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 JUNE 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from TO .
------------- ------------
Commission File Number:
0-27778
Premiere Technologies, Inc.
(Exact name of registrant as specified in its charter)
Georgia 59-3074176
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3399 Peachtree Road NE
The Lenox Building, Suite 600
Atlanta, Georgia 30326
(Address of principal executive offices, including zip code)
(404) 262-8400
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No (2) Yes X No .
----- ----- ----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 13, 1998
----------------------------- --------------------------------
Common Stock, $0.01 par value 45,885,865 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
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations for the
Three and Six Month periods ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
Six Month period ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk 12
PART II OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURES 18
EXHIBIT INDEX 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
1998 1997
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and equivalents........................................ $ 47,009 $ 43,731
Marketable securities....................................... 51,988 154,569
Accounts receivable (less allowances of
$12,727 and $7,248, respectively)......................... 60,272 55,040
Prepaid expenses and other.................................. 13,957 10,589
Deferred income taxes, net.................................. 41,848 27,957
--------- ---------
Total current assets...................................... 215,074 291,886
--------- ---------
PROPERTY AND EQUIPMENT, NET.................................... 118,826 87,428
--------- ---------
OTHER ASSETS
Deferred income taxes, net.................................. - 544
Strategic alliances and investments, net.................... 62,264 54,328
Goodwill, net............................................... 175,570 104,244
Intangibles and other....................................... 28,453 22,937
--------- ---------
$ 600,187 $ 561,367
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses......................... $ 114,395 $ 100,694
Revolving loan, net of issue costs............................ 129,332 128,456
Current maturities of long term debt.......................... 4,209 6,243
Accrued restructuring, rebranding and other special charges... 26,226 22,324
--------- ---------
Total current liabilities................................... 274,162 257,717
--------- ---------
LONG TERM LIABILITIES
Convertible subordinated notes, net of issue costs............ 167,651 167,270
Long term debt................................................ 12,188 3,562
Other accrued liabilities..................................... 2,835 11,879
Deferred income taxes, net.................................... 5,762 -
--------- ---------
Total long term liabilities................................. 188,436 182,711
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value; 150,000,000 shares authorized,
46,200,865 and 44,670,619 shares issued and outstanding,
respectively................................................ 462 447
Additional paid-in capital.................................... 280,419 246,255
Treasury stock, at cost....................................... (2,616) -
Note receivable, shareholder.................................. (973) (973)
Cumulative translation adjustment............................. (3,497) (3,551)
Accumulated deficit........................................... (136,206) (121,239)
--------- ---------
Total shareholders' equity.................................. 137,589 120,939
--------- ---------
$ 600,187 $ 561,367
========= =========
Accompanying notes are integral to these condensed consolidated financial statements.
3
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------------------------- --------------------------
(Unaudited) (Unaudited)
REVENUES................................................................. $ 121,435 $ 98,519 $ 240,461 $ 191,092
COST OF SERVICES......................................................... 37,620 31,885 76,655 61,702
--------- --------- --------- ---------
GROSS PROFIT............................................................. 83,815 66,634 163,806 129,390
--------- --------- --------- ---------
OPERATING EXPENSES
Selling, general and administrative.................................... 76,379 43,688 124,542 84,962
Depreciation and amortization.......................................... 11,827 6,946 21,778 13,087
Restructuring, rebranding and other special charges.................... - 45,423 24,845 45,423
Accrued settlement cost................................................ - 1,500 2,850 1,500
--------- --------- --------- ---------
Total operating expenses............................................. 88,206 97,557 174,015 144,972
--------- --------- --------- ---------
OPERATING INCOME (LOSS).................................................. (4,391) (30,923) (10,209) (15,582)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest, net.......................................................... (3,723) (752) (6,546) (1,653)
Other, net............................................................. (71) 57 (104) (64)
--------- --------- --------- ---------
Total other income (expense)......................................... (3,794) (695) (6,650) (1,717)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES........................................ (8,185) (31,618) (16,859) (17,299)
INCOME TAX BENEFIT....................................................... (3,307) (4,333) (1,893) (281)
--------- --------- --------- ---------
NET INCOME (LOSS)........................................................ $ (4,878) $ (27,285) $ (14,966) $ (17,018)
========= ========= ========= =========
BASIC NET INCOME (LOSS) PER SHARE........................................ $ (0.11) $ (0.64) $ (0.33) $ (0.40)
========= ========= ========= =========
DILUTED NET INCOME (LOSS) PER SHARE...................................... $ (0.11) $ (0.64) $ (0.33) $ (0.40)
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC.................................................................. 46,243 42,475 45,614 42,399
========= ========= ========= =========
DILUTED................................................................ 46,243 42,475 45,614 42,399
========= ========= ========= =========
Accompanying notes are integral to these condensed consolidated financial statements.
