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 MARCH 31, 1997
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 May 8, 1997
- - ----------------------------- --------------------------
Common Stock, $0.01 par value 24,114,338 shares
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1996 and March 31, 1997 3
Condensed Consolidated Statements of Operations for the
Three Months ended March 31, 1996 and 1997 5
Condensed Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1996 and 1997 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 12
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBITS INDEX 15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND MARCH 31, 1997
December 31, 1996 March 31, 1997
----------------- --------------
(Audited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,800,057 $ 4,693,289
Investments 67,333,688 62,644,561
Accounts receivable (less allowance for
doubtful accounts of $609,769 and
$671,299, respectively) 4,743,304 7,005,488
Due from related parties 127,444 52,226
Prepaid expenses and other 2,283,944 3,206,445
Deferred tax asset, net 3,571,938 2,177,632
------------ ------------
Total current assets 84,860,375 79,779,641
------------ ------------
PROPERTY AND EQUIPMENT 19,775,141 24,998,948
Less accumulated depreciation (3,001,941) (3,887,608)
------------ ------------
Net property and equipment 16,773,200 21,111,340
------------ ------------
OTHER ASSETS:
Deferred software development costs, net 507,221 472,833
Investments 0 3,101,259
Due from related parties 189,618 211,460
Deferred tax asset 7,566,401 7,566,401
Strategic alliance contract intangible 29,814,143 29,508,677
Other 340,151 1,692,749
------------ ------------
$140,051,109 $143,444,360
============ ============
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, 1996 AND MARCH 31, 1997
December 31, 1996 March 31, 1997
----------------- --------------
(Audited) (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,172,542 $ 2,797,935
Accrued payroll 1,036,866 630,170
Accrued transmission 496,210 2,128,294
Accrued sales taxes 993,829 1,203,911
Accrued bonuses 138,671 40,000
Accrued construction costs 1,445,517 678,212
Other accrued expenses 3,725,470 2,657,809
Unearned revenue 452,618 461,541
Current portion of capital lease obligation 286,642 295,006
Notes payable 2,560,500 4,110,500
------------ ------------
Total current liabilities 15,308,865 15,003,378
------------ ------------
LONG TERM LIABILITIES:
Notes payable 11,543 11,543
Obligation under capital lease 237,692 160,729
Deferred tax liability 334,520 334,520
------------ ------------
Total long term liabilities 583,755 506,792
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)
SHAREHOLDERS' EQUITY:
Common Stock, $0.01 par value; 150,000,000 shares
authorized, 12,367,920 and 24,094,769 shares issued and
outstanding, respectively 240,118 240,948
Additional paid-in capital 125,785,798 125,798,347
Accumulated (deficit) earnings (1,867,427) 1,894,895
------------ ------------
Total shareholders' equity 124,158,489 127,934,190
------------ ------------
$140,051,109 $143,444,360
============ ============
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 MONTHS ENDED MARCH 31, 1996 AND 1997
1996 1997
------------ -----------
(Unaudited) (Unaudited)
REVENUES:
Subscriber services $ 7,204,316 $12,383,498
License fees 2,296,273 6,178,135
Other revenues 592,533 309,419
------------ -----------
Total revenues 10,093,122 18,871,052
COST OF SERVICES 3,450,941 6,211,183
------------ -----------
GROSS MARGIN 6,642,181 12,659,869
------------ -----------
OPERATING EXPENSES:
Selling and marketing 3,653,505 4,703,832
General and administrative 1,711,303 2,121,207
Depreciation and amortization 344,486 1,242,744
------------ -----------
Total operating expenses 5,709,294 8,067,783
------------ -----------
OPERATING INCOME 932,887 4,592,086
------------ -----------
OTHER INCOME (EXPENSE):
Interest income 266,186 707,320
Interest expense (90,473) (77,651)
Other, net (4,563) 38,661
------------ -----------
Total other income (expense) 171,150 668,330
------------ -----------
NET INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS 1,104,037 5,260,416
