 64,768 70,595 129,379 123,139
--------- -------- -------- --------
OTHER OPERATING EXPENSES
Selling and Marketing.................................. 30,882 27,585 55,006 48,663
General and administrative............................. 31,762 35,535 53,747 43,698
Depreciation and amortization.......................... 42,130 28,705 82,431 41,244
Restructuring, merger costs and other special charges.. - - - 7,545
Acquired research and development...................... - - - 15,500
Accrued settlement cost................................ - - - 1,500
--------- -------- -------- --------
Total other operating expenses...................... 104,774 91,825 191,184 158,150
--------- -------- -------- --------
OPERATING LOSS........................................... (40,006) (21,230) (61,805) (35,011)
--------- -------- -------- --------
OTHER INCOME (EXPENSE)...................................
Interest, net.......................................... (6,420) (3,942) (12,016) (5,422)
Other, net............................................. 13,664 (71) 13,219 (183)
--------- -------- -------- --------
Total other income (expense)........................ 7,244 (4,013) 1,203 (5,605)
--------- -------- -------- --------
LOSS BEFORE INCOME TAXES................................. (32,762) (25,243) (60,602) (40,616)
INCOME TAX BENEFIT....................................... (6,881) (4,291) (9,693) (6,904)
--------- -------- -------- --------
NET LOSS................................................. $(25,881) $(20,952) $(50,909) $(33,712)
========= ======== ======== ========
BASIC NET LOSS PER SHARE................................. $ (0.56) $ (0.45) $ (1.10) $ (0.79)
========= ======== ======== ========
DILUTED NET LOSS PER SHARE............................... $ (0.56) $ (0.45) $ (1.10) $ (0.79)
========= ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC.................................................. 46,168 46,074 46,083 42,784
========= ======== ======== ========
DILUTED................................................ 46,168 46,074 46,083 42,784
========= ======== ======== ========
Accompanying notes are integral to these condensed consolidated
financial statements.
4
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
June 30, June 30,
1999 1998
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................... $(50,909) $(33,712)
Adjustments to reconcile net loss to cash flows
from operating activities:
Depreciation and amortization........................... 82,431 41,244
Deferred income taxes................................... (10,776) (16,498)
Restructuring, merger costs and other special
charges................................................ 7,545
Accrued settlement cost ................................ - 1,500
Acquired research and development....................... - 15,500
Payments for restructuring, merger costs and
other special charges.................................. (1,747) (13,657)
Changes in assets and liabilities:
Accounts receivable, net................................ (2,269) 899
Prepaid expenses and other.............................. (8,479) 2,536
Accounts payable and accrued expenses................... 4,299 8,910
-------- --------
Total adjustments.................................. 63,459 47,979
-------- --------
Net cash provided by operating activities.......... 12,550 14,267
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment......................... (20,791) (31,688)
Proceeds from disposal of property and equipment .......... - 107
Redemption of marketable securities, net................... 20,613 102,581
Cash paid for acquired companies, net of cash
acquired.................................................. (24,047) (39,900)
Strategic investments...................................... (8,089) (8,019)
Other...................................................... 7,407 105
-------- --------
Net cash (used in) provided by investing
activities....................................... (24,907) 23,186
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments under) borrowing
arrangements, net......................................... 6,307 (6,741)
Purchase of common stock for treasury...................... - (2,619)
Net funds from exercise of stock options................... 970 (2,150)
Other...................................................... - (354)
-------- --------
Net cash provided by (used in) financing activities. 7,277 (11,864)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH...................... (5) (350)
-------- --------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS.............. (5,085) 25,239
CASH AND EQUIVALENTS, beginning of period.................... 19,226 21,770
-------- --------
CASH AND EQUIVALENTS, end of period.......................... $ 14,141 $ 47,009
======== ========
Accompanying notes are integral to these condensed consolidated
financial statements.
5
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
have been prepared by management of Premiere Technologies, Inc. (the "Company"
or "Premiere") in accordance with rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, certain information and footnote
disclosures usually found in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. In the
opinion of management of the Company, all adjustments (consisting only of normal
recurring adjustments, except as disclosed herein) considered necessary for a
fair presentation of the condensed consolidated financial statements have been
included. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Examples include provisions for bad debts, carrying
values and useful lives assigned to goodwill and other long-lived assets and
accruals for restructuring costs and employee benefits. Actual results could
differ from those estimates. These interim condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K/A, for the year ended December 31, 1998, as amended.
2. ACCOUNTING CHANGES
Restatement
In February 1999, Premiere announced that as a result of discussions with the
Office of the Chief Accountant of the Securities and Exchange Commission,
Premiere was required to discontinue accounting for its acquisition of Xpedite
Systems, Inc. ("Xpedite") as a pooling-of-interests and to account for such
acquisition under the purchase method of accounting. Accordingly, Premiere has
restated its unaudited interim financial statements for 1998. The Office of the
Chief Accountant determined that Premiere's post-merger share repurchase
program, completed in September 1998, was not implemented in accordance with
pooling requirements. No questions were raised regarding the propriety of the
original accounting for the merger with Xpedite.
Acceleration of Depreciation and Amortization
In the fourth quarter of 1998, the Company accelerated depreciation of certain
assets by shortening their estimated useful lives. These assets consist of
computers and telecommunications equipment associated with certain legacy
technology systems which management intends to remove from service in the
foreseeable future. Effective in the fourth quarter of 1998, these assets are
being amortized over periods ranging from nine months to one year, the
anticipated remaining service period. Prior to the change, such assets were
being amortized over estimated lives ranging from two to five years.
In addition, the Company accelerated the amortization of all remaining goodwill
and other acquired intangible assets effective in the fourth quarter of 1998.
This action resulted from management's determination that the period over which
it anticipates deriving future cash flows from such assets warrants a shorter
estimated useful life for amortization purposes. Goodwill is now being amortized
over seven years as compared with 10 to 40 years prior to the change. Remaining
acquired intangible assets are being amortized over lives ranging from three to
five years as compared with five to eight years prior to the change.
The Company has also shortened the amortization period associated with a
strategic alliance contract intangible asset from 25 years to three years
effective in the fourth quarter of 1998. See "Note 8-Strategic Alliances and
Investments" for further discussion surrounding events causing this change.
6
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes accounting and reporting standards for derivatives and
hedging. It requires that all derivatives be recognized as either assets or
liabilities at fair value and establishes specific criteria for the use of hedge
accounting. The Company's required adoption date is January 1, 2001. SFAS No.
133 is not to be applied retroactively to financial statements of prior periods.
The Company expects no material impact to its results of operations or financial
position upon adoption of SFAS No. 133.
4. NET INCOME (LOSS) PER SHARE
Net loss per share is computed in accordance with SFAS No. 128, "Earnings per
Share." Basic and diluted net loss per share are the same in the three and six
month periods ended June 30, 1999 and 1998 because both of the Company's
potentially dilutive securities, convertible subordinated notes and stock
options, are antidilutive in such periods.
5. COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income (loss) represents the change in equity of a business during
a period, except for investments by owners and distributions to owners. Foreign
currency translation adjustments represent the Company's only component of other
comprehensive income (loss) in the six month periods ended June 30, 1999 and
1998. For the three month periods ended June 30, 1999 and 1998, total
comprehensive loss was approximately $(24.1) million and $(20.3) million,
respectively. For the six month periods ended June 30, 1999 and 1998, total
comprehensive loss was $(51.0) million and $(33.6) million, respectively.
6. ACQUISITIONS
AMERICAN TELECONFERENCING SERVICES, LTD. ACQUISITION
In April 1998, the Company purchased all of the issued and outstanding common
stock of American Teleconferencing Services ("ATS"), a provider of full service
conference calling and group communication services. The shareholders of ATS
received an aggregate of approximately 712,000 shares of Premiere common stock
and cash consideration of approximately $22.1 million. Excess purchase price
over fair value of net assets acquired of approximately $47 million has been
recorded as goodwill and is being amortized on a straight-line basis over seven
years. This transaction has been accounted for as a purchase.