4
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
1998 1997
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................................... $(14,966) $(17,018)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization..................................... 21,778 13,087
Deferred income taxes............................................. (12,848) (5,784)
Restructuring, rebranding and other special charges............... 24,845 45,423
Accrued settlement cost........................................... 2,850 1,500
Payments for restructuring, rebranding and other special charges.. (29,458) (13,190)
Changes in assets and liabilities:
Accounts receivable, net........................................ (3,791) (6,857)
Prepaid expenses and other...................................... 1,421 (1,233)
Accounts payable and accrued expenses........................... 4,376 339
-------- --------
Total adjustments.................................................. 9,173 33,285
-------- --------
Cash flows from operating activities............................ (5,793) 16,267
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment................................... (33,117) (17,980)
Redemption of marketable securities, net............................. 102,581 36,104
Cash paid for acquired companies, net of cash acquired............... (46,350) (16,198)
Strategic investments................................................ (8,019) -
Other................................................................ 49 (514)
-------- --------
Cash flows from investing activities............................ 15,144 1,412
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments under borrowing arrangements................................ (6,742) (22,666)
Payment for purchase of treasury stock............................... (2,616) -
Proceeds from issuance of debt....................................... - 2,050
Proceeds from revolving loan, net.................................... 2,000 -
Proceeds from convertible subordinated notes, net.................... - 145,105
Shareholder distributions, primarily S-Corporation distributions..... - (5,161)
Net funds from exercise of stock options............................. 1,696 235
Other................................................................ (395) (1,501)
-------- --------
Cash flows from financing activities............................ (6,057) 118,062
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................ (16) (887)
-------- --------
NET INCREASE IN CASH AND EQUIVALENTS................................... 3,278 134,854
CASH AND EQUIVALENTS, beginning of period.............................. 43,731 22,616
-------- --------
CASH AND EQUIVALENTS, end of period.................................... $ 47,009 $157,470
======== ========
Accompanying notes are integral to these condensed consolidated financial statements.
5
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
have been prepared by management of Premiere Technologies, Inc. (the "Company"
or "Premiere") in accordance with rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, certain information and footnote
disclosures usually found in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. In the
opinion of management of the Company, all adjustments (consisting only of normal
recurring adjustments, except as disclosed herein) considered necessary for a
fair presentation of the condensed consolidated financial statements have been
included. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Examples include provisions for bad debts, carrying
values and useful lives assigned to goodwill and other long-lived assets and
accruals for restructuring costs and employee benefits. Actual results could
differ from those estimates. These interim condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K, for the year ended December 31, 1997.
2. SIGNIFICANT CHARGES AND COSTS
The Company recorded certain charges and costs of approximately $17.1 million
before income taxes in the three month period ended June 30, 1998. Such amount
consists of approximately $8.4 million of charges associated with uncollectible
accounts receivable related principally to the bankruptcy of two customers, $2.3
million of start-up costs, primarily executive compensation, incurred by its
Orchestrate.com subsidiary, $1.8 million related to asset impairments and other
costs. Approximately $16.1 million of these nonrecurring charges and costs are
included as selling, general and administrative expenses in the accompanying
condensed consolidated statement of operations.
3. NEW ACCOUNTING PRONOUNCEMENTS
During 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 131, "Disclosures About Segments of
an Enterprise and Related Information" effective for fiscal years beginning
after December 15, 1997. Interim period reporting is not required in the initial
year of adoption. Management is currently studying the impact that SFAS No. 131
will have on its financial statement disclosures.
4. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed in accordance with SFAS No. 128,
"Earnings per Share." Basic and diluted net income (loss) per share are the same
for the three and six month periods ended June 30, 1998 and 1997 because both of
the Company's potentially dilutive securities, convertible subordinated notes
and stock options, are antidilutive in all periods presented.
5. COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income represents the change in equity of a business during a
period, except for investments by owners and distributions to owners. Foreign
currency translation adjustments represent the Company's only component of other
comprehensive income. For the three month period ended June 30, 1998 and 1997,
total comprehensive loss was approximately $5.5 and $28.3 million, respectively.
For the six month period ended June 30, 1998 and 1997, total comprehensive loss
was $14.9 and $18.0 million, respectively.
6
6. ACQUISITIONS
American Teleconferencing Services, Ltd. Acquisition
Effective April 22, 1998, the Company purchased all of the outstanding common
stock of American Teleconferencing Services, Ltd. ("ATS") for an aggregate
purchase price of approximately $58 million in stock and cash. ATS is a leading
provider of full service conference calling and other forms of group
communications. Excess purchase price over fair value of net assets acquired of
approximately $47 million has been recorded as goodwill based on a preliminary
purchase price allocation and is being amortized on a straight-line basis over
40 years. Such purchase price allocation is subject to change within one year of
the acquisition date under certain circumstances as set forth in Accounting
Principles Board Opinion No. 16 "Business Combinations" ("APB No.16").
Xpedite Systems, Inc. Acquisition
On February 27, 1998, the Company completed its merger with Xpedite Systems,
Inc. ("Xpedite"). In connection with the merger, the Company issued
approximately 11 million shares of its common stock in exchange for all of the
issued and outstanding common shares of Xpedite. This transaction was accounted
for as a pooling-of-interests and the Company's financial statements have been
restated for all periods presented to include Xpedite.