PROVISION FOR INCOME TAXES 371,219 1,498,094
------------ -----------
NET INCOME BEFORE EXTRAORDINARY LOSS 732,818 3,762,322
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET OF TAX EFFECT OF $37,880 59,251 0
------------ -----------
NET INCOME $ 673,567 $ 3,762,322
=========== ===========
PRO FORMA INCOME ATTRIBUTABLE TO COMMON
SHAREHOLDERS FOR PRIMARY EARNINGS PER SHARE $ 1,010,576 $ 4,148,041
=========== ===========
PRO FORMA INCOME PER COMMON AND COMMON
EQUIVALENT SHARES (Note 3) $ 0.05 $ 0.16
=========== ===========
SHARES USED IN COMPUTING EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE: Primary 18,750,781 26,620,621
=========== ===========
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 THREE MONTHS ENDED MARCH 31, 1996 AND 1997
1996 1997
-------------- --------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 673,567 $ 3,762,322
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 344,486 1,242,744
Amortization of note discount 8,677 0
Loss on early extinguishment of debt 97,131 0
Loss on sale of asset 17,672 0
Changes in assets and liabilities:
Accounts receivable, net (373,848) (2,262,184)
Prepaid expenses and other 175,109 (742,321)
Deferred tax asset 547,905 1,394,306
Accounts payable 401,945 (1,374,607)
Accrued expenses (131,329) 269,137
Unearned revenue 503,366 8,923
----------- -----------
Total adjustments 1,591,114 (1,464,002)
----------- -----------
Net cash provided by operating activities 2,264,681 2,298,320
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (2,028,359) (5,223,807)
(Purchase) redemption of investments, net (74,536,106) 1,587,868
Licensing agreement 0 (1,550,000)
Decrease in accrued construction costs 0 (767,305)
Purchase of software development 0 0
Due from related parties, net 261,572 53,376
----------- -----------
Net cash used in investing activities (76,302,893) (5,899,868)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 74,666,094 0
Principal payments under capital lease obligation (47,260) (68,599)
Proceeds from issuance of note payable 0 1,550,000
Early extinguishment of debt (2,000,000) 0
Payment of dividends on preferred stock (676,981) 0
Proceeds from payments of subscriptions receivable 2,436,703 0
Proceeds from exercise of stock options 24,040 13,379
----------- -----------
Net cash provided by financing activities 74,402,596 1,494,780
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 364,384 (2,106,768)
CASH AND CASH EQUIVALENTS, beginning of period 1,981,144 6,800,057
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,345,528 $ 4,693,289
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 81,796 $ 78,749
=========== ===========
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, 1996 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("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 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 and
related footnotes included in the Company's Annual Report on Form 10-K, as filed
with the SEC on March 27, 1997.
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. 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 SEC 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
$337,009 and $385,719 for the three months ended March 31, 1996 and 1997,
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.
7
New Accounting Pronouncement. In March 1997, the Financial Accounting
Standards Board released Statement of Financial Accounting Standard No. 128
("SFAS 128"), Earnings Per Share, which is effective for fiscal years ending
after December 15, 1997. Early adoption is not permitted. SFAS 128 may
significantly change reported earnings per share for companies with complex
capital structures, such as the Company, as compared to the modified treasury
stock method. The proforma effect of giving treatment to SFAS 128 is as follows:
March 31, 1996 March 31, 1997
----------------------------------------------
Historical Proforma Historical Proforma
----------------------------------------------
Basic $0.05 $0.04 $0.16 $0.16
Fully dilutive (1) -- -- -- $0.15
(1) Fully dilutive earnings per share is not presented where antidilutive.