XPEDITE SYSTEMS, INC. ACQUISITION
On February 27, 1998, Premiere acquired Xpedite Systems, Inc. ("Xpedite"), a
worldwide leader in the electronic document distribution business including,
fax, e-mail, telex and mailgram services. Premiere issued approximately 11.0
million shares of its common stock in connection with this acquisition. This
transaction has been accounted for as a purchase. The purchase price of Xpedite
has been allocated as follows (in thousands):
Operating and other tangible assets.. $ 90,035
Customer lists....................... 35,700
Developed technology................. 34,300
Acquired research and development.... 15,500
Assembled workforce.................. 7,500
Goodwill............................. 384,701
--------
Assets acquired...................... 567,736
Less liabilities assumed............. 203,487
--------
$364,249
========
7
The customer lists, developed technology and acquired research and development
were valued using the income approach, which consisted of estimating the
expected after-tax cash flows to present values through discounting. The
assembled workforce was valued using a cost approach, which estimates the cost
to replace the asset. Acquired research and development represents the value
assigned to research and development projects in the development stage which had
not reached technological feasibility at the date of acquisition or had no
alternative future use. The acquired research and development costs were
expensed at the date of the acquisition.
The acquired research and development related to a project to develop a new job
monitor. This project was 50% complete as of the acquisition date and had not
yet completed a successful beta test. The primary high risk at valuation date
involved identifying and correcting the design flaws that would typically arise
during beta testing. Fair value was determined using an income approach.
Revenues from this new job monitor are anticipated beginning in 1999 and a
discount rate of 25% was used for valuation purposes.
The Company expects to complete the job monitor project during the fourth
quarter of 1999. The job monitor project is approximately 85% complete with less
than $100,000 of anticipated costs left to complete the project.
The developed technology is a software program called the job monitoring system
and related technologies that are primarily related to the Xpedite document
delivery system. This software and the related hardware is the basis for
Xpedite's enhanced facsimile delivery service.
INTERNATIONAL ACQUISITIONS
During the second quarter of 1999, Premiere purchased all remaining ownership
interests it did not already own in an affiliated electronic document
distribution company located in France for approximately $19 million in cash and
liabilities assumed. Premiere held an approximate 18% ownership interest in the
affiliate prior to this transaction which has been accounted for as a purchase.
Excess purchase price over fair value of net assets acquired of approximately
$18 million has been recorded as goodwill and is being amortized on a straight-
line basis over seven years.
During the second quarter of 1998, the Company acquired two electronic document
distribution companies located in Germany and Singapore. The aggregate purchase
price of these acquisitions approximates $18 million in cash and liabilities
assumed. Both of the acquisitions were accounted for as purchases. Excess
purchase price over fair value of net assets acquired of approximately $13
million has been recorded as goodwill and is being amortized on a straight-line
basis over seven years.
The following unaudited pro forma consolidated results of operations assumes the
acquisitions made by the Company in 1998 and 1999 which were accounted for as
purchases occurred on January 1, 1998. Pro forma adjustments consist of
amortization of intangible assets acquired and interest reflecting cash paid in
the acquisitions (amounts in thousands):
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues $118,643 $129,471 $238,401 $266,110
Net income (loss) (26,205) (21,359) (51,133) (49,555)
Basic net income (loss) per share (0.57) (0.46) (1.11) (1.08)
Diluted net income (loss) per share (0.57) (0.46) (1.11) (1.08)
7. RESTRUCTURING, MERGER COSTS AND OTHER SPECIAL CHARGES
In the first quarter of 1998, Premiere recorded a charge of approximately $7.5
million to restructure the operations of Premiere and Xpedite subsequent to
their merger. Such costs consist of severance associated with workforce
reduction, lease termination costs, costs to terminate certain contractual
obligations and asset impairments. Severance benefits have been provided for
termination of 122 employees. These actions resulted from management's plan to
reduce sales, operations and administrative headcount by exiting duplicative and
underperforming operations. Premiere has also provided for lease termination
and clean-up costs associated with these facilities and operations. In addition,
the Company provided for costs associated with commitments under certain
advertising contracts from which the Company was generating no incremental
revenue and for costs to terminate certain unfavorable reseller agreements.
Although certain restructuring actions were being contemplated at the
acquisition date, definitive plans for such actions were not formalized until
after such date. Accordingly, there were no exit costs included in the purchase
price allocation of Xpedite.
8
Activity in accrued costs for restructuring, merger costs and other special
charges during the six month period ended June 30, 1999 is as follows (amounts
in thousands):
Accrued Accrued
Costs Costs
December 31, Costs June 30,
1998 Incurred 1999
---- -------- ----
Severance......................................................... $ 4,837 $ 912 $ 3,925
Asset impairments................................................. 4,722 300 4,422
Restructure or terminate contractual obligations.................. 417 94 323
Other costs, primarily to exit facilities and certain activities.. 2,291 440 1,851
------- ------ -------
$12,267 $1,746 $10,521
======= ====== =======
8. STRATEGIC ALLIANCES AND INVESTMENTS
Assets recorded as strategic alliances and investments at June 30, 1999 and
December 31, 1998 are as follows (amounts in thousands):
June 30, December 31,
1999 1998
---- ----
MCI WorldCom strategic alliance...................... $16,072 $16,072
Less accumulated amortization........................ 5,740 3,445
------- -------
10,332 12,627
Equity investments................................... 21,388 15,883
------- -------
$31,720 $28,510
======= =======
Management periodically reviews assets for impairment and in 1998 determined
that a write-down in the carrying value of the MCI WorldCom strategic alliance
was required based upon management's assessment of revenue levels expected to be
derived from this alliance and uncertainties surrounding the merger of WorldCom
and MCI in 1998. Accordingly, Premiere recorded a write-down in the carrying
value of this investment of approximately $13.9 million in 1998. In addition,
the Company accelerated amortization of this asset effective in the fourth
quarter of 1998 by shortening its amortization period to three years as compared
with 25 years prior to the change. In June 1999, Premiere filed a complaint
against MCI WorldCom alleging breach of the Strategic Alliance Agreement. See
"Note 10 - Commitments and Contingencies." If Premiere is unsuccessful in
attaining revenue levels from this alliance sufficient to recover the carrying
value of this asset, future write-downs of this asset will be required. In
addition, Premiere recorded a write-down of approximately $3.9 million in the
fourth quarter of 1998 in its investment in certain equity securities of DigiTEC
2000. This charge was necessary to reduce the carrying value of this investment
to its fair market value based upon management's assessment that the decline in
value of these securities below their carrying value was not temporary.
Management continually reviews these and other assets for impairment. In the
event management determines an asset impairment has occurred, write-downs in the
carrying value of such assets may be required.
Equity investments classified as strategic alliances and investments consist of
initiatives funded by the Company to further its strategic plan. These
investments and alliances involve emerging technologies, such as the Internet,
as well as marketing alliances and outsourcing programs designed to reduce costs
and develop new markets and distribution channels for the Company's products.
Premiere's investments include minority equity interests in WebMD, a provider of
Internet-based services to the healthcare industry; USA.NET, a provider of
outsourced e-mail services; VerticalOne, a network-based services provider that
increases frequency, duration, and quality of its customers' visits to Websites;
Webforia, a provider of Web services, tools and communities that assist
individuals in presenting high quality information from the Internet; and
Derivion, a provider of electronic bill presentment and payment solutions.
Premiere's investments also include a minority equity interest in Intellivoice,
an entity engaged in developing Internet-enabled communications products. See
"Note 13-Subsequent Event." Management intends to make such investments in the
future in complementary businesses and other initiatives that further its
strategic business plan. All equity investments held by the Company in other
organizations represent a less than 20 percent ownership interest and are being
accounted for under the cost method.