International Acquisitions
During the first quarter of 1998, the Company acquired Xpedite Systems, GmbH
("XSG") for $13.1 million in cash, net of cash acquired. XSG provides enhanced
electronic document distribution services in Germany. Excess purchase price
over fair value of net assets acquired of approximately $12.9 million has been
recorded as goodwill based on a preliminary purchase price allocation and is
being amortized on a straight-line basis over 40 years. Such purchase price
allocation is subject to change within one year of the acquisition date under
certain circumstances as set forth in APB No. 16.
On December 17, 1997, Xpedite purchased substantially all of the outstanding
capital stock of Xpedite Systems Limited ("XSL") for $87.8 million in cash. XSL
is a leading supplier of enhanced electronic document distribution services in
the United Kingdom. Excess purchase price over fair value of net assets acquired
of approximately $79.1 million has been recorded as goodwill based on a
preliminary purchase price allocation and is being amortized on a straight-line
basis over 40 years. Such purchase price allocation is subject to change within
one year of the acquisition date under certain circumstances as set forth in
APB No. 16.
During the second quarter of 1998, the Company acquired two electronic document
distribution companies located in Germany and Singapore. The aggregate purchase
price of these acquisitions approximates $16 million in cash and liabilities
assumed. Both of the acquisitions were accounted for as purchases. Excess
purchase price over fair value of net assets acquired of approximately $12
million has been recorded as goodwill based on a preliminary purchase price
allocation and is being amortized over 40 years. Such purchase price allocation
is subject to change within one year of the acquisition date under certain
circumstances as set forth in APB No. 16.
VoiceCom Acquisition
During the third quarter of 1997, the Company completed its merger with VoiceCom
Holdings, Inc. ("VoiceCom"), a provider of voice messaging, interactive voice
response and other enhanced communications services. In connection with the
merger, the Company issued approximately 446,000 shares of its common stock in
exchange for all of the issued and outstanding common shares of VoiceCom. This
transaction has been accounted for as a pooling-of-interests and the Company's
financial statements have been restated for all periods presented to include
VoiceCom.
7
Voice-Tel Acquisitions
On June 12, 1997, the Company completed the acquisitions of Voice-Tel
Enterprises, Inc. ("VTE"), its affiliate Voice-Tel Network Limited Partnership
("VTN") and substantially all of the approximately 100 independently owned
Voice-Tel franchise businesses ("Franchisees") (collectively, the "Voice-Tel
Entities" and "Voice-Tel Acquisitions"). In connection with the acquisitions,
the Company issued approximately 7.4 million shares of its common stock, paid
approximately $16.2 million in cash and assumed approximately $21.3 million in
indebtedness, net of cash acquired. Most of the Voice-Tel Acquisitions were
structured as tax-free mergers or share exchanges and were accounted for under
the pooling-of-interests method of accounting. Accordingly, the financial
results of the Company have been restated for all periods presented to include
the results of the Voice-Tel Acquisitions accounted for using this method. The
Company purchased 15 of the Voice-Tel Entities for an aggregate of approximately
$15.5 million in cash and approximately 94,000 shares of its common stock.
Excess purchase price over fair value of net assets acquired has been recorded
as goodwill based on preliminary purchase price allocations and is being
amortized on a straight-line basis over 40 years. Such purchase price
allocations are subject to change within one year of the acquisition date under
certain circumstances as set forth in APB No. 16.
The following unaudited pro forma consolidated results of operations for the
three and six month periods ended June 30, 1998 and 1997 assumes the
acquisitions made by the Company in 1997 and 1998 which were accounted for as
purchases occurred on January 1, 1997. Pro forma adjustments consist of
amortization of intangible assets acquired, interest expense associated with
borrowings incurred in connection with the XSG and XSL purchases and lost
interest income reflecting cash paid in the purchase of ATS.
(000's) (000's)
Three Month Period Ended Six Month Period Ended
-------------------------- ---------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
Revenues $122,150 $118,017 $251,869 $228,023
======== ======== ======== ========
Net loss $ (5,060) $(28,261) $(21,971) $(18,905)
======== ======== ======== ========
Basic net loss per share $ (0.11) $ (0.65) $ (0.48) $ (0.44)
======== ======== ======== ========
Diluted net loss per share $ (0.11) $ (0.65) $ (0.48) $ (0.44)
======== ======== ======== ========
7. RESTRUCTURING, REBRANDING AND OTHER SPECIAL CHARGES
The Company recorded charges against income of approximately $27.7 million in
the first quarter of 1998 in connection with the Xpedite merger. Such charges
consist of transaction costs, principally investment banking and professional
fees, which must be expensed under the pooling of interests method of
accounting. In addition, the Company has accrued the estimated costs to exit
certain facilities and discontinue certain business processes and activities
which are duplicative or redundant in the combined operations of Premiere and
Xpedite. These costs consist of severance associated with workforce reduction,
lease termination costs resulting from exiting certain facilities and asset
impairments resulting from management's decision to upgrade certain network
based telecommunications equipment in order to more efficiently integrate the
Premiere and Xpedite telecommunication networks. The Company also recorded the
costs to settle a patent infringement claim made against Xpedite. This
settlement was paid in April 1998.