4. COMMITMENTS AND CONTINGENCIES
On January 30, 1996, Eric Bott, E.B. Elliott and Cost Recovery
Systems, Inc. ("CRS") filed a complaint against the Company's wholly-owned
subsidiary, Premiere Communications, Inc. ("PCI" or "Premiere Communications")
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 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
filed an answer and counterclaim denying all allegations of the complaint and
asserting various affirmative defenses. Assuming that the allegations concerning
stock options and stock sales relate to the common stock of Premiere
Technologies, Inc., rather than PCI, 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 plaintiffs' motion was denied
on December 17, 1996, and the plaintiffs dismissed the case without prejudice on
January 13, 1997. The plaintiffs filed a new complaint against the Company on
January 21, 1997 setting forth the same allegations as described above. The
Company has filed an answer and counterclaim denying all allegations of the
complaint and asserting various affirmative defenses and a motion to dismiss
with respect to all counts of the complaint. 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 or financial condition.
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 (the "Bankruptcy Code"). 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 in connection with an alleged
fraudulent scheme designed to damage CNC. The court has not ruled on CNC's
request. Based upon the bankruptcy examiner's findings, the bankruptcy trustee,
who has been substituted for CNC in this action, is investigating the merits of
any potential actions directed to PCI. No actions or suits have been filed by
the trustee against
8
PCI, but the trustee has notified PCI that as one of the potential claims he is
investigating, he intends to assert an avoidable preference claim under the
Bankruptcy Code of an amount up to approximately $950,000. PCI and the trustee
are currently in settlement discussions. In the event that PCI and the trustee
conclude a settlement, such settlement will be subject to Bankruptcy Court
approval. Due to the inherent uncertainties of the judicial system, the Company
is unable to predict with certainty whether PCI and the trustee will conclude a
settlement and, if so, whether the settlement will be approved by the Bankruptcy
Court. If a settlement is not approved and the trustee successfully pursues
possible litigation against the Company, it could have a material adverse effect
on the Company's business, operating results or financial condition.
On September 20, 1996, Peter Lucina ("Lucina") filed a complaint
against the Company, Donald B. Gasgarth ("Gasgarth") and Patrick G. Jones
("Jones") in the United States District Court for the Eastern District of
Illinois. In the complaint, Lucina alleges, among other things, 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 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. The Company
has filed an answer to the complaint denying allegations of the complaint and
asserting various defenses. Discovery is actively underway, but no trial date
has been set. 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 or financial
condition.
5. AUDIOFAX SETTLEMENT
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 alleged 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. In the third quarter of 1996, the Company took a one-time
charge for the estimated legal fees and other costs that the Company expected to
incur to resolve this matter. On February 11, 1997, the Company entered into a
long term, non-exclusive license agreement with AudioFAX settling the
litigation. The one-time charge was adequate to cover the actual costs of
litigation, and the cost of the license agreement is not expected to have a
material effect on the Company's earnings.
6. SUBSEQUENT EVENTS
On April 30, 1997, the Company completed the acquisitions, in separate
transactions, of Voice-Tel Enterprises, Inc. ("VTE"), VTN, Inc. ("VTN") (the
general partner of Voice-Tel Network Limited Partnership ("VTNLP"), an affiliate
of VTE), the limited partner interests in VTNLP owned by Merchandising
Productions, Inc. ("MPI") and certain independently owned and operated
franchisees of VTE ("Franchisees") (collectively, the "Acquisitions"). The
Company is negotiating with the owners of the remaining franchisees of VTE
regarding the acquisition of their businesses. The Company can provide no
assurance if or when such proposed acquisitions will be consummated. VTE, VTN
and the Franchisees provide voice messaging services through a privately owned
frame relay network throughout the United States, Canada, Australia and New
Zealand. An aggregate of approximately 5,059,000 shares of common stock were
issued in exchange for all of the outstanding shares of owners' interests of
VTE, VTN and the Franchisees. All but one of the acquisitions have been
accounted for under the pooling of interests method of accounting. The purchase
of MPI's limited partner interests in VTNLP for $9.2 million in cash has been
accounted for under the purchase method of accounting.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues. Total revenues increased $8.8 million or 87.1% from $10.1 million in
the three months ended March 31, 1996 to $18.9 million in the three months ended
March 31, 1997. Subscriber services revenues increased $5.2 million or 72.2%
from $7.2 million in the three months ended March 31, 1996 to $12.4 million in
the three months ended March 31, 1997. This increase was due primarily to
increased revenues from Premiere WorldLink subscriber services resulting
from response to the Company's print advertising campaign and additional co-
branded relationships which were in existence during the three months ended
March 31, 1997. In addition, the increase in subscriber services was also due in
part to a nonrecurring debit card arrangement in existence during the first
quarter of 1997. AFCOM subscriber services revenues declined $0.4 million or
19.0% from $2.1 million in the three months ended March 31, 1996 to $1.7 million
in the three months ended March 31, 1997. 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 $3.9 million
or 169.6% from $2.3 million in the three months ended March 31, 1996 to $6.2
million in the three months ended March 31, 1997. This increase was due to the
establishment of additional licensing relationships and increased revenues from
existing licensees. Other revenues decreased $284,000 or 47.9% from $593,000 in
the three months ended March 31, 1996 to $309,000 in the three months ended
March 31, 1997. This decrease was attributable primarily to nonrecurring system
design and development revenues in the three months ended March 31, 1996.
