UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
__________,19 ___ .
COMMISSION FILE NUMBER:
0-27778
PREMIERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 59-3074176
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3399 PEACHTREE ROAD NE
THE LENOX BUILDING, SUITE 400
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 November 11, 1996
- - ----------------------------- --------------------------------
Common Stock, $0.01 par value 21,683,377 shares
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1995 and September 30, 1996 3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months ended
September 30, 1995 and 1996 5
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 1995
and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 6 Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBITS INDEX 17
2
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
December 31, 1995 September 30, 1996
----------------- ------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,981,144 $ 3,762,729
Investments 3,515,782 74,537,930
Accounts receivable (less allowance for doubtful accounts of
$107,613 and $546,535, respectively) 3,013,185 5,797,395
Due from related parties 276,477 29,040
Prepaid expenses and other 497,746 1,247,716
Deferred tax asset, net 2,533,403 5,615,387
------------- -------------
Total current assets 11,817,737 90,990,197
------------- -------------
PROPERTY AND EQUIPMENT 5,734,992 13,357,879
Less: accumulated depreciation (980,943) (2,195,595)
------------- -------------
Net property and equipment 4,754,049 11,162,284
------------- -------------
OTHER ASSETS:
Deferred software development costs, net 78,105 774,808
Due from related parties 100,672 180,834
Other 237,099 317,711
------------- -------------
$ 16,987,662 $103,425,834
============= =============
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,1995 AND SEPTEMBER 30,1996
December 31,1995 September 30, 1996
----------------- ------------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 849,584 $ 4,922,511
Accrued payroll 357,345 446,489
Accrued transmission 1,325,094 1,332,625
Accrued sales taxes 780,661 988,996
Accrued bonuses 15,000 136,753
Accrued construction costs 883,850 623,888
Other accrued expenses 887,726 4,076,082
Unearned revenue 352,541 703,106
Current portion of capital lease obligation 172,422 313,814
Dividends payable on preferred stock 647,644 0
Note payable 10,500 10,500
------------- -------------
Total current liabilities 6,282,367 13,554,764
------------- -------------
LONG TERM LIABILITIES:
Notes payable 1,915,192 21,000
Obligation under capital lease 355,160 277,174
Deferred tax liability 242,216 242,216
------------- -------------
Total long term liabilities 2,512,568 540,390
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Series A convertible, redeemable 8% cumulative preferred stock,
$0.01 par value; 5,000,000 shares authorized, 128,983 and 0 shares
issued and outstanding, respectively, converted to common stock 3,906,500 0
Common Stock, $0.01 par value; 150,000,000 shares
authorized, 12,367,920 and 21,683,377 shares issued and
outstanding, respectively 123,679 216,834
Additional paid-in capital 7,237,795 93,648,711
Subscriptions receivable (2,436,703) 0
Stock warrants outstanding 243,760 0
Accumulated deficit (882,304) (4,534,865)
------------- -------------
Total shareholders' equity 8,192,727 89,330,680
------------- -------------
$ 16,987,662 $103,425,834
============= =============
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
4
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
Three Months Ended Nine Months Ended
------------------------------------------------------------
-------------- ------------ ------------ --------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1995 1996 1995 1996
-------------- ------------ ------------ --------------
(Unaudited) (Unaudited)
REVENUES:
Subscriber services $ 4,213,342 $ 9,863,733 $ 9,879,935 $ 25,604,693
License fees 1,533,089 2,830,702 3,521,529 7,915,843
Hospitality services 321,751 264,942 884,419 790,232
Other revenues 53,622 130,216 137,019 557,697
----------- ----------- ----------- ------------
Total revenues 6,121,804 13,089,593 14,422,902 34,868,465
COST OF SERVICES 2,149,071 4,341,365 5,012,786 11,775,061
----------- ----------- ----------- ------------
GROSS MARGIN 3,972,733 8,748,228 9,410,116 23,093,404
----------- ----------- ----------- ------------
OPERATING EXPENSES:
Selling and marketing 2,162,431 4,147,000 4,813,390 11,922,736
General and administrative 1,136,136 2,098,820 2,877,140 5,947,104
Depreciation and amortization 180,999 514,090 443,062 1,282,564
Charge for purchased research and development 0 11,030,000 0 11,030,000
Accrued litigation costs 0 1,250,000 0 1,250,000
----------- ----------- ----------- ------------
Total operating expenses 3,479,566 19,039,910 8,133,592 31,432,404
----------- ----------- ----------- ------------
OPERATING INCOME (LOSS) 493,167 (10,291,682) 1,276,524 (8,339,000)
----------- ----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income 65,663 714,275 196,800 1,783,301
Interest expense (94,795) (21,067) (270,189) (129,127)
Other, net 2,248 20,762 37,718 33,174
----------- ----------- ----------- ------------
Total other income (expense) (26,884) 713,970 (35,671) 1,687,348
----------- ----------- ----------- ------------
NET INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS 466,283 (9,577,712) 1,240,853 (6,651,652)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 109,395 (3,941,214) 259,788 (3,087,679)
----------- ----------- ----------- ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 356,888 (5,636,498) 981,065 (3,563,973)
----------- ----------- ----------- ------------
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET OF TAX EFFECT OF $37,880 0 0 0 59,251
----------- ----------- ----------- ------------
NET INCOME (LOSS) 356,888 (5,636,498) 981,065 (3,623,224)
PREFERRED STOCK DIVIDENDS 77,105 0 231,314 0
----------- ----------- ----------- ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ 279,783 $(5,636,498) $ 749,751 $ (3,623,224)
=========== =========== =========== ============
PRO FORMA INCOME (LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS FOR PRIMARY EARNINGS PER SHARE $ 339,896 $(5,446,296) $ 930,090 $ (3,004,067)
=========== =========== =========== ============
PRO FORMA INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARES: Primary $ 0.02 $ (0.23) $ 0.05 $ (0.13)
=========== =========== =========== ============
SHARES USED IN COMPUTING EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARES: Primary 18,752,938 23,595,844 18,912,679 22,374,935
=========== =========== =========== ============
The accompanying notes are an integral part of these condensed consolidated
statements.