Xpedite recorded restructuring and other special charges of approximately $16.5
million before income taxes in the fourth quarter of 1997. Such amounts result
principally from transaction costs incurred by Xpedite in connection with its
merger with the Company, including legal and professional fees and a $9.5
million transaction "break-up" fee paid by Xpedite in connection with an
unsuccessful attempt to acquire Xpedite. In addition, Xpedite recorded charges
for severance and asset impairment costs associated with closing its existing
United Kingdom ("UK") based operation. This action resulted from Xpedite
management's plan to restructure its European operations by acquiring its UK
affiliate (XSL) in December 1997 and centralizing administration of European
business operations in the newly acquired organization.
8
In connection with the VoiceCom acquisition, the Company recorded restructuring
and other special charges of approximately $28.2 million before income taxes in
the third quarter of 1997. Such amounts consisted of transaction costs, asset
impairments, costs to terminate or restructure certain contractual obligations
and other costs.
Transaction costs associated with the VoiceCom acquisition were expensed as
required by the pooling-of-interests method of accounting. Other restructuring
and special charges recorded in the third quarter result principally from
management's plan to restructure VoiceCom's operations by reducing its
workforce, exiting certain facilities, discontinuing duplicative product
offerings and terminating or restructuring certain contractual obligations.
The Company recorded approximately $45.4 million of restructuring and other
special charges in the second quarter of 1997 in connection with the Voice-Tel
Acquisitions. Those charges result from management's plan to restructure the
operations of the Voice-Tel Entities under a consolidated business group model
and discontinue its franchise operations. This initiative involves substantial
reduction in the administrative workforce, abandoning duplicate facilities and
assets and other costs necessary to discontinue redundant business activities.
The Company also recorded a $1.5 million charge for anticipated legal and
settlement costs resulting from bankruptcy proceedings of a customer,
Communications Network Corporation. See Note 10 for further information.
Activity in accrued costs for restructuring and other special charges during
the six month period ended June 30, 1998 is as follows:
Accrued Costs Accrued Costs
December 31, Charges to Costs June 30,
1997 Operations Incurred 1998
------------- --------------- -------- -------------
Severance $ 6,672 $ 1,803 $ 2,885 $ 5,590
Asset impairments 12,648 3,490 7,010 9,128
Restructure or terminate contractual
obligations 13,354 670 1,952 12,072
Transaction costs 6,948 11,388 14,653 3,683
Accrued settlement costs - 2,850 2,751 99
Rebranding costs - 2,710 1,566 1,144
Other costs, primarily to exit facilities
and certain activities 3,788 4,784 6,236 2,336
------- ------- ------- -------
$43,410 $27,695 $37,053 $34,052
======= ======= ======= =======
8. STRATEGIC ALLIANCES AND INVESTMENTS
Assets recorded as strategic alliances and investments at June 30, 1998 and
December 31, 1997 are as follows (amounts in millions):
June 30, December 31,
1998 1997
-------- ------------
WorldCom $30.0 $30.0
Intangible and other asset 15.0 18.5
Less accumulated amortization 3.8 1.9
-------- ------------
41.2 46.6
Equity investments 21.1 7.7
-------- ------------
$62.3 $54.3
======== ============
The most individually significant asset in this caption relates to the Company's
strategic alliance agreement entered into with WorldCom, Inc. ("WorldCom") in
November 1996. Under the agreement, WorldCom is required, among other things, to
provide the Company with the right of first opportunity to provide enhanced
computer telephony products for a period of at least 25 years. In connection
with the agreement, the Company issued WorldCom 2,050,000 shares of common stock
valued at approximately $25.2 million (based on an independent appraisal), and
paid WorldCom approximately $4.7 million in cash. Costs capitalized of
approximately $30.0 million are being amortized over the life of the agreement.
WorldCom has entered into an agreement to acquire MCI, the consummation of which
is subject to certain regulatory approvals. MCI competes with the Company with
respect to certain services. The impact of WorldCom's proposed acquisition of
MCI on the Company's strategic alliance with WorldCom cannot be determined at
this time. Current revenue levels under the strategic alliance agreement are
significantly below the specified minimum payment levels in the agreement. The
minimum payments cease at the end of September 1998. The Company periodically
reviews this asset for impairment. Based on such reviews, management currently
believes this asset is appropriately valued. Management will continue to review
this asset periodically, and there can be no assurance that future reviews will
not require a write-down in the carrying value of this asset.