On August 6, 1996, CNC, a licensing customer of the Company, was placed into
bankruptcy under Chapter 11 of the Bankruptcy Code. CNC accounted for none of
the Company's licensing revenues and total revenues in the three months ended
March 31, 1997, although it accounted for 47.8% and 10.9% of the Company's
licensing revenues and total revenues in the first 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 believes that through a
combination of new licensing agreements, the strategic alliance agreement with
WorldCom and increased revenues from existing licensees, the Company has
replaced all of the anticipated CNC revenue.
Cost of Services. Cost of services increased $2.7 million or 77.1% from $3.5
million in the three months ended March 31, 1996 to $6.2 million in the three
months ended March 31, 1997. These expenses decreased as a percentage of
revenues from 34.7% in the three months ended March 31, 1996 to 32.8% in the
three months ended March 31, 1997. The decrease in cost of services as a
percentage of revenues reflects higher margins resulting from relatively lower
per minute transmission costs and the relative increase in contribution from
license fees, which have a lower cost of services because the licensees bear the
cost of call transmission.
Selling and Marketing Expenses. Selling and marketing expenses increased $1.0
million or 27.0% from $3.7 million in the three months ended March 31, 1996 to
$4.7 million in the three months ended March 31, 1997. 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 36.6% in the three months ended March 31, 1996 to
24.9% in the three months ended March 31, 1997. This decrease resulted from
improved operating leverage related to increased recurring revenues.
General and Administrative Expenses. General and administrative expenses
increased $0.4 million or 23.5% from $1.7 million in the three months ended
March 31, 1996 to $2.1 million in the three months ended March 31, 1997. 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 16.8% in the three months ended March 31, 1996 to
11.1% in the three months ended March 31, 1997. This decrease resulted from
improved operating leverage related to increased recurring revenues.
10
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased $856,000 or 248.8% from $344,000 in the three months ended March 31,
1996 to $1.2 million in the three months ended March 31, 1997. This increase was
due primarily to depreciation of additional equipment acquired during the last
three quarters of 1996 and the three months ended March 31, 1997.
Operating Income. Operating income increased $3.7 million or 396.6% from
$933,000 in the three months ended March 31, 1996 to $4.6 million in the three
months ended March 31, 1997.
Interest Income. Interest income increased $441,000 or 165.8% from $266,000 in
the three months ended March 31, 1996 to $707,000 in the three months ended
March 31, 1997. This increase was attributable to the Company receiving the full
benefit for the entire first quarter of 1997 from the investment of the proceeds
from the Company's initial public offering in March 1996, as compared to the
partial quarter of benefit in the three months ended March 31, 1996.
Interest Expense. Interest expense decreased $12,000 or 13.3% from $90,000 in
the three months ended March 31, 1996 to $78,000 in the three months ended March
31, 1997. This decrease is attributable to the early extinguishment of long term
debt during the first quarter of 1996.