5
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
1995 1996
---------------- ----------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 981,065 $ (3,623,224)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 443,062 1,282,564
Amortization of note discount 34,791 8,677
Non-recurring charges 0 12,280,000
Loss on early extinguishment of debt 0 97,131
Loss on sale of asset 0 17,672
Changes in assets and liabilities:
Accounts receivable, net (1,251,552) (2,784,210)
Prepaid expenses and other (477,903) (1,027,420)
Deferred tax asset 0 (3,081,984)
Accounts payable 678,137 3,601,419
Accrued expenses 1,760,457 1,289,440
Unearned revenue (67,024) 350,565
---------------- ----------------
Total adjustments 1,119,968 12,033,854
---------------- ----------------
Net cash provided by operating activities 2,101,033 8,410,630
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (1,441,728) (7,350,190)
Purchase of investments, net 963 (71,022,148)
Acquisition of Telet Communications LLC 0 (2,870,000)
Due from related parties, net 56,860 167,275
---------------- ----------------
Net cash used in investing activities (1,383,905) (81,075,063)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 0 74,666,094
Principal payments under capital lease obligation (95,479) (167,514)
Proceeds from issuance of note payable 85,500 0
Early extinguishment of debt 0 (2,000,000)
Payment of dividends on preferred stock 0 (676,981)
Proceeds from payments of subscriptions receivable 0 2,436,703
Proceeds from exercise of stock options 0 187,716
---------------- ----------------
Net cash (used in) provided by financing activities (9,979) 74,446,018
---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 707,149 1,781,585
CASH AND CASH EQUIVALENTS, beginning of period 1,513,528 1,981,144
---------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 2,220,677 $ 3,762,729
=============== ================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 163,848 $ 120,451
=============== ===============
NON-CASH TRANSACTIONS:
Assets acquired with TeleT acquisition $ 0 $ 627,225
=============== ===============
Liabilities assumed with TeleT acquisition $ 0 $ 100,000
=============== ===============
The accompanying notes are an integral part of these condensed consolidated
statements.
6
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements, with the
exception of the December 31, 1995 condensed consolidated balance sheet, are
unaudited and have been prepared by the management of Premiere Technologies,
Inc. (the "Company") in accordance with the rules and regulations of the
Securities and Exchange Commission. 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 the management of the Company, all adjustments
(consisting only of normal recurring adjustments) considered necessary for fair
presentation of the condensed consolidated financial statements have been
included, and the accompanying condensed consolidated financial statements
present fairly the financial position and the results of operations for the
interim periods presented. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
included in the Company's Registration Statement on Form S-1 (Reg. No. 33-
80547), as amended, declared effective by the Securities and Exchange Commission
on March 4, 1996.
2. INITIAL PUBLIC OFFERING
The Company issued 4,570,000 shares of its $0.01 par value common stock in
an initial public offering in March 1996. Proceeds to the Company, net of the
underwriting discount and expenses of the offering, were $74,666,094.
3. ACQUISITIONS
On September 18, 1996, the Company, through its wholly owned subsidiary
PTEK Acquisition Corporation (the "Sub"), acquired substantially all of the
assets and business operations of TeleT Communications LLC ("TeleT") for 498,187
shares of the Company's $0.01 par value per share common stock (the "Shares"),
$2,870,000 in cash and the assumption of approximately $100,000 in liabilities
(the "Acquisition"). TeleT is an Internet-based technology development company
focused on applications that create an interchange between telephone and
computer resources. The Acquisition was made pursuant to an Asset Purchase
Agreement dated as of September 18, 1996 by and among the Company, the Sub,
TeleT and the Members of TeleT. The Company financed the cash portion of the
purchase price from working capital.
An aggregate of 75,000 of the Shares were placed in escrow pursuant to an
Escrow Agreement among the Company and the Members of TeleT to secure certain
indemnification obligations of those Members. All Shares issued are subject to
Lockup Agreements prohibiting the sale of such Shares for a weighted average
period of one year following the closing of the Acquisition. Pursuant to the
Acquisition, the Company granted registration rights to the holder of 320,833 of
the Shares. The registration rights are subordinate to the lockup restrictions
applicable to such Shares. Also pursuant to the Acquisition, Premiere entered
into Employment Agreements with the two senior executives of TeleT.