Intangible assets and equity investments classified as strategic alliances and
investments consist of investments made by the Company to further its strategic
plan. These investments and alliances involve emerging technologies, such as
telemedicine and the Internet, as well as marketing alliances and outsourcing
programs designed to reduce costs and develop new markets and distribution
channels for the Company's products. Costs classified as an intangible asset are
being amortized over seven years. All equity investments held by the Company in
other organizations represent a less than 20% ownership and are being accounted
for under the cost method. Management periodically reviews these assets for
impairment. Based on such reviews, management believes that these assets are
appropriately valued. Management will continue to periodically review these
assets and there can be no assurance that future reviews will not require a
write-down of these assets.
9. STOCK PLANS
Recent sharp declines in the market price of the Company's common stock have
resulted in many outstanding employee stock options being exercisable at prices
that exceed the current market price, thereby substantially impairing the
effectiveness of such options as performance incentives. Consistent with the
Company's philosophy of using equity incentives to motivate and retain
management and employees, the Board of Directors determined it to be in the best
interests of the Company and its shareholders to restore the performance
incentives intended to be provided by employee stock options by repricing such
options to the current market price. Consequently, on July 22, 1998, the Board
of Directors of the Company determined to reprice or regrant all employee stock
options which had exercise prices in excess of the closing price of the Common
Stock on such date (other than those of Chief Executive Officer Boland T. Jones,
who requested that his options not be repriced) to $10.25, which was the closing
price of Premiere's common stock on July 22, 1998. While the vesting schedules
will remain unchanged, all repriced and regranted options will be subject to a
twelve-month black-out period, during which the options may not be exercised. In
addition, if the optionee's employment is terminated during the black-out
period, he or she will forfeit any repriced or regranted options that first
vested during the twelve-month period preceding his or her termination of
employment. By imposing the black-out and forfeiture provisions on the repriced
and regranted options, the Board of Directors intends to provide added incentive
for the optionees to continue service.
On July 22, 1998, the Board of Directors approved a new 1998 Stock Plan (the
"1998 Plan") that essentially mirrors the terms of the Company's existing Second
Amended and Restated 1995 Stock Plan (the "1995 Plan"), except that it is not
intended to be used for officers or directors. In addition, the 1998 Plan,
because it was not approved by the shareholders, does not provide for the grant
of incentive stock options. Under the 1998 Plan, 4,000,000 shares of Common
Stock are reserved for the grant of nonqualified stock options and other
incentive awards to employees and consultants of the Company. The objective of
the 1998 Plan is to provide the grantees with an incentive to achieve the
Company's objectives by encouraging their continued service and contribution. In
connection with the repricing of options, as discussed above, some of the
options currently outstanding under the 1998 Plan will be cancelled and replaced
with market-value options under the 1998 Plan, thereby achieving greater
availability for the grant of incentive stock options and other performance
incentives under the 1995 Plan.
On June 23, 1998, the Company's Board of Directors declared a dividend of one
preferred stock purchase right (a "Right") for each outstanding share of the
Company's Common Stock. The dividend was paid on July 6, 1998, to the
shareholders of record on that date. Each Right entitles the registered holder
to purchase from the Company one one-thousandth of a share of Series C Junior
Participating Preferred Stock, par value $0.01 per share (the "Preferred
Shares"), at a price of sixty dollars ($60.00) per one-thousandth of a Preferred
Share, subject to adjustment. The description and terms of the Rights are set
forth in the Shareholder Protection Rights Agreement, as the same may be amended
from time to time, dated as of June 23, 1998, between the Company and SunTrust
Bank, Atlanta, as rights agent. The Rights may have certain anti-takeover
effects. The Rights will cause substantial dilution by a person or group that
attempts to acquire the Company on terms not approved by the Board of Directors
of the Company. However, the Rights should not interfere with any merger,
statutory share exchange or other business combination approved by the Board of
Directors since the Rights may be terminated by the Board of Directors at any
time on or prior to the close of business ten business days after announcement
by the Company that a person has become an Acquiring Person. Thus, the Rights
are intended to encourage persons who may seek to acquire control of the Company
to initiate such an acquisition through negotiations with the Board of
Directors. However, the effect of the Rights may be to discourage a third party
from making a partial tender offer or otherwise attempting to obtain a
substantial equity position in the equity securities of, or seeking to obtain
control of, the Company.
10. COMMITMENTS AND CONTINGENCIES
Litigation
Since June 25, 1998, the Company and certain of its current and former officers,
two of whom are currently directors and one of whom was previously a director,
have been named as defendants in multiple shareholder class action lawsuits
filed in the United States District Court for the Northern District of Georgia.
Plaintiffs seek to represent a class of individuals who purchased the Company's
Common Stock during various periods, including as early as April 2, 1997 through
June 10, 1998. Plaintiffs allege the defendants made positive public statements
concerning the Company's growth and acquisitions. In particular, plaintiffs
allege the defendants spoke positively about the Company's acquisition of Voice-
Tel, Xpedite, ATS, TeleT, and VoiceCom as well as its venture with UniDial
Communications, its investment in USA.NET, Inc. and the roll out of Orchestrate.