9
9. STOCK-BASED COMPENSATION PLANS
The Company has three stock based compensation plans, the 1994 Stock Option
Plan, the 1995 Stock Plan and the 1998 Stock Plan, which provide for the
issuance of restricted stock, stock options, warrants or stock appreciation
rights to employees, directors, non-employee consultants and advisors of the
Company. In addition, the Company has implemented an Associate Stock Purchase
Plan, which allows employees to purchase common stock through payroll
deductions. These plans are administered by committees consisting of members of
the Board of Directors of the Company.
Options for all 960,000 shares of common stock available under the 1994 Stock
Option Plan have been granted. Generally, all such options are non-qualified,
provide for an exercise price equal to fair market value at date of grant, vest
ratably over three years and expire eight years from date of grant.
The 1995 Stock Plan provides for the issuance of stock options, stock
appreciation rights and restricted stock to employees. A total of 8,000,000
shares of common stock have been reserved in connection with this plan. Options
issued under this plan may be either incentive stock options, which permit
income tax deferral upon exercise of options, or non-qualified options not
entitled to such deferral.
On July 22, 1998, the Board of Directors approved the 1998 Stock Plan (the "1998
Plan") that essentially mirrors the terms of the Company's existing 1995 Stock
Plan, except that it is not intended to be used for executive officers or
directors. In addition, the 1998 Plan, because it was not approved by the
shareholders, does not provide for the grant of incentive stock options. Under
the 1998 Plan, 6,000,000 shares of common stock are reserved for the grant of
non-qualified stock options and other incentive awards to employees and
consultants of the Company.
Sharp declines in the market price of the Company's common stock during 1998
resulted in many outstanding employee stock options being exercisable at prices
that exceeded the current market price of the Company's common stock, thereby
substantially impairing the effectiveness of such options as performance
incentives. Consistent with the Company's philosophy of using equity incentives
to motivate and retain management and employees, the Board of Directors
determined it to be in the best interests of the Company and its shareholders to
restore the performance incentives intended to be provided by employee stock
options by repricing such options. Consequently, on July 22, 1998 the Board of
Directors of the Company determined to reprice or regrant all employee stock
options which had exercise prices in excess of the closing price on such date
(other than those of Chief Executive Officer Boland T. Jones) to $10.25, which
was the closing price of Premiere's common stock on such date.
On December 14, 1998, the Board of Directors determined to reprice or regrant at
an exercise price of $5.50, all employee stock options which had an exercise
price in excess of $5.50, which was above the closing price of Premiere's common
stock on such date. The vesting schedules remained the same and the repriced or
regranted options are generally subject to a twelve-month black-out period
during which the option may not be exercised. If the optionee's employment is
terminated during the black-out period, generally he or she will forfeit any
repriced or regranted options that first vested during the twelve-month period
preceding his or her termination of employment. By imposing the black-out and
forfeiture provisions on the repriced and regranted options, the Board of
Directors intends to provide added incentive for the optionees to continue
service with the Company.
Effective June 1, 1999, the Company adopted an Associate Stock Purchase Plan to
provide all employees who regularly work at least 20 hours each week and at
least five months each calendar year and who have two months of consecutive
service an opportunity to purchase shares of its common stock through payroll
deductions. The purchase price of the stock is equal to 85% of the fair market
10
value of the common stock on either the first or last day of each six month
subscription period, whichever is lower. Purchases under the plan are limited to
20% of an associate's base salary and a maximum of a calendar year aggregate
fair market value of $25,000. In connection with this Plan, 1,000,000 shares of
common stock are reserved for future issuance.
During the second quarter of 1999, the Company made restricted stock grants to
certain executives of a limited number of Company-owned shares held in certain
strategic equity investments. These Company-owned shares included 168,000 shares
of WebMD Series E Common Stock and 6,461 shares of WebMD Series F Preferred
Stock, and 70,692 shares of USA.NET Series C Preferred Stock. The vesting
periods for these shares ranged from immediately upon grant to three years,
contingent on the executive being employed by the Company. Excluding the shares
subject to these restricted stock grants, the Company owns an aggregate of
1,932,000 shares of WebMD Series E Common Stock and 74,305 shares of WebMD
Series F Preferred Stock, and 812,960 shares of USA.NET Series C Preferred
Stock. In connection with this action, the Company recorded a $13.9 million non-
cash gain resulting from the write-up to fair market value of these investments
and a $8.9 million non-cash expense related to the partial vesting of these
grants. The gain reflects the difference between the Company's cost basis and
fair market value at date of grant of these investments. The fair value of these
investments was determined through an assessment of the market values of
comparable public companies, proposed initial public offering price ranges, and
a contemplated cash tender offer from an unrelated investor. The Company will be
required to record additional non-cash charges of $2.7 million and $1.5 million
in the third and fourth quarters of 1999, respectively, and $1.6 million
thereafter reflecting the remaining vesting period associated with the
grant.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company has several litigation matters pending, as described below, which it
is defending vigorously. Due to the inherent uncertainties of the litigation
process and the judicial system, the Company is unable to predict the outcome of
such litigation matters. If the outcome of one or more of such matters is
adverse to the Company, it could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company and certain of its officers and directors have been named as
defendants in multiple shareholder class action lawsuits filed in the United
States District Court for the Northern District of Georgia. Plaintiffs seek to
represent a class of individuals who purchased or otherwise acquired the
Company's common stock from as early as February 11, 1997 through June 10, 1998.
Class members allegedly include those who purchased the Company's common stock
as well as those who acquired stock through the Company's acquisitions of Voice-
Tel Enterprises, Inc. ("Voice-Tel"), Voice-Tel's franchisees and Xpedite.
Plaintiffs allege the defendants made positive public statements concerning the
Company's growth and acquisitions. In particular, plaintiffs allege the
defendants spoke positively about the Company's acquisitions of Voice-Tel,
Xpedite, American Teleconferencing Services, TeleT Telecommunications, LLC
("TeleT") and VoiceCom Holdings, Inc. ("VoiceCom"), as well as its venture with
UniDial Communications, its investment in USA.NET and the commercial release of
Orchestrate(R). Plaintiffs allege these public statements were fraudulent
because the defendants knowingly failed to disclose that the Company allegedly
was not successfully consolidating and integrating these acquisitions. Alleged
evidence of scienter include sales by certain individual defendants during the
class period and the desire to keep the common stock price high so that future
acquisitions could be made using the Company's common stock. Plaintiffs allege
the truth was purportedly revealed on June 10, 1998, when the Company announced
it would not meet analysts' estimates of second quarter 1998 earnings because,
in part, of the financial difficulties experienced by a customer and by a
strategic partner with respect to the Company's Enhanced Calling Services,
revenue shortfalls from its Voice and Data Messaging services, as well as other
unanticipated costs and charges totaling approximately $17.1 million on a pre-
tax basis. Plaintiffs allege the Company admitted it had experienced difficulty
in achieving its anticipated revenue and earnings from voice messaging services
due to difficulties in consolidating and integrating its sales function.
Plaintiffs allege violation of Sections 10(b), 14(a) and 20(a) of the Securities
Exchange Act of 1934 and Sections 11, 12 and 15 of the Securities Act of 1933.
The Company filed a motion to dismiss this complaint in April 1999, which is
pending.
A lawsuit was filed on November 4, 1998 against the Company, as well as
individual defendants Boland T. Jones, Patrick G. Jones, George W. Baker, Sr.,
Eduard J. Mayer and Raymond H. Pirtle, Jr. in the Southern District of New York.
Plaintiffs were shareholders of Xpedite who acquired common stock of the Company
as a result of the merger between the Company and Xpedite in February 1998.