In connection with the acquisition of TeleT, the Company allocated $11.0
million of the purchase price to incomplete research and development projects.
Accordingly, this cost was expensed as of the acquisition date. This allocation
represents the estimated value related to the incomplete projects determined by
an independent appraisal. The development of these projects had not yet reached
technological feasibility and the technology has no alternative future use. The
technology acquired in the acquisition of TeleT will require substantial
additional development by the Company.
This acquisition has been accounted for under the purchase method of
accounting and the results of TeleT's operations since the acquisition date
have been included with those of the Company.
The table below reflects the historical results of the Company and the
historical results of the Company and TeleT, as adjusted for pro forma
purchase accounting adjustments to reflect additional depreciation and
7
amortization of acquired software, and the related pro forma income tax effects
of the adjustments. The charge for purchased research and development has been
excluded from the pro forma results of operations since it has no continuing
effect on operations. Pro forma results for fiscal year 1995 are not presented
as the pro forma results do not differ materially from the historical results of
the Company. These pro forma amounts are provided for informational purposes
only and are not necessarily indicative of what actually would have occurred if
the acquisition had occurred at the beginning of the period presented. In
addition, they are not intended to be projections of future results and do not
reflect any synergies that might be achieved from combined operations.
For the Nine Months Ended
September 30, 1996
-------------------------
Historical As Adjusted
----------- -----------
Revenues $34,868 $35,119
Net income (loss) $(3,623) $ 2,609
Earnings (loss) per share $ (0.13) $ 0.14
4. EARNINGS PER SHARE
Primary net income per share is computed under the modified treasury stock
method using the weighted average number of shares of common stock and dilutive
common stock equivalent shares ("CSEs") from stock options outstanding during
the period. For periods prior to the Company's initial public offering, earnings
per share were calculated pursuant to Securities and Exchange Commission Staff
Accounting Bulletins. Under the modified treasury stock method, proceeds from
the exercise of CSEs consist of the exercise price of the CSEs, as well as the
related income tax benefit to the Company. CSE proceeds are assumed to be
applied first to repurchase up to 20% of the Company's common stock, and then to
repay outstanding long term indebtedness. Any remaining CSE proceeds are assumed
to be invested in U.S. Government securities.
In determining the Company's primary net income per share under the
modified treasury stock method, net income per share applicable to common
shareholders has been adjusted on a pro forma basis to reflect the decrease in
interest expense related to a capitalized lease obligation and to loans payable
to a licensed small business investment company ("SBIC") that were repaid in
full in the first quarter of 1996. To the extent that excess proceeds from the
assumed exercise of outstanding options and tax benefits from the assumed
exercise were in excess of the capitalized lease obligation and the SBIC loans,
an increase in interest income related to the investment of such excess proceeds
in U.S. Government securities is reflected in adjusted net income per share
applicable to common shareholders. The pro forma net interest adjustment to
primary net income per share under the modified treasury stock method was
$60,113 and $190,202 for the three months ended September 30, 1995 and 1996,
respectively, and $180,339 and $619,157 for the nine months ended
September 30, 1995 and 1996, respectively.
Fully diluted net income per common and common equivalent shares is
computed by including convertible instruments which are not CSEs in the weighted
average per share calculation (using the modified treasury stock method) at
period-end market value of stock prices. To the extent that the convertible
securities are anti-dilutive, they are not included in the fully diluted net
income per common and common equivalent shares. To the extent that period-end
market value of stock prices is less than the average market value for the
period, then the average market value is used for fully diluted net income per
common and common equivalent shares. For all periods presented, the inclusion
of convertible securities in the fully diluted calculation are anti-dilutive.
Accordingly, fully diluted earnings per share data is not presented.
5. COMMITMENTS AND CONTINGENCIES
The Company has entered into an agreement to purchase 50 shares of the
common stock of EBIS Communications, Inc. ("EBIS"), a Georgia corporation, for
an aggregate purchase price of $5,000,000, of which $2,500,000 is payable upon
demand of the Board of Directors of EBIS and the balance of which is payable
upon demand of the Board of Directors of EBIS on each of August 1, September 1,
October 1, November 1 and December 1, 1996. As of the date of this filing, the
Board of Directors has not made any demand for payment and no payment has been
made by the Company.
8
On August 6, 1996, Communications Network Corporation ("CNC"), a licensing
customer of the Company, was placed into bankruptcy under Chapter 11 of the
United States Bankruptcy Code. CNC accounted for 0.0% and 34.2% of the Company's
licensing revenues in the three months ended September 30, 1996 and the nine
months ended September 30, 1996, respectively, and 0.0% and 7.7% of the
Company's total revenues in the three months ended September 30, 1996 and the
nine months ended September 30, 1996, respectively. The Company is owed
approximately $627,000 by CNC; however, the transmission provider (WorldCom
Network Services, Inc.) for CNC is also obligated to pay this amount to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for further discussion.