Plaintiffs allege these public statements were fraudulent because the defendants
knowingly failed to disclose that the Company allegedly was not successfully
consolidating and integrating these acquisitions. Alleged evidence of scienter
include sales by certain individual defendants during the class period and the
desire to keep the Common Stock price high so that future acquisitions could be
made using the Company's Common Stock. Plaintiffs allege the truth was
purportedly revealed on June 10, 1998, when the Company announced it would not
meet analysts' estimates of second quarter 1998 earnings because, in part, of
the financial difficulties experienced by a licensing customer and by a
strategic partner in the Company's Enhanced Calling Services product group,
revenue shortfalls in its Voice Messaging product group, as well as other
unanticipated costs and one-time charges totaling approximately $17.1 million on
a pre-tax basis. Plaintiffs allege the Company admitted it had experienced
difficulty in achieving its anticipated revenue and earnings from its Voice
Messaging product group due to difficulties in consolidating and integrating its
sales function. Plaintiffs allege violation of Section 10(b) of the Securities
Exchange Act of 1934 against all defendants and violation of Section 20(a) of
the Securities Exchange Act of 1934 against the individual defendants as
"controlling persons." The Company believes the alleged claims in these lawsuits
are without merit. The Company intends to defend these lawsuits vigorously. Due
to inherent uncertainties of the litigation process and the judicial system, the
Company is unable to predict the outcome of this litigation. If the outcome of
any of this litigation is adverse to the Company, it could have a material
adverse effect on the Company's business, financial condition and results of
operations.
On January 21, 1997, two former employees and an affiliate of one of the former
employees filed a complaint against the Company seeking remuneration for alleged
work performed on behalf of the Company. In December 1997, the Company reached a
settlement with one of the claimants. The amount of this settlement was not
material to the Company's financial position. The remaining plaintiffs are
seeking an accounting of commissions allegedly due to them, options to purchase
72,000 shares of the Company's common stock and reasonable attorney's fees. The
Company has filed a motion for summary judgment which is currently pending.
Management of the Company believes it has meritorious defenses to the remaining
allegations, but due to the inherent uncertainties of the litigation process,
the Company is unable to predict the outcome of this litigation and the effect,
if any, on its business, financial condition or results of operations.
On June 28, 1996, AudioFAX IP LLC ("AudioFAX") filed a lawsuit against the
Company alleging that the Company infringed certain patents held by AudioFAX for
enhanced facsimile products. In the third quarter of 1996, the Company recorded
a charge to operations of $1.5 million for the estimated legal fees and other
costs to resolve this matter. On February 11, 1997, the Company entered into a
long-term, non-exclusive license agreement with AudioFAX settling this
litigation. Costs accrued in the third quarter of 1996 were adequate to cover
the actual costs of litigation. The final payment under the license agreement
was made in April 1998.
On August 6, 1996, Communications Network Corporation ("CNC"), a licensing
customer of the Company, was placed into bankruptcy (the "Bankruptcy Case")
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
Premiere Communications, Inc. ("PCI") for alleged negligent misrepresentations
of fact in connection with an alleged fraudulent scheme designed to damage CNC
(the "Intervention Suit"). The District Court has denied CNC's request to
intervene and to file a third party action and has transferred the remainder of
the Intervention Suit to the Bankruptcy Case. Based upon the bankruptcy
examiner's findings and the subsequently appointed bankruptcy trustee's
investigation of potential actions directed at PCI, including an avoidable
preference claim of approximately $950,000, the bankruptcy trustee (the
"Trustee") and PCI have reached a tentative settlement of all issues, subject to
Bankruptcy Court approval. The terms of the proposed settlement have been
incorporated into a motion requesting approval of the settlement and a proposed
plan of reorganization (the "Plan") filed by the Trustee. On June 23, 1998, the
Bankruptcy Court approved the settlement whereby PCI obtained a release from the
Trustee and the Trustee dismissed the Intervention Suit in consideration of PCI
making a cash payment of $1.2 million to the Trustee. If the Plan is
subsequently approved, PCI will make an additional cash payment of up to
$300,000 to the Trustee in consideration of PCI obtaining, among other things,
an injunction against possible nuisance suits relating to the CNC business. The
Company has previously recorded a reserve for the settlement and Plan payment.
On November 26, 1997, Wael Al-Khatib ("Al-Khatib"), the sole shareholder and
former president of CNC, and his company, Platinum Network, Corp. ("Platinum")
(Al-Khatib and Platinum are collectively referred to herein as "Plaintiffs"),
filed a complaint against PCI, WorldCom Network Services, Inc. f/k/a WilTel,
Inc., Bernard J. Ebbers, David F. Meyers, Robert Vetera, Joseph Cusick, William
Trower, Don Wilmouth, Digital Communications of America, Inc., Boland Jones,
Patrick Jones, and John Does I-XX in the Eastern District of New York, United
States District Court. Plaintiffs contend that PCI, certain officers of PCI and
the other defendants engaged in a fraudulent scheme to restrain trade in the
debit card market nationally and in the New York debit card sub-market and made
misrepresentations of fact in connection with the alleged scheme. The Plaintiffs
are seeking at least $250 million in compensatory damages and $500 million in
punitive damages from PCI and the other defendants. Pursuant to the local rules
of the District Court, PCI has filed a letter stating the reasons it believes
the lawsuit should be dismissed. On May 1, 1998, PCI filed a motion to dismiss
for failure to state a claim and such motion to dismiss is currently pending.