Plaintiffs' allegations are based on the representations and warranties made by
the Company in the prospectus and the registration statement related to the
merger, the merger agreement and other documents incorporated by reference,
regarding the Company's acquisitions of Voice-Tel and VoiceCom, the Company's
roll-out of Orchestrate(R), the Company's relationship with customers Amway
Corporation and DigiTEC, 2000, Inc., and the Company's 800-based calling card
service. Based on these factual allegations, plaintiffs allege causes of action
against the Company for breach of contract, against all defendants for negligent
misrepresentation, violations of Sections 11 and 12(a)(2) of the Securities Act
of 1933 ("Securities Act"), and against the individual Defendants for violation
of Section 15 of the Securities Act. Plaintiffs seek undisclosed damages
together with pre- and post-judgment interest, recission or recissory damages as
to violation of Section 12(a)(2) of the Securities Act, punitive damages, costs
and attorneys' fees. Defendants' motion to transfer venue to Georgia has been
granted and the defendants' motion to dismiss is pending.
On November 26, 1997, Wael Al-Khatib ("Al-Khatib"), the sole shareholder and
former president of
11
Communications Network Corporation ("CNC"), and his company, Platinum
NetworkCorp. ("Platinum"), filed a complaint against Premiere Communications,
Inc. ("PCI"), WorldCom Network Services, Inc. f/k/a WilTel, Inc, ("WorldCom"),
Bernard J. Ebbers, David F. Meyers, Robert Vetera, Joseph Cusick, William
Trower, Don Wilmouth, Digital Communications of America, Inc., Boland Jones,
Patrick Jones, and John Does I-XX in the United States District Court for the
Eastern District of New York. Plaintiffs contend that PCI, certain officers of
PCI and the other defendants engaged in a fraudulent scheme to restrain trade in
the debit card market nationally and in the New York debit card sub-market and
made misrepresentations of fact in connection with the scheme. The plaintiffs
are seeking at least $250 million in compensatory damages and $500 million in
punitive damages from PCI and the other defendants. This matter has been
settled, pending payment of $250,000 by Khatib to WorldCom. The settlement does
not require PCI or Premiere to make any payments.
On February 23, 1998, Rudolf R. Nobis and Constance Nobis filed a complaint in
the Superior Court of Union County, New Jersey against 15 named defendants
including Xpedite and certain of its alleged current and former officers,
directors, agents and representatives. The plaintiffs allege that the 15 named
defendants and certain unidentified "John Doe defendants" engaged in wrongful
activities in connection with the management of the plaintiffs' investments with
Equitable Life Assurance Society of the United States and/or Equico Securities,
Inc. (collectively "Equitable"). More specifically, the complaint asserts
wrongdoing in connection with the plaintiffs' investment in securities of
Xpedite and in unrelated investments involving insurance-related products. The
defendants include Equitable and certain of its current or former
representatives. The allegations in the complaint against Xpedite are limited to
plaintiffs' investment in Xpedite. The plaintiffs have alleged that two of the
named defendants, allegedly acting as officers, directors, agents or
representatives of Xpedite, induced the plaintiffs to make certain investments
in Xpedite but that the plaintiffs failed to receive the benefits that they were
promised. Plaintiffs allege that Xpedite knew or should have known of alleged
wrongdoing on the part of other defendants. Plaintiffs seek an accounting of the
corporate stock in Xpedite, compensatory damages of approximately $4.85 million,
plus $200,000 in "lost investments," interest and/or dividends that have accrued
and have not been paid, punitive damages in an unspecified amount, and for
certain equitable relief, including a request for Xpedite to issue 139,430
shares of common stock in the plaintiffs' names, attorneys' fees and costs and
such other and further relief as the court deems just and equitable. On November
16, 1998 the court entered an order transferring all disputes between plaintiffs
and certain defendants to arbitration and dismissing without prejudice
plaintiff's complaint against those defendants. On or about December 23, 1998,
Xpedite filed a motion to stay the action pending the resolution of the
arbitration or in the alternative to compel plaintiffs to provide discovery. On
January 22, 1999, the court granted Xpedite's motion to stay further proceedings
pending the arbitration. On March 11, 1999, plaintiffs filed a motion for
reconsideration of the court's decision. On April 1, 1999, the court vacated the
January 22, 1999 order and directed that the action be referred to the active
case list. Xpedite filed a motion for leave to amend answer and assert cross-
claims, which is presently pending.
On December 22, 1998 Shelly D. Swift filed a complaint against First USA Bank,
First Credit Card Services USA, and PCI in the United States District Court for
the Northern District of Illinois. Swift alleges that the defendants sent her an
unsolicited "credit card" in violation of the Truth in Lending Act and state
law. Swift seeks an injunction and monetary damages on behalf of a putative
class of persons who received the alleged credit card. On February 19, 1999, the
defendants moved to dismiss the complaint for failure to state a claim upon
which relief can be granted. In May 1999, the court granted the motion to
dismiss as to all claims against PCI and, as a result, PCI is no longer a party
to this lawsuit.
In March 1999, Aspect Telecommunications, Inc. ("Aspect"), the purported current
owner of certain patents, filed suit against Premiere and PCI alleging that they
had violated certain patent rights owned by Aspect and requesting damages and
injunctive relief. The suit asserts that Premiere is offering certain "calling
card and related enhanced services," "single number service" and "call
connecting services" covered by such rights. Premiere has reviewed the subject
patents and, based on that review, believes that its products and services
currently being marketed do not infringe them. On March 29, 1999, the Company
filed an answer denying the allegations and a counterclaim seeking to invalidate
the patents. This lawsuit is currently in the discovery phase. Additionally, the
Company believes that certain licenses it has from third-party vendors may
insulate the Company from some or all of any damages in the event of an adverse
outcome in this litigation.
On June 11, 1999, Premiere filed a complaint against MCI WorldCom, Inc. ("MCI
WorldCom") in the Superior Court of Fulton County for the State of Georgia.
Premiere subsequently filed an amended complaint on June 18, 1999. The amended
complaint alleges that MCI WorldCom breached the Strategic Alliance Agreement,
dated November 13, 1996 between Premiere and MCI WorldCom by, inter alia,
awarding various contracts to vendors other than Premiere and to which Premiere
was entitled either exclusive or preferential consideration. In addition to
injunctive relief, Premiere seeks damages of not less than $10 million, pre- and
post-judgment interest, costs and expenses of litigation, including attorneys'
fees. On July 1, 1999, the court entered an order staying all proceedings
pending arbitration. In connection with that order, MCI WorldCom agreed that it
would not issue any requests for information, requests for proposals or enter
into any contracts with respect to the proposals challenged by Premiere.
Premiere intends to commence arbitration proceedings against MCI WorldCom in the
near future.
12
The Company is also involved in various other legal proceedings which the
Company does not believe will have a material adverse effect upon the Company's
business, financial condition or results of operations, although no assurance
can be given as to the ultimate outcome of any such proceedings.
11. SEGMENT REPORTING
The Company's reportable segments are strategic business groups that align the
Company in two distinct market segments focused on the customers each serves:
large businesses and small office/home businesses and individuals. Corporate
Enterprise Solutions caters to large businesses, such as Fortune 1000 companies.
Its services include those most complementary with large organizations including
electronic document distribution, corporate messaging services, 800-based and
local access voice messaging, interactive voice response and calling card
programs and full-service conference calling. Emerging Enterprise Solutions
focuses in the small office/home office and individual subscriber segment. Its
services include Orchestrate (R), a suite of internet-based communication
services, local access voice and data messaging and enhanced calling services,
including long distance and enhanced 800-based services.