On August 23, 1996, CNC filed a motion to intervene in a separate lawsuit
brought by a CNC creditor in the United States District Court for the Southern
District of New York against certain guarantors of CNC's obligations and to file
a third party action against numerous entities, including such CNC creditor and
Premiere Communications, Inc. ("PCI"), a subsidiary of the Company, for alleged
negligent misrepresentations of fact connected to an alleged fraudulent scheme
designed to damage CNC. The court has not ruled on CNC's request and the
bankruptcy examiner is investigating these allegations. Based upon the
examiner's preliminary findings, the Company believes that the bankruptcy
trustee, who has been substituted for CNC in this action, will dismiss the
actions directed at PCI; however, due to the inherent uncertainties of the
judicial system, the Company is unable to predict with certainty the outcome of
this litigation. If the outcome of this litigation is adverse to the Company,
it could have a material adverse effect on the Company's business, operating
results and financial condition.
On June 28, 1996, AudioFAX IP LLC ("AudioFAX") filed a complaint against
the Company and PCI in the United States District Court for the Northern
District of Georgia. In the complaint, AudioFAX alleges that the Company
manufactures, uses, sells and/or distributes certain enhanced facsimile products
which infringe three United States patents and one Canadian patent allegedly
held by AudioFAX. AudioFAX seeks injunctive relief, three times an unspecified
amount of damages, prejudgment interest, attorneys' fees and expenses of
litigation and court costs. The Company has filed an answer to the complaint
in which it denies plaintiff's allegations, asserts various affirmative defenses
and seeks declaratory judgment regarding noninfringement and patent invalidity.
Prior to receiving the complaint, the Company obtained an opinion from outside
patent counsel to the effect that the Company's enhanced facsimile service does
not infringe any of the United States patents held by AudioFAX, and also
obtained a concurring opinion from separate patent counsel engaged to review the
initial opinion. Based on these opinions and other considerations, the Company
believes that it has meritorious defenses to the AudioFAX complaint; however,
due to the inherent uncertainties of the judicial system, the Company is unable
to predict the outcome of this litigation. If the outcome of this litigation is
adverse to the Company, it could have a material adverse effect on the Company's
business, operating results and financial condition. The Company has taken a
one-time charge for the estimated legal fees and other costs that the Company
expects to incur to resolve this matter.
On September 20, 1996, Peter Lucina ("Lucina") filed a complaint against
the Company, Donald B. Gasgarth ("Gasgarth") and Patrick Jones ("Jones") in the
United States District Court for the Eastern District of Illinois. In the
complaint, Lucina alleges that: (i) in November 1995 he sold 1,563 shares of the
Company common stock to Gasgarth, a former director of the Company, for $31,260;
(ii) Jones, an officer of Company, offered to "facilitate" the sale; (iii) in
December 1995 the Company filed a registration statement relating to the initial
public offering of its Common Stock; (iv) prior to his sale of stock to
Gasgarth, neither Gasgarth nor Jones told Lucina that the Company planned an
initial public offering; and (v) the 1,563 shares sold to Gasgarth, adjusted for
the 24-to-1 stock split subsequently effected, was worth $675,216 based on the
Company's initial public offering at $18 per share in March, 1996. In his
complaint, Lucina asserts violations of the Securities Exchange Act of 1934 and
the rules promulgated thereunder, the Illinois Consumer Fraud and Deceptive
Business Practices Act and common law fraud. Lucina seeks the return of 37,512
shares of common stock of the Company, or in the alternative, compensatory
damages in the amount of $975,312 with interest thereon, punitive damages in the
amount of $1 million and costs of the suit, including reasonable attorneys' fees
and other associated costs. Although the Company has not yet filed an answer to
the complaint the Company believes that it has meritorious defenses to the
Lucina complaint; however, due to the inherent uncertainties of the judicial
system, the Company is unable to predict the outcome of this litigation. If
9
the outcome of this litigation is adverse to the Company, it could have a
material adverse effect on the Company's business, operating results and
financial condition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1996
Revenues. Total revenues increased $7.0 million or 114.8% from $6.1 million in
the three months ended September 30, 1995 to $13.1 million in the three months
ended September 30, 1996. Subscriber services revenues increased $5.7 million
or 135.7% from $4.2 million in the three months ended September 30, 1995 to $9.9
million in the three months ended September 30, 1996. This increase was due
almost entirely to increased revenues from Premiere WorldLink subscriber
services resulting primarily from response to the Company's print advertising
campaign, which was substantially expanded starting in January 1996. Additional
co-branded relationships were in existence during the three months ended
September 30, 1996, which also contributed to the growth in Premiere Worldlink
subscriber services revenues. AFCOM subscriber services revenues declined
$300,000 or 13.6% from $2.2 million in the three months ended September 30, 1995
to $1.9 million in the three months ended September 30, 1996. This decrease was
attributable primarily to certain branches of the military modifying their
payroll practices to require direct deposit, which has resulted in a reduction
in the level of banking activity at certain military financial institutions with
which the Company has marketing arrangements. The Company has revised its AFCOM
marketing strategy to address this situation. License fee revenues increased
$1.3 million or 86.7% from $1.5 million in the three months ended September 30,
1995 to $2.8 million in the three months ended September 30, 1996. This
increase was due to the establishment of additional licensing relationships and
increased revenues from existing licensees. Hospitality services revenues
declined $57,000 or 17.7% from $322,000 in the three months ended September 30,
1995 to $265,000 in the three months ended September 30, 1996. This decrease
was attributable primarily to the Company's reallocation of resources away from
hospitality services to other areas. Other revenues increased $76,000 or 140.7%
from $54,000 in the three months ended September 30, 1995 to $130,000 in the
three months ended September 30, 1996. This increase was attributable primarily
to nonrecurring system design and development revenues.