Income Taxes. Income taxes increased $1.1 million or 296.5% from $371,000 in the
three months ended March 31, 1996 to $1.5 million in the three months ended
March 31, 1997. The Company's effective tax rate was less than the statutory
rate during these periods as a result of the use of net operating loss
carryforwards and the tax savings effect of investing in certain non-taxable and
tax-reduced instruments.
Net Income. As a result of the foregoing, net income increased $3.1 million or
459.9% from $674,000 in the three months ended March 31, 1996 to $3.8 million in
the three months ended March 31, 1997. As a percentage of revenues, net income
increased from 6.7% in the three months ended March 31, 1996 to 20.1% in the
three months ended March 31, 1997.
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 has used a portion of its 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
March 31, 1997 were approximately $6.5 million and $419,000 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 March 31, 1997, the Company had approximately $ 4.1
million of the borrowings outstanding against the line-of-credit.
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
This Quarterly Report on Form 10-Q contains certain statements and
projections (including statements concerning plans and objectives of management
for future operations and services and statements concerning certain revenue
expectations) that should be considered forward-looking and subject to certain
risks and uncertainties. Such forward-looking statements are based on
management's belief as well as assumptions made by, and information currently
available to, management pursuant to "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results might
differ
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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 Annual Report on Form 10-K for the year ended December 31, 1996 under
the heading "Forward-Looking Statements." The Company cautions that such factors
are not exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by, or on behalf of, the Company.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING
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 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. Assuming that the allegations concerning stock options and
stock sales relate to the common stock of Premiere Technologies, Inc., rather
than PCI 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 plaintiffs' motion was denied on
December 17, 1996, and the plaintiffs dismissed the case without prejudice on
January 13, 1997. The plaintiffs filed a new complaint against the Company on
January 21, 1997 setting forth the same allegations as described above. The
Company has filed an answer and counterclaim denying all allegations of the
complaint and asserting various affirmative defenses and a motion to dismiss
with respect to all counts of the complaint. 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 August 6, 1996, CNC, a licensing customer of the Company, was
placed into bankruptcy under Chapter 11 of the Bankruptcy Code. 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 in connection with an alleged
fraudulent scheme designed to damage CNC. The court has not ruled on CNC's
request. Based upon the bankruptcy examiner's findings, the bankruptcy trustee,
who has been substituted for CNC in this action, is investigating the merits of
any potential actions directed to PCI. No actions or suits have been filed by
the trustee against PCI, but the trustee has notified PCI that as one of the
potential claims he is investigating, he intends to assert an avoidable
preference claim under the Bankruptcy Code of an amount up to approximately
$950,000. PCI and the trustee are currently in settlement discussions. In the
event that PCI and the trustee conclude a settlement, such settlement will be
subject to Bankruptcy Court approval. Due to the inherent uncertainties of the
judicial system, the Company is unable to predict with certainty whether PCI and
the trustee will conclude a settlement and, if so, whether the settlement will
be approved by the Bankruptcy Court. If a settlement is not approved and the
trustee successfully pursues possible litigation
12
against the Company, it could have a material adverse effect on the Company's
business, operating results or financial condition.
On September 20, 1996, Lucina filed a complaint against the Company,
Gasgarth and Jones in the United States District Court for the Eastern District
of Illinois. In the complaint, Lucina alleges, among other things, 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 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. The Company has
filed an answer to the complaint denying allegations of the complaint and
asserting various defenses. Discovery is actively underway, but no trial date
has been set. 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 or 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
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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.
PREMIERE TECHNOLOGIES, INC.
May 15, 1997 /s/ Boland T. Jones
- - ------------ -------------------
Date Boland T. Jones
Chairman of the Board and President
May 15, 1997 /s/ Patrick G. Jones
- - ------------ --------------------
Date Patrick G. Jones
Senior Vice President
Finance and Legal
14
EXHIBIT INDEX
PAGE
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11.1 Statement re computation of per share earnings 16
27.1 Financial data schedule 17
15