EBITDA before accrued settlement costs, acquired research and development costs
and restructuring, merger and other special charges is management's primary
measure of segment profit and loss. Information concerning the operations in
these reportable segments for the three and six month periods ended June 30,
1999 and 1998 is as follows (in millions):
Three month period Six month period
ended June 30, ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
REVENUES:
Corporate Enterprise Solutions... $ 84.1 $ 81.6 $165.8 $115.1
Emerging Enterprise Solutions.... 30.4 39.9 61.7 91.3
Corporate and eliminations (1)... (.1) (.1) (.2) (.1)
------ ------ ------ ------
Totals........................... $114.4 $121.4 $227.3 $206.3
====== ====== ====== ======
EBITDA:
Corporate Enterprise Solutions... $ 19.7 $ 22.9 $ 40.2 $ 34.5
Emerging Enterprise Solutions.... (2.5) (1.7) 0.3 10.4
Corporate and eliminations (1)... (15.1) (13.7) (19.9) (14.2)
------ ------ ------ ------
Subtotal 2.1 7.5 20.6 30.7
Restructuring, merger costs and
other special charges........... - - - (7.5)
Acquired research and development - - - (15.5)
Accrued settlement cost.......... - - - (1.5)
------ ------ ------ ------
Totals $ 2.1 $ 7.5 $ 20.6 $ 6.2
====== ====== ====== ======
(1) Corporate and eliminations is primarily comprised of general and
administrative costs associated with the corporate headquarters management
infrastructure and revenue eliminations of business transacted between Corporate
Enterprise Solutions and Emerging Enterprise Solutions.
12. AMENDMENT OF REVOLVING LOAN AGREEMENT
Effective June 4, 1999, the Company entered into an amendment to its revolving
loan facility to, among other things, eliminate certain financial covenants,
provide for the pledge of additional collateral (including its WebMD stock) and
establish a loan to value ratio with respect to the stock to be received by the
Company in connection with the merger between WebMD and Heatheon. The Company
was in compliance with all such loan covenants at June 30, 1999. Continued
compliance under these loan covenants will require that Premiere achieve certain
EBITDA ratios, and that the pledge of the additional collateral be completed by
no later than August 27, 1999 (which requires certain third party consents), and
until such pledge is completed the Company may not borrow additional funds in
excess of $4.0 million or a maximum of approximately $137.0 million. At June 30,
1999, the Company had unused borrowing capacity of approximately $23.9 million
under the revolving loan facility.
13. SUBSEQUENT EVENT
In August 1999, Premiere purchased the remaining shares of Intellivoice that it
did not already own for approximately 573,000 shares of Premiere common stock.
Intellivoice is engaged in developing Internet-enabled communications products.
This acquisition will be accounted for as a purchase.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Premiere is a leading provider of enhanced communications services designed to
simplify everyday communications of both businesses and individuals. Premiere
provides its innovative solutions for simplifying communications through two
strategic business groups: Corporate Enterprise Solutions ("CES"), which targets
Fortune 1000 and other large companies; and Emerging Enterprise Solutions
("EES"), which targets smaller fast-track companies and individuals. CES's
services include: Premiere Document Distribution, which provides enhanced
electronic document distribution services; Premiere Corporate Messaging, which
provides local access and 800-based voice messaging services; Premiere WorldLink
Corporate Card, an 800-based enhanced calling card service; Premiere Interactive
Voice Response, which provides various IVR applications; and Premiere
Conferencing, which provides a full range of conferencing services. EES's
services include: Premiere Internet-Based Communications Services, featuring
Orchestrate(R) by Premiere, which integrates the Company's service offerings by
allowing customers to access such services through a computer or telephone;
Premiere Voice and Data Messaging, which provides customers access to one of the
largest "voice intranets" in the world; and Premiere Enhanced Calling Services,
which provides long distance and enhanced 800-based services.
Premiere's revenues are generally based on usage. In addition to usage fees,
local access Voice and Data Messaging services, certain of Premiere's Enhanced
Calling Services and the Orchestrate(R) suite of products contain fixed monthly
fees.
Telecommunications costs consist primarily of the cost of long distance
transmission and other telecommunications related charges incurred in providing
Premiere's services.
Direct operating costs consist primarily of rent and facility expense associated
with operations centers, salaries and wages of operations, engineering and
support personnel and other operating costs incurred in service delivery
activities.
Selling and marketing costs consist primarily of advertising and promotion
costs, employee and non-employee commissions and salary and wages and other
operating expenses associated with selling and marketing activities.
General and administrative expenses include salaries and wages associated with
customer service, research and development and administrative functions, bad
debt expense, professional and consulting fees, property taxes and other
operating expenses incurred in customer service, research and development and
administrative activities.
Depreciation and amortization includes depreciation of computer and
telecommunications equipment, office equipment and leasehold improvements and
amortization of intangible assets. The Company provides for depreciation using
the straight-line method of depreciation over the estimated useful lives of the
assets, with the exception of leasehold improvements which are depreciated on a
straight-line basis over the shorter of the term of the lease or the estimated
useful life of the assets. Intangible assets being amortized include capitalized
software development costs, goodwill, customer lists, assembled work force, and
the MCI WorldCom strategic alliance.
EBITDA before accrued settlement costs, acquired research and development
costs and restructuring, merger and other special charges is defined as net
income before taxes, other income (expense), interest income (expense),
depreciation and amortization, accrued settlement costs, acquired research and
development costs and restructuring, merger costs and other special charges.
EBITDA before accrued settlement costs, acquired research and development costs
and restructuring, merger and other special charges is considered a key
management performance indicator of financial condition because it excludes the
effects of goodwill and intangible amortization attributable to acquisitions
primarily acquired using the Company's common stock, the effects of prior years
cash investing and financing activities that affect current period profitability
and the affect of one time cash or non-cash charges associated with acquisitions
and internal exit activities. EBITDA, as defined by the Company, is used as an
indicator of operating cash flow before payments for interest and taxes. EBITDA
before accrued settlement costs, acquired research and development costs and
restructuring, merger and other special charges may not be comparable to
similarly titled measures presented by other companies and could be misleading
unless all companies and analysts calculate them in the same manner.
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") 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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from estimates. The following discussion and
analysis provides information which management believes is relevant to an
assessment and understanding of the Company's consolidated results of operations
and financial condition. This discussion should be read in conjunction with the
consolidated condensed financial statements and notes thereto.
14
In February 1999, Premiere announced that as a result of discussions with the
Office of the Chief Accountant of the Securities and Exchange Commission,
Premiere was required to discontinue accounting for its acquisition of Xpedite
Systems, Inc. ("Xpedite") as a pooling-of-interests and to account for such
acquisition under the purchase method of accounting. Accordingly, Premiere has
restated its unaudited interim financial statements for 1998. The Office of the
Chief Accountant determined that Premiere's post merger share repurchase
program, completed in September 1998, was not implemented in accordance with
pooling requirements. No questions were raised regarding the propriety of the
original accounting for the merger with Xpedite.
ANALYSIS OF OPERATING RESULTS
Overview
The following table presents certain financial information about the Company's
strategic business groups for the three and six month periods ended June 30
(amounts in millions):
Three month period Six month period
ended June 30, ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
REVENUES:
Corporate Enterprise Solutions... $ 84.1 $ 81.6 $165.8 $115.1
Emerging Enterprise Solutions.... 30.4 39.9 61.7 91.3
Corporate and eliminations....... (.1) (.1) (.2) (.1)
------ ------ ------ ------
Totals........................... $114.4 $121.4 $227.3 $206.3
====== ====== ====== ======
EBITDA:
Corporate Enterprise Solutions... $ 19.7 $ 22.9 $ 40.2 $ 34.5
Emerging Enterprise Solutions.... (2.5) (1.7) 0.3 10.4
Corporate and eliminations....... (15.1) (13.7) (19.9) (14.2)
------ ------ ------ ------
Subtotal 2.1 7.5 20.6 30.7
Restructuring, merger costs and
other special charges........... - - - (7.5)
Acquired research and development - - - (15.5)
Accrued settlement costs......... - - - (1.5)
------ ------ ------ ------
Totals $ 2.1 $ 7.5 $ 20.6 $ 6.2
====== ====== ====== ======
Analysis
Premiere's financial statements reflect the results of operations of Xpedite,
acquired in February 1998, and ATS, acquired in April 1998, from the date of
their respective acquisitions. These acquisitions have been accounted for under
the purchase method of accounting. The following discussion and analysis is
prepared on that basis.