On August 6, 1996, CNC, a licensing customer of the Company, was placed into
bankruptcy under Chapter 11 of the United States Bankruptcy Code. CNC accounted
for 0.0% of both the Company's licensing revenues and total revenues in the
three months ended September 30, 1996, although it accounted for 57.1% and 13.7%
of the Company's licensing revenues and total revenues in the second quarter of
1996, respectively. The Company is owed approximately $627,000 by CNC; however,
the transmission provider (WorldCom Network Services, Inc.) for CNC is also
obligated to pay this amount to the Company. The Company has entered into
several licensing agreements since July 1, 1996 which provided for combined
minimum payments through September 30, 1996 that exceeded the revenues from CNC
during the three months ended June 30, 1996. While these licensing agreements do
not provide for this same level of minimum payments after September 30, 1996,
the Company believes that through a combination of new licensing agreements and
increased revenues from existing licensees, the Company should be able to
replace substantially all of the CNC revenue after September 30, although such
replacement is not assured.
Cost of Services. Cost of services increased $2.2 million or 104.8% from $2.1
million in the three months ended September 30, 1995 to $4.3 million in the
three months ended September 30, 1996, but remained stable as a percentage of
revenues.
Selling and Marketing Expenses. Selling and marketing expenses increased $1.9
million or 86.4% from $2.2 million in the three months ended September 30, 1995
to $4.1 million in the three months ended September 30, 1996. This increase was
due to greater expenditures on print advertising and other selling and marketing
costs related to the increase in subscribers and revenues. These expenses
decreased as a percentage of revenues from 36.1% in the three months ended
September 30, 1995 to 31.3% in the three months ended September 30, 1996. This
decrease resulted from improved operating leverage related to increased
recurring revenues.
10
General and Administrative Expenses. General and administrative expenses
increased $1.0 million or 90.9% from $1.1 million in the three months ended
September 30, 1995 to $2.1 million in the three months ended September 30, 1996.
This increase was due primarily to increased numbers of employees and related
expenses to support the Company's growth. These expenses decreased as a
percentage of revenues from 18.0% in the three months ended September 30, 1995
to 16.0% in the three months ended September 30, 1996. This decrease
resulted from improved operating leverage related to increased recurring
revenues.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased $333,000 or 184.0% from $181,000 in the three months ended September
30, 1995 to $514,000 in the three months ended September 30, 1996. This
increase was due primarily to depreciation of additional equipment acquired
during the second half of 1995 and the nine months ended September 30, 1996.
Charge for Purchased Research and Development. This is a one-time charge in an
amount equal to the estimated value of incomplete research and development
projects acquired in the acquisition of TeleT Communications LLC. See Note 3 of
Notes to Condensed Consolidated Financial Statements.
Accrued Litigation Costs. This is one-time charge for the estimated legal fees
and other costs that the Company expects to incur to resolve pending patent
litigation. See Note 5 of Notes to Condensed Consolidated Financial Statements.
Operating Income. Operating income decreased $10.8 million from $493,000 in the
three months ended September 30, 1995 to a $10.3 operating loss in the three
months ended September 30, 1996. Excluding the one-time charges for purchased
research and development and accrued litigation costs, operating income would
have increased $1.5 million or 304.3% from $493,000 to $2.0 million in the three
months ended September 30, 1996.
Interest Income. Interest income increased $648,000 or 981.8% from $66,000 in
the three months ended September 30, 1995 to $714,000 in the three months ended
September 30, 1996. This increase was attributable to the Company's investment
of the net proceeds from its initial public offering.
Interest Expense. Interest expense decreased $74,000 or 77.9% from $95,000 in
the three months ended September 30, 1995 to $21,000 in the three months ended
September 30, 1996. This decrease is attributable to the early extinguishment
of long term debt.
Income Taxes. Income taxes went from a $109,000 expense in the three months
ended September 30, 1995 to a $3.9 million benefit in the three months ended
September 30, 1996 which was due to the Company's recording of a tax benefit for
its net operating loss incurred during the period. The net operating loss was
attributable primarily to the one-time charges for purchased research and
development and accrued litigation costs. The Company's effective tax rate was
less than the statutory rate primarily due to the use of net operating loss
carryforwards in the third quarter of 1995 and the Company's investment of the
net proceeds of its initial public offering in tax free instruments in the third
quarter of 1996.