The individual PCI defendants, Boland Jones and Patrick Jones, filed a separate
motion to dismiss based upon lack of personal jurisdiction and such motion to
dismiss is currently pending. PCI believes that it has meritorious defenses to
the Plaintiffs' allegations and will vigorously defend the same. Due to the
inherent uncertainties of litigation process and the judicial system, the
Company is not able to predict the outcome of this litigation. If this
litigation is not resolved in PCI's favor, it could have a material adverse
effect on the Company's business, financial condition and results of operations.
On July 8, 1997, various limited partners purporting to act on behalf of
Telentry Research Limited Partnership, Telentry Development Limited Partnership,
Telentry XL Limited Partnership, Telentry Research Limited Partnership II and
Telentry Development Limited Partnership II (collectively, the "Telentry
Partnerships") filed a complaint in the Superior Court of New Jersey for Morris
County against Xpedite and two other defendants. The complaint alleges, inter
alia, that Xpedite is in breach of its obligations to make royalty payments
under a series of license agreements between Xpedite and the Telentry
Partnerships. In this action, the plaintiffs seek damages of approximately $2.0
million and an accounting of royalties. The Company believes that Xpedite has
meritorious defenses to the plaintiffs' allegations, but due to the inherent
uncertainties of the litigation process and the judicial system, the Company is
not able to predict the outcome of this litigation. If this litigation is not
resolved in Xpedite's favor it could have a material adverse effect on the
Company's business, financial condition and results of operations.
On February 23, 1998, Rudolf R. Nobis and Constance Nobis filed a complaint in
the Superior Court of Union County, New Jersey against 15 named defendants,
including Xpedite and certain of its alleged current and former officers,
directors, agents and representatives. The plaintiffs allege that the 15 named
defendants and certain unidentified "John Doe defendants" engaged in wrongful
activities in connection with the management of the plaintiffs' investments with
Equitable Life Assurance Society of the United States and/or Equico Securities,
Inc. (collectively "Equitable"). More specifically, the complaint asserts
wrongdoing in connection with the plaintiffs' investment in securities of
Xpedite and in unrelated investments involving insurance-related products. The
defendants include Equitable and certain of its current or former
representatives. The allegations against Xpedite are limited to plaintiffs'
investment in Xpedite. The plaintiffs have alleged that two of the named
defendants, allegedly acting as officers, directors, agents or representatives
of Xpedite, induced the plaintiffs to make certain investments in Xpedite but
that the plaintiffs failed to receive the benefits that they were promised. The
plaintiffs allege that Xpedite knew or should have known of alleged wrongdoing
on the part of other defendants. The plaintiffs seek an accounting of the
corporate stock in Xpedite, compensatory damages of approximately $4.85 million,
plus $200,000 in "lost investments," interest and/or dividends that have accrued
and have not been paid, punitive damages in an unspecified amount, and for
certain equitable relief, including a request for Xpedite to issue 139,430
shares of common stock in the plaintiffs' names, attorneys' fees and costs and
such other and further relief as the Court deems just and equitable. Xpedite has
filed an answer denying the material allegations of the complaint and asserting
various affirmative defenses and intends to file a motion to dismiss the counts
of the complaint against it. The Company believes that Xpedite has meritorious
defenses to the plaintiffs' allegations, but due to the inherent uncertainties
of the litigation process and the judicial system, the Company is not able to
predict the outcome of this litigation. If the outcome of this litigation is
adverse to Xpedite, it could have a material adverse effect on the Company's
business, financial condition and results of operations.
On or about May 27, 1998, Telephone Company of Central Florida, Inc. ("TCCF"), a
user of the Company's network management system, filed for protection under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Middle District of Florida. WorldCom Network Services, Inc. ("WorldCom Network
Services") and the Company are two of the largest creditors in this bankruptcy
case. In August 1998, WorldCom Network Services filed a separate lawsuit in the
Federal District Court for the Middle District of Florida against certain
insiders of TCCF alleging payment of improper distributions to the insiders in
excess of $1.0 million and asserting a constructive trust claim against the
amounts received by the insiders. On August 10, 1998, TCCF filed a motion with
the Bankruptcy Court requesting authority to hire counsel for the purpose of
pursuing certain alleged claims against WorldCom Network Services and the
Company, alleging service problems with WorldCom Network Services and the
Company. Due to the inherent uncertainties of the litigation process and the
judicial system, and the lack of specificity of the nature of the claims which
may be asserted by TCCF, the Company is not able to predict with certainty
whether a lawsuit will be filed by TCCF or, if such a lawsuit is filed, whether
the outcome of such litigation will be adverse to the Company. If TCCF pursues
its alleged claims through litigation which is not resolved in the Company's
favor, it could have a material adverse effect on the Company's business,
financial condition and results of operations.