Consolidated revenues declined 5.8% to $114.4 million in the three months ended
June 30, 1999 as compared with the same period in 1998 and increased 10.1%
comparing the six month periods ended June 30, 1999 and 1998. CES revenues
increased 3.1% in the second quarter of 1999 as compared with the same period in
1998. Conference calling, Bank of America IVR program and increased
international document distribution volumes drove revenue growth in this group.
Additionally, the acquisition of the remaining ownership interests in an
affiliated document distribution company located in France contributed
incremental revenue in the second quarter of 1999. Revenue growth of 44.0% in
the first half of 1999 in the CES group as compared with the same 1998 period,
is due mainly to the acquisition of Xpedite in February 1998 and ATS in April
1998. EES Group revenues declined in the three and six month periods ended June
30, 1999 as compared with the same periods in 1998 due to revenue losses in 1998
from two EES Group customers which declared bankruptcy in the second quarter of
1998, management's decision to discontinue certain unprofitable prepaid calling
card programs and expiration of minimum revenue commitments provided under the
Company's strategic alliance agreement with MCI Worldcom.
15
Consolidated gross profit margins were 71.9% and 70.5% for the three months
ended June 30, 1999 and 1998, respectively, and 71.5% and 69.9% for the six
month periods ended June 30, 1999 and 1998, respectively. Consolidated gross
profit margins benefited in 1999 from the discontinuance of unprofitable prepaid
calling card programs in the first half of 1998. In general, Premiere has
experienced favorable trends in per unit telecommunications costs in each of its
strategic business groups by aggressively leveraging increasing minute volumes
to negotiate quantity discounts with telecommunications carriers. Such costs
have also been favorably affected by general industry trends in which long
distance transport and the cost of local access services have decreased as a
result of increased capacity and competition among long distance and local
exchange carriers.
Direct costs of operations increased to 15.3% of revenues in the three months
ended June 30, 1999 as compared with 12.4% for the same period of 1998 and
increased to 14.6% of revenues in the six months ended June 30, 1999 as compared
with 10.2% for the same period of 1998. The increase in these costs as a percent
of revenues results mainly from the acquisition of ATS (Premiere Conferencing)
in April 1998. The service delivery processes of Premiere Conferencing include a
relatively higher labor cost than Premiere's other services. Another factor
contributing to the increase in these costs as a percent of revenues in 1999, is
revenue losses in the EES group. Such losses hampered coverage of certain
relatively fixed operations, engineering and support costs.
Selling and marketing costs increased to $30.9 million or 27.0% of revenues in
the three months ended June 30, 1999 as compared with $27.6 million or 22.7% of
revenues in the same period of 1998 and increased to $55.0 million or 24.2% of
revenues in the six months ended June 30, 1999 as compared with $48.7 million or
23.6% of revenues in the same period of 1998. Increased selling and marketing
costs in the second quarter of 1999 as compared with the same period in 1998
result largely from Orchestrate branding initiatives in which Premiere
introduced its suite of Unified Messaging services in selected markets.
Management anticipates continuing to invest in selling and marketing costs at or
above these levels throughout 1999 as the Company continues Orchestrate brand
awareness campaigns in selected new markets. Increases in selling and marketing
costs for the six months ended June 30, 1999 as compared with the year ago
period were driven primarily by the inclusion of Xpedite and ATS in the
Company's consolidated financial statements subsequent to their acquisition in
1998 and the Orchestrate branding initiatives.
General and administrative costs were 27.8% of revenues for the three months
ended June 30, 1999 compared with 29.3% of revenues for the same period in 1998
and 23.7% of revenues for the six months ended June 30, 1999 compared with 21.2%
of revenues for the same period in 1998. During the second quarter of 1999, the
Company made restricted stock grants to certain executives of a limited number
of Company-owned shares held in certain strategic equity investments. In
connection with these grants, the Company recorded a $8.9 million non-cash
expense related to the partial vesting of these grants. The Company
will be required to record additional non-cash charges of $2.7 million and $1.5
million in the third and fourth quarters of 1999 and $1.6 million thereafter
reflecting the vesting period associated with the grant. In the second quarter
of 1998, the Company recorded $16.1 million of non-recurring costs reflecting
approximately $8.4 million of charges associated with uncollectible accounts
receivable related primarily to two financially distressed customers, $2.3
million of start-up costs, primarily executive compensation, incurred in the
start-up of its Orchestrate.com subsidiary and $1.8 million of asset impairment
and other costs. Excluding the costs set forth above, general and administrative
costs increased to $22.9 million or 20.0% of revenues in the second quarter of
1999 as compared with $19.4 million or 16.0% of revenues in the 1998 period.
Contributing to the increase in these costs as a percent of revenues, was the
Company's aggressive expansion of its management infrastructure in 1998 to more
effectively support anticipated growth in its business. These actions included
hiring additional senior level managers and expanding its corporate headquarters
facilities throughout 1998. On a year-to-date basis, the acquisition of Xpedite
in February 1998 and ATS in April 1998 added incremental general and
administrative costs in comparing 1999 with 1998.
Depreciation and amortization was $42.1 million for three month period ended
June 30, 1999 as compared with $28.7 million for the same period in 1998.
Depreciation and amortization increased in 1999 mainly due to changes in
depreciable lives for certain assets and goodwill. Amortization and
depreciation of certain operating and intangible assets were accelerated,
effective in the fourth quarter of 1998, following a reduction in the estimated
useful lives of such assets. This action was based on a reassessment of the
utility of such assets by Premiere's management. The affected assets consist of
goodwill and other intangible assets and computer and telecommunications
equipment associated with certain legacy technology systems, the use of which is
expected to be discontinued in the foreseeable future. Such assets are being
amortized over lives ranging from one to seven
16
years, effective in the fourth quarter of 1998, as compared with lives ranging
from five to 40 years prior to the change.
Net interest expense increased to $6.4 million for the three months ended June
30, 1999 as compared with $3.9 million for the same period in 1998 and $12.0
million for the six months ended June 30, 1999 as compared with $5.4 million for
the same period in 1998. Net interest expense increased in 1999 primarily as a
result of reduced interest income caused by lower cash and short-term investment
balances in 1999. Such investments were used to fund 1998 and 1999 capital
expenditures, strategic investments and operating activities.
In the first quarter of 1998, Premiere recorded a charge of approximately $7.5
million to restructure the operations of Premiere and Xpedite subsequent to
their merger. Such costs consist of severance associated with workforce
reduction, lease termination costs, costs to terminate certain contractual
obligations and asset impairments. Severance benefits have been provided for
termination of 122 employees. These actions resulted from management's plans to
reduce sales, operations and administrative headcount by exiting duplicative and
underperforming operations. Premiere has also provided for lease termination
and clean-up costs associated with these facilities and operations. In addition,
the Company provided for costs associated with commitments under certain
advertising contracts from which the Company was generating no incremental
revenue and for costs to terminate certain unfavorable reseller agreements.
Although certain restructuring actions were being contemplated at the
acquisition date, definitive plans for such actions were not formalized until
after such date. Accordingly, there were no exit costs included in the purchase
price allocation of Xpedite.