Net Income. As a result of the foregoing, net income decreased $6.0 million
from $357,000 in the three months ended September 30, 1995 to a $5.6 million
loss in the three months ended September 30, 1996. Excluding the one-time
charges and the related tax effect, net income would have increased $1.5 million
or 420.2% from $357,000 in the three months ended September 30, 1995 to $1.9
million in the three months ended September 30, 1996 and net income as a
percentage of revenues would have increased from 5.9% in the three months ended
September 30, 1995 to 14.5% in the three months ended September 30, 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues. Total revenues increased $20.5 million or 142.4% from $14.4 million
in the nine months ended September 30, 1995 to $34.9 million in the nine months
ended September 30, 1996. Subscriber services revenues increased $15.7 million
or 158.6% from $9.9 million in the nine months ended September 30, 1995 to $25.6
million in the nine months ended September 30, 1996. This increase was due
almost entirely to increased revenues from Premiere Worldlink subscriber
services resulting primarily from response to the
11
Company's print advertising campaign, which was substantially expanded starting
in January 1996. Additional co-branded relationships were in existence during
the nine months ended September 30, 1996, which also contributed to the growth
in Premiere Worldlink subscriber services revenues. AFCOM subscriber services
revenues declined $600,000 or 9.2% from $6.5 million in the nine months ended
September 30, 1995 to $5.9 million in the nine months ended September 30, 1996.
This decrease was attributable primarily to certain branches of the military
modifying their payroll practices to require direct deposit, which has resulted
in a reduction in the level of banking activity at certain military financial
institutions with which the Company has marketing arrangements. The Company has
revised its AFCOM marketing strategy to address this situation. License fee
revenues increased $4.4 million or 125.7% from $3.5 million in the nine months
ended September 30, 1995 to $7.9 million in the nine months ended September 30,
1996. This increase was due to the establishment of additional licensing
relationships and increased revenues from existing licensees. Hospitality
services revenues declined $94,000 or 10.6% from $884,000 in the nine months
ended September 30, 1995 to $790,000 in the nine months ended September 30,
1996. This decrease was attributable primarily to the Company's reallocation of
resources away from hospitality services to other areas. Other revenues
increased $421,000 or 307.3% from $137,000 in the nine months ended September
30, 1995 to $558,000 in the nine months ended September 30, 1996. This increase
was attributable primarily to nonrecurring system design and development
revenue.
On August 6, 1996, CNC, a licensing customer of the Company, was placed into
bankruptcy under Chapter 11 of the United States Bankruptcy Code. CNC accounted
for approximately 34.2% of the Company's licensing revenues and 7.7% of the
Company's total revenues in the nine months ended September 30, 1996,
respectively. The Company is owed approximately $627,000 by CNC; however, the
transmission provider (WorldCom Network Services, Inc.) for CNC is also
obligated to pay this amount to the Company. The Company has entered into
several licensing agreements since July 1, 1996 which provided for combined
minimum payments through September 30, 1996 that exceeded the revenues from CNC
during the three months ended June 30, 1996. While these licensing agreements do
not provide for this same level of minimum payments after September 30, 1996,
the Company believes that through a combination of new licensing agreements and
increased revenues from existing licensees, the Company should be able to
replace substantially all of the CNC revenue after September 30, although such
replacement is not assured.
Cost of Services. Cost of services increased $6.8 million or 136.0% from $5.0
million in the nine months ended September 30, 1995 to $11.8 million in the nine
months ended September 30, 1996, but remained stable as a percentage of
revenues.
Selling and Marketing Expenses. Selling and marketing expenses increased $7.1
million or 147.9% from $4.8 million in the nine months ended September 30, 1995
to $11.9 million in the nine months ended September 30, 1996, and increased as a
percentage of revenues from 33.3% to 34.1%. This increase was due to greater
expenditures on print advertising and other selling and marketing costs related
to the increase in revenues.
General and Administrative Expenses. General and administrative expenses
increased $3.0 million or 103.4% from $2.9 million in the nine months ended
September 30, 1995 to $5.9 million in the nine months ended September 30, 1996.
This increase was due primarily to increased numbers of employees and related
expenses to support the Company's growth. These expenses decreased as a
percentage of revenues from 20.1% in the nine months ended September 30, 1995 to
16.9% in the nine months ended September 30, 1996. This decrease resulted
from improved operating leverage related to increased recurring revenues.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased $857,000 or 193.5% from $443,000 in the nine months ended September
30, 1995 to $1.3 million in the nine months ended September 30, 1996. This
increase was due primarily to depreciation of additional equipment acquired
during the second half of 1995 and the nine months ended September 30, 1996.
Charge for Purchased Research and Development. This is a one-time charge in an
amount equal to the estimated value of incomplete research and development
projects acquired in the acquisition of TeleT Communications LLC. See Note 3 of
Notes to Condensed Consolidated Financial Statements.
12
Accrued Litigation Costs. This is a one-time charge for the estimated legal
fees and other costs that the Company expects to incur to resolve pending
patent litigation. See Note 5 of Notes to Condensed Consolidated Financial
Statements.
Operating Income. Operating income decreased $9.6 million from $1.3 million in
the nine months ended September 30, 1995 to an $8.3 million loss in the nine
months ended September 30, 1996. Excluding the one-time charges for purchased
research and development and accrued litigation costs, operating income would
have increased $3.5 million or 709.9% from $493,000 to $4.0 million in the nine
months ended September 30, 1996.
Interest Income. Interest income increased $1.6 million or 812.2% from $197,000
in the nine months ended September 30, 1995 to $1.8 million in the nine months
ended September 30, 1996. This increase was attributable to the Company's
investment of the net proceeds from its initial public offering.
Interest Expense. Interest expense decreased $141,000 or 52.2% from $270,000 in
the nine months ended September 30, 1995 to $129,000 in the nine months ended
September 30, 1996. This decrease is attributable to the early extinguishment
of long term debt in the first quarter of 1996.