Premiere expensed approximately $15.5 million in the first quarter of 1998
reflecting costs associated with a research and development project acquired in
the Xpedite acquisition. These costs were valued based upon an independent
appraisal. The acquired research and development related to a project to develop
a new job monitor. This project was 50% complete as of the acquisition date and
had not yet completed a successful beta test. The primary high risk at valuation
date involved identifying and correcting the design flaws that would typically
arise during beta testing. Fair value was determined using an income approach.
Revenues from this new job monitor are anticipated beginning in 1999 and a
discount rate of 25% was used for valuation purposes.
The Company recorded a $13.9 million nonrecurring gain as other income in the
second quarter of 1999 resulting from the write-up to fair market value of a
limited number of shares owned by the Company in certain strategic investments
which were granted into an executive incentive pool. The gain reflects the
difference between the Company's cost basis and fair market value at date of
grant of these investments as determined by an independent appraisal.
In 1999 and 1998, the Company's effective income tax rate varied from the
statutory rate primarily as a result of non-deductible goodwill amortization
associated with Premiere's acquisitions which have been accounted for under the
purchase method of accounting. Additionally, in 1999 non-deductible executive
compensation contributed to this variance.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $12.6 million for the six month period ended
June 30, 1999 as compared with $14.3 million in 1998. Operating cash flow
declined in 1999 primarily as a result of revenue losses in Premiere's EES
group, advertising and promotion costs associated with Orchestrate branding
initiatives and continued investment by the Company to expand its management
infrastructure.
Investing activities used cash of approximately $24.9 million in the six months
ended June 30, 1999 and provided $23.2 million in the same period in 1998. In
1999, the Company's investing activities included two individually insignificant
international acquisitions, capital expenditures of $20.8 million primarily
associated with expanding the Company's service delivery platforms, and
strategic equity investments of $8.1 million, including $5.0 million in
Derivion, $2.1 million in VerticalOne and $1.0 million in WebForia. The
principal source of cash from investing activities in 1998 was the liquidation
of approximately $102.6 million of short-term investments in marketable
securities. Significant uses of cash for investing activities in 1998 included
the acquisition of ATS and two document distribution companies located in
Germany and Singapore, capital expenditures of $31.7 million and strategic
equity
17
investments of $8.0 million. Management anticipates that capital expenditure
levels will increase in the second half of 1999 compared to the levels
experienced in the first half of 1999, as the Company continues development of
its Web-based communications services and upgrades and expands operational
infrastructure of both its existing computer telephony network and the networks
of its acquired companies.
Financing activities provided net cash of $7.3 million in 1999 mainly from
borrowings under the Company's revolving loan facility. Effective December 16,
1998, Premiere amended and restated the revolving loan facility it assumed in
connection with the Xpedite acquisition for a period of one year. This
arrangement provides for borrowings of up to $150 million and contains certain
covenants which require the Company to maintain minimum earnings and interest
coverage ratios, in addition to other covenants. Effective June 4, 1999, the
Company entered into an amendment to its revolving loan facility to, among other
things, eliminate certain financial covenants, provide for the pledge of
additional collateral (including its WebMD stock) and establish a loan to value
ratio with respect to the stock to be received by the Company in connection with
the merger between WebMD and Heatheon. The Company was in compliance with all
such loan covenants at June 30, 1999. Continued compliance under these loan
covenants will require that Premiere achieve certain EBITDA ratios, and that the
pledge of the additional collateral be completed by no later than August 27,
1999 (which requires certain third party consents), and until such pledge is
completed the Company may not borrow additional funds in excess of $4.0 million
or a maximum of approximately $137.0 million. At June 30, 1999, the Company had
unused borrowing capacity of approximately $23.9 million under the revolving
loan facility.
At June 30, 1999, the Company's principal commitments involve indebtedness under
its revolving loan facility which matures December 16, 1999, convertible
subordinated notes which mature in June 2004, lease obligations and minimum
purchase requirements under supply agreements with telecommunications providers.
The Company is in compliance under all such agreements at this date.
Management believes that cash and marketable securities on-hand of approximately
$14.3 million, cash generated by operating activities, borrowing capacity under
the Company's revolving loan facility and the monitization of certain strategic
investments during the second half of 1999 will be adequate to fund growth in
the Company's existing businesses in 1999. Premiere's revolving loan arrangement
matures on December 16, 1999 and the Company will be required to repay or
refinance this indebtedness at that time. Management regularly reviews the
Company's capital structure and evaluates potential alternatives in light of
current conditions in the capital markets. Depending upon conditions in these
markets and other factors, the Company, may from time to time, engage in capital
transactions, including debt or equity issuances or sell a portion or all of its
strategic equity investments in order to increase the Company's financial
flexibility and meet other capital needs.
RESTRUCTURING, MERGER COSTS AND OTHER SPECIAL CHARGES
In the first quarter of 1998, Premiere recorded a charge of approximately $7.5
million to restructure the operations of Premiere and Xpedite subsequent to
their merger. Such costs consist of severance associated with workforce
reduction, lease termination costs, costs to terminate certain contractual
obligations and asset impairments. Severance benefits have been provided for
termination of 122 employees. These actions resulted from management's plans to
reduce sales, operations and administrative headcount by exiting duplicative and
underperforming operations. Premiere has also provided for lease termination
and clean-up costs associated with these facilities and operations. In addition,
the Company provided for costs associated with commitments under certain
advertising contracts from which the Company was generating no incremental
revenue and for costs to terminate certain unfavorable reseller agreements.
Although certain restructuring actions were being contemplated at the
acquisition date, definitive plans for such actions were not formalized until
after such date. Accordingly, there were no exit costs included in the purchase
price allocation of Xpedite.
THE YEAR 2000 ISSUE
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. These problems generally arise from the fact that much
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000s" from dates in the "1900s." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
The Company's State Of Readiness. The Company has formed a Year 2000 Executive
Committee comprised of members of senior management and a Year 2000 Task Force
comprised of project leaders for each of the
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Company's operating subsidiaries and key corporate functional areas. The Year
2000 Executive Committee and the Task Force are charged with evaluating the
Company's Year 2000 issue and taking appropriate actions so that the Company
will incur minimal disruption from the Year 2000 issue ("Year 2000 ready"). The
Year 2000 Task Force is nearing completion of its comprehensive initiative (the
"Initiative") to make the Company's necessary software applications and/or
systems ("Software Applications") and hardware platforms ("Hardware Platforms")
Year 2000 ready. The Initiative covers the following seven phases: (i) inventory
of all appropriate Software Applications and Hardware Platforms, (ii) assessment
of appropriate repair requirements, (iii) repair or replacement of Software
Applications and Hardware Platforms, where appropriate, (iv) researching and/or
testing of appropriate individual Software Applications and Hardware Platforms
to determine correct manipulation of dates and date-related data regarding the
Year 2000 issue, (v) certification by users or testers within the Company that
such Software Applications and Hardware Platforms appropriately handle dates and
date-related data regarding the Year 2000 issue, (vi) appropriate system
integration testing of multiple Software Applications and Hardware Platforms to
determine correct manipulation of dates and date-related data regarding the Year
2000 issue, and (vii) creation of commercially reasonable contingency plans in
the event certain Year 2000 readiness efforts fail. The Company is aware that
some of its Hardware Platforms contain embedded microprocessors and it has
included the repair or replacement of such embedded microprocessors as part of
the Initiative.
The Company retained a nationally recognized independent consultant
("Consultant") to assist in assessing and recommending revisions to the
Initiative, and such recommendations have been taken into consideration
throughout the initiative. Internal reviews ("audits") have been conducted in
each Business Unit and at Corporate Headquarters to evaluate progress toward
being Year 2000 ready and the quality and completeness of the test results. An
external Consultant assisted with many of these audits. The Company will
continue to review its progress with respect to the Initiative as the Year 2000
is approached and reached. This periodic review by the Company will include
additional adjustments to the Initiative, as required.
The Company has materially completed the first six phases of the Initiative for
its Software Applications and Hardware Platforms. In one operating subsidiary,
an operational challenge not related to Year 2000 delayed the completion of
software deployment in one subsystem into the third quarter of 1999. In another
subsidiary, the implementation of a new, enhanced customer care system has been
rescheduled until after the completion of the summer peak usage season. As a
contingency plan, the existing system will also be adapted for Year 2000. The
system integration testing of Software Applications and Hardware Platforms
required by phase (vi) of the Initiative has been completed with respect to most
of the Company's business activities.
In the process of assessing the Year 2000 readiness of Software Applications and
Hardware Platforms as required by phase (ii) of the Initiative, the Company has
communicated with its suppliers to determine (1) whether the Software
Applications and Hardware Platforms provided to the Company will correctly
manipulate dates and date-related data as the Year 2000 is approached and
reached, and (2) whether the suppliers will solve their Year 2000 problems in
order to continue providing the Company products and services as the Year 2000
is approached and reached. The Company has received verification that the
majority of suppliers' Software Applications and Hardware Platforms, with
appropriate "version modification," will correctly manipulate dates and date-
related data as the Year 2000 is approached and reached. If a supplier informs
the Company that it will not appropriately rectify its Year 2000 issues, then
the Company will use that information to develop appropriate contingency plans
as required by phase (vii) of the Initiative. As a general matter, the Company
may be vulnerable to a supplier's inability to remedy its own Year 2000 issues.
Other than the Company's own remediation and integration testing efforts, there
can be no assurance that the Software Applications and Hardware Platforms
supplied by third parties on which the Company's business relies will correctly
manipulate dates and date-related data as the Year 2000 is approached and
reached. Such failures could have a material adverse effect on the Company's
financial condition and results of operations.
To operate its business, the Company relies upon providers of telecommunication
services, government agencies, utility companies, and other third party service
providers ("External Providers"), over which it can assert little control. If
the inability of any of these entities to correct their Year 2000 issues results
in a failure to provide the Company services, the Company's operations may be
materially adversely impacted and may result in a material adverse effect on the
Company's business, financial condition and results of operations. The Company
relies upon telecommunications carriers to conduct its business and is heavily
dependent upon the ability of these entities to
19
correctly fix their Year 2000 issues. If telecommunications carriers and other
External Providers do not appropriately rectify their Year 2000 issues, the
Company's ability to conduct its business may be materially impacted, which
could result in a material adverse effect on the Company's business, financial
condition and results of operations.
A significant portion of the Company's business is conducted outside of the
United States. External Providers located outside of the United States may face
significantly more severe Year 2000 issues than similar entities located in the
United States. If such External Providers located outside the United States are
unable to rectify their Year 2000 issues, the Company may be unable to
effectively conduct a portion of its international business, which could result
in a material adverse effect on the Company's business, financial condition and
results of operations.
Costs to Address the Company's Year 2000 Issues. The majority of the work on
the Initiative has been performed by the Company's employees and subcontractors,
which has limited its cost. The Company estimates that the total historical and
future costs of implementing the Initiative will be approximately $7 million,
the majority as capital expenditures. The Company will fund the costs of
implementing the Initiative from cash flows. The Company has not deferred any
specific information technology project as a result of the implementation of the
Initiative. The Company does not expect that the opportunity cost of
implementation of the Initiative will have a material effect on the financial
condition of the Company or its results of operations.
Risks Presented by Year 2000 Issues. With system integration testing is
substantially complete, the Company anticipates that it has found effective
solutions to the Year 2000 issue for its appropriate, necessary systems. If,
however, there is an unanticipated disruptions to a major business activity, it
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, as noted above, the Company's
business critical External Providers may not appropriately address their Year
2000 issues, the result of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's Contingency Plans. The Initiative includes the development of
commercially reasonable contingency plans for business activities that are
susceptible to a substantial risk of a disruption resulting from a Year 2000
related event. Successful systems integration testing has substantially reduced
the number of business functions requiring contingency plans. The Company is
developing detailed contingency plans specific to Year 2000 events for any
remaining business activities.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS" No. 133"). SFAS No. 133 establishes accounting and reporting
standards for derivatives and hedging. It requires that all derivatives be
recognized as either assets or liabilities at fair value and establishes
specific criteria for the use of hedge accounting. The Company's required
adoption date is January 1, 2001. SFAS No. 133 is not to be applied
retroactively to financial statements of prior periods. The Company expects no
material adverse effect to its financial position upon adoption of SFAS No. 133.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q and elsewhere by management or Premiere from time to
time, the words "believes," "anticipates," "expects," "will" and similar
expressions are intended to identify forward-looking statements concerning
Premiere's operations, economic performance and financial condition. These
include, but are not limited to, forward-looking statements about Premiere's
business strategy and means to implement the strategy, Premiere's objectives,
the amount of future capital expenditures, the likelihood of Premiere's success
in developing and introducing new products and services and expanding its
business, and the timing of the introduction of new and modified products and
services. For those statements, Premiere claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. These statements are based on a number of
assumptions and estimates which are inherently subject to significant risks and
uncertainties, many of which are beyond the control of Premiere, and reflect
future business decisions which are subject to change. A variety of factors
could cause actual results to differ materially from those anticipated in
Premiere's forward-looking
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statements, including the following factors:
. factors described from time to time in the Company's press releases,
reports and other filings made with the Securities and Exchange
Commission;
. Premiere's ability to comply with the financial covenants and other
conditions of its revolving credit facility, as amended, and its
ability to repay, refinance or extend the revolving credit facility
in December 1999;
. Premiere's ability to manage its growth and to respond to rapid
technological change and risk of obsolescence of its products,
services and technology;
. market acceptance of new products and services, including
Orchestrate(R);
. development of effective marketing, pricing and distribution;
. strategies for new products and services, including Orchestrate(R);
. competitive pressures among communications services providers may
increase significantly;
. costs or difficulties related to the integration of businesses, if
any, acquired or that may be acquired by Premiere may be greater
than expected;
. expected cost savings from past or future mergers and acquisitions
may not be fully realized or realized within the expected time
frame;
. revenues following past or future mergers and acquisitions may be
lower than expected;
. operating costs or customer loss and business disruption following
past or future mergers and acquisitions may be greater than
expected;
. the success of Premiere's strategic relationships, including the
amount of business generated and the viability of the strategic
partners, may not meet expectations;
. possible adverse results of pending or future litigation;
. risks associated with interruption in Premiere's services due to the
failure of the platforms and network infrastructure utilized in
providing its services;
. risks associated with the Year 2000 issue, including Year 2000
problems that may arise on the part of third parties which may
effect Premiere's operations;
. risks associated with expansion of Premiere's international
operations;
. general economic or business conditions, internationally, nationally
or in the local jurisdiction in which Premiere is doing business,
may be less favorable than expected;
. legislative or regulatory changes may adversely affect the business
in which Premiere is engaged; and
. changes in the securities markets may negatively impact Premiere.
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Premiere cautions that these factors are not exclusive. Consequently, all of the
forward-looking statements made in this Form 10-Q and in documents incorporated
in this Form 10-Q are qualified by these cautionary statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Form 10-Q. Premiere takes on no obligation to
publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date of
this Form 10-Q, or the date of the statement, if a different date.
All statements made herein regarding the Company's state of readiness with
respect to the Year 2000 issue constitute "Year 2000 readiness disclosures" made
pursuant to the Year 2000 Information and Readiness Disclosure Act, Public Law
No. 105-271.
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SIGNATURES
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 thereunto duly authorized.
January 18, 2000 PREMIERE TECHNOLOGIES, INC.
Date
/s/ Patrick G. Jones
---------------------
Patrick G. Jones
Executive Vice President, Chief Legal Officer
and Chief Financial Officer
(Principal Financial and Accounting Officer and
duly authorized signatory of the Registrant)
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