Income Taxes. Income taxes went from a $260,000 expense in the nine months ended
September 30, 1995 to a $3.1 million benefit in the nine months ended September
30, 1996 which was due to the Company's recording of a tax benefit for its net
operating loss incurred during the period. The net operating loss was
attributable primarily to the one-time charges for purchased research and
development and accrued litigation costs. The Company's effective tax rate was
less than the statutory rate primarily due to the use of net operating loss
carryforwards in the nine month ended September 30, 1995 and the Company's
investment of the net proceeds of its initial public offering in tax free
instruments in the nine months ended September 30, 1996.
Extraordinary Loss. As a result of the early extinguishment of debt, the
Company recognized an extraordinary loss of $59,000, net of the income tax
effect of $38,000, in the nine months ended September 30, 1996. This debt
consisted of two $1.0 million loans obtained from an SBIC in 1992 and 1993. The
extraordinary loss resulted from the write-off of the remaining unamortized
discount related to stock warrants issued in connection with the loans.
Net Income. As a result of the foregoing, net income decreased $4.6 million
from $981,000 in the nine months ended September 30, 1995 to a $3.6 million loss
in the nine months ended September 30, 1996. Excluding the one-time charges,
the extraordinary loss, and their related tax effect, net income would have
increased $2.9 million or 295.6% from $981,000 in the nine months ended
September 30, 1995 to $3.9 million in the nine months ended September 30, 1996,
and net income as a percentage of revenues would have increased from 6.8% in the
nine months ended September 30, 1995 to 11.2% in the nine months ended September
30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are from cash and cash equivalents
and investments (including the net proceeds of the Company's initial public
offering) and operations. The Company's principal uses of cash are for working
capital, capital expenditures and to fund acquisitions.
The Company anticipates using initial public offering proceeds to expand
and enhance its network management system and related network and other
infrastructure. This includes enhancements to the database as well as
establishing the Company's platform site in Dallas, Texas, and the installation
of telnodes and related telecommunications interface equipment in the United
Kingdom and proposed sites in New Zealand and Canada. Actual expenditures as of
September 30, 1996 are approximately $2.6 million and $286,000 for Dallas, Texas
and the United Kingdom, respectively.
In October 1996, the Company established a $5 million line-of-credit with
NationsBank, N.A. to facilitate interim long term capital equipment financing
needs. As of November 11, 1996, the Company had total borrowings of $2.6 million
under the line-of-credit.
13
The Company believes that funds provided by operations, available
borrowings under the line-of-credit and current amounts of cash, cash
equivalents and short term investments, including the net proceeds of the
Company's initial public offering, will be sufficient to meet its presently
anticipated needs for working capital.
FORWARD-LOOKING STATEMENTS
Item 2. of Part I contains certain forward-looking statements and
projections (including statements concerning plans and objectives of management
for future operations and services and statements concerning certain revenue
expectations) that are based on management's belief as well as assumptions made
by, and information currently available to, management. The Company's actual
results might differ materially from the plans envisioned in, or results
projected by, those statements if the Company's assumptions prove to be
incorrect or for a variety of other reasons, including those relating to factors
identified in the Company's Prospectus dated March 5, 1996 and its Quarterly
Reports on Form 10-Q for the first three fiscal quarters of 1996, as filed with
the Securities and Exchange Commission.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's Registration Statement on Form S-1
(Reg. No. 33-80547), as amended, relating to the Company's March 1996 initial
public offering, on January 30, 1996, Eric Bott, E.B. Elliott and Cost Recovery
Systems, Inc. ("CRS") filed a complaint against PCI and the Company's President,
Boland T. Jones, in the Superior Court of Fulton County, Georgia. In the
complaint, the plaintiffs allege that: (i) Mr. Bott, a former Company employee,
is entitled to options to purchase 10,000 shares of common stock of PCI at $5.00
per share; (ii) Mr. Bott is entitled to a commission equal to 10% of all
revenues that have been and in the future are collected as a result of the
Company's licensing arrangement with one of its customers; (iii) Mr. Bott is
entitled to $7,000 for consulting work allegedly performed for the Company; (iv)
Mr. Bott is entitled to unspecified damages resulting from his sale in June 1995
of 750 shares of common stock of PCI to an unrelated third party for an
unspecified amount; (v) Mr. Elliott or CRS, an affiliate of Mr. Elliott, is
entitled to options to purchase 5,000 or 10,000 shares of common stock of PCI at
an unspecified exercise price arising out of work allegedly performed by CRS for
the Company; and (vi) CRS is owed an unspecified amount of commissions from the
Company relating to sales of the Company's telecommunications services by CRS.
Subsequent to the filing of the complaint, the plaintiffs dismissed without
prejudice count (iv) above. The plaintiffs also seek attorneys' fees and
unspecified amounts of punitive damages. The Company has filed an answer and
counterclaim denying all allegations of the complaint and asserting various
affirmative defenses, and the Company intends to vigorously defend the action.
Assuming that the allegations concerning stock options and stock sales relate to
the common stock of Premiere Technologies, Inc., rather than Premiere
Communications, Inc., as alleged, the Company believes that the share numbers
and exercise prices have not been adjusted for the 24-to-1 stock split effected
in December 1995. In this regard, the plaintiffs filed a motion to add the
Company as a defendant and to amend their complaint to assert their claims
against the Company. Adjusting the share numbers and exercise prices of these
options to reflect the 24-to-1 stock split, the plaintiffs' claims relate to
options to purchase up to a total of 480,000 shares of Common Stock and the
alleged exercise price of $5.00 per share with regard to a portion of such
options becomes approximately $0.21 per share. The Company believes it has
meritorious defenses to the plaintiffs' allegations, but due to the inherent
uncertainties of the judicial system, the Company is unable to predict the
outcome of this litigation. If the outcome of this litigation is adverse to the
Company, it could have a material adverse effect on the Company's business,
operating results and financial condition.
On June 28, 1996, AudioFAX filed a complaint against the Company and PCI in
the United States District Court for the Northern District of Georgia. In the
complaint, AudioFAX alleges that the Company manufactures, uses, sells and/or
distributes certain enhanced facsimile products which infringe three United
States patents and one Canadian patent allegedly held by AudioFAX. AudioFAX
seeks injunctive relief, three times an unspecified amount of damages,
prejudgment interest, attorneys' fees and expenses of litigation, and court
costs. The Company has filed an answer to the complaint in which it denies
plaintiff's allegations, asserts various affirmative defenses, and seeks
declaratory judgment regarding noninfringement and patent invalidity. Prior to
receiving the complaint, the Company obtained an opinion from outside patent
counsel to the effect that the Company's enhanced facsimile service does not
infringe any of the United States patents
14
held by AudioFAX, and also obtained a concurring opinion from separate patent
counsel engaged to review the initial opinion. Based on these opinions and other
considerations, the Company believes that it has meritorious defenses to the
AudioFAX complaint; however, due to the inherent uncertainties of the judicial
system, the Company is unable to predict the outcome of this litigation. If the
outcome of the litigation is adverse to the Company, it could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company has taken a one-time charge for the estimated legal fees
and other costs that the Company expects to incur to resolve this matter.
On August 23, 1996, CNC filed a motion to intervene in a separate lawsuit
brought by a CNC creditor in the United States District Court for the Southern
District of New York against certain guarantors of CNC's obligations and to file
a third party action against numerous entities, including such CNC creditor and
PCI for alleged negligent misrepresentations of fact connected to an alleged
fraudulent scheme designed to damage CNC. The court has not ruled on CNC's
request and the bankruptcy examiner is investigating these allegations. Based
upon the examiner's preliminary findings, the Company believes that the
bankruptcy trustee, who has been substituted for CNC in this action, will
dismiss the actions directed at PCI; however, due to the inherent uncertainties
of the judicial system, the Company is unable to predict with certainty the
outcome of this litigation. If the outcome of this litigation is adverse to the
Company, it could have a material adverse effect on the Company's business,
operating results and financial condition.
On September 20, 1996, Peter Lucina ("Lucina") filed a complaint against
the Company, Donald B. Gasgarth ("Gasgarth") and Patrick Jones ("Jones") in the
United States District Court for the Eastern District of Illinois. In the
complaint, Lucina alleges that: (i) in November 1995 he sold 1,563 shares of the
Company common stock to Gasgarth, a former director of the Company, for $31,260;
(ii) Jones, an officer of Company, offered to "facilitate" the sale; (iii) in
December 1995 the Company filed a registration statement relating to the initial
public offering of its Common Stock; (iv) prior to his sale of stock to
Gasgarth, neither Gasgarth nor Jones told Lucina that the Company planned an
initial public offering; and (v) the 1,563 shares sold to Gasgarth, adjusted for
the 24-to-1 stock split subsequently effected, was worth $675,216 based on the
Company's initial public offering at $18 per share in March, 1996. In his
complaint, Lucina asserts violations of the Securities Exchange Act of 1934 and
the rules promulgated thereunder, the Illinois Consumer Fraud and Deceptive
Business Practices Act and common law fraud. Lucina seeks the return of 37,512
shares of common stock of the Company, or in the alternative, compensatory
damages in the amount of $975,312 with interest thereon, punitive damages in the
amount of $1 million and costs of the suit, including reasonable attorneys' fees
and other associated costs. Although the Company has not yet filed an answer to
the complaint the Company believes that it has meritorious defenses to the
Lucina complaint; however, due to the inherent uncertainties of the judicial
system, the Company is unable to predict the outcome of this litigation. If the
outcome of this litigation is adverse to the Company, it could have a material
adverse effect on the Company's business, operating results and financial
condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
11.1 Statement re computation of per share earnings
27.1 Financial data schedule
15
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.
PREMIERE TECHNOLOGIES, INC.
November 11, 1996 /s/ Boland T. Jones
- - ----------------- -------------------------------------------
Date Boland T. Jones
Chairman of the Board and President
November 11, 1996 /s/ Patrick G. Jones
- - ------------------ -------------------------------------------
Date Patrick G. Jones
Senior Vice President
Finance and Legal
16
EXHIBITS INDEX
PAGE
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11.1 Statement re computation of per share earnings 18
27.1 Financial data schedule 19
17