On July 30, 1998, Xfer Communications, Inc. ("Xfer") filed a lawsuit against
VoiceCom in the United States District Court for the Eastern District of
Michigan, alleging breach of contract, tortious interference with business
relationships, fraudulent inducement, and misappropriation of trade secrets
allegedly in connection with the solicitation by VoiceCom of certain
telecommunication customer accounts of Xfer. The plaintiff seeks to recover
actual damages in an amount alleged to be in excess of $100,000, together with
costs, interest, attorneys' fees and punitive damages. The Company believes that
VoiceCom has meritorious defenses to the plaintiff's allegations, but due to the
inherent uncertainties of the litigation process and the judicial system, the
Company is unable to predict the outcome of this litigation. If the outcome of
this litigation is adverse to VoiceCom, it could have a material adverse effect
on the Company's business, financial condition and results of operations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company operates in one industry segment, enhanced communications services.
The Company's services include enhanced calling services for mobile individuals,
voice messaging, full service conference calling, enhanced electronic document
distribution services and Internet based communications. The Company believes
its principal competitive advantage is that it integrates these services through
its private network and provides its customers a single source solution for
enhanced communications. By offering a network-based solution, the Company's
customers can access and use its services through a telephone or computer
anywhere in the world and avoid costs associated with purchasing and maintaining
technology and equipment themselves.
Revenues from enhanced calling services consist of usage fees from individual
subscribers which are generally based on per minute rates. Also, license
fees from corporations, primarily telecommunication carriers, under outsourcing
arrangements by which the carriers license use of the Company's network to offer
enhanced communications service to their customers. License fees are also
generally based on per minute rates. Voice messaging revenues generally consist
of fixed monthly fees and usage fees, based on the number of messages initiated
by a subscriber. Enhanced document distribution services revenues generally
consist of per page or per minute fees, sales of fax message handling systems
and royalties for the use of certain Company software from corporations and
individual subscribers. Revenues from full service conference calling are
generally based on per minute rates. Although the Company does not currently
derive any revenues from its Internet-based services, management anticipates
that revenues from these products will consist of both fixed monthly and usage
based components.
Cost of services consists primarily of transmission costs. License customers
generally arrange for, and directly bear the cost of, transmission.
Consequently, while the per minute fees for licensee platform usage are lower
than those for individual subscriber services, the gross margin from license
arrangements is considerably higher than for subscriber services.
Selling, general and administrative expenses include direct and indirect
commissions, the cost of print advertisements, salaries and benefits, travel and
entertainment expenses, bad debt expense, rent and facility expense, accounting
and audit fees, legal fees, property taxes and other administrative and
operating expenses.
Depreciation and amortization include depreciation of computer and
telecommunications equipment and amortization of intangible assets. The Company
provides for depreciation using the straight-line method of depreciation over
the estimated useful lives of the assets, which range from five to ten years,
with the exception of leasehold improvements which are depreciated on a
straight-line basis over the shorter of the term of the lease or the estimated
useful life of the assets. Amortization of intangible assets includes deferred
software development costs, goodwill and strategic investments and alliances,
which are amortized over lives ranging from five to 40 years.
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from estimates. The following discussion and
analysis provides information which management believes is relevant to an
assessment and understanding of the Company's consolidated results of operations
and financial condition. This discussion should be read in conjunction with the
consolidated condensed financial statements and notes thereto.
10
Analysis
The Company's financial statements for all periods presented have been restated
to include the operations of Xpedite, the Voice-Tel Acquisitions and VoiceCom
which were accounted for as poolings of interests. The following discussion and
analysis is prepared on that basis.
Revenues by major product group for the three and six month periods ended June
30, 1998 and 1997 are as follows (amounts in millions):
Three month period Six month period
ended ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
------ -------- ------- ------
Enhanced Calling Services $ 20.6 $20.4 $ 51.9 $ 39.3
Voice Messaging 31.8 34.7 64.5 70.2
Conference Calling 11.7 .9 12.7 1.8
Enhanced Document Distribution 57.3 42.5 111.4 79.8
------ ----- ------ ------
$121.4 $98.5 $240.5 $191.1
====== ===== ====== ======
Revenues increased 23.3% for the three month period ended June 30, 1998 as
compared with the same period in 1997 and increased 25.8% comparing the six
month periods ended June 30, 1998 and 1997. Revenue grew in the following areas:
. Conference Calling, through the acquisition of ATS in April 1998,
. Electronic Document Distribution services, through both internal growth and
acquisitions of European-based electronic document distribution providers XSL
and XSG in December 1997 and January 1998, respectively,
. Strategic partner programs for Enhanced Calling Services, particularly
American Express and First USA, which experienced significant increases in new
subscribers and,
. License programs, both from growth in revenue from existing customers and new
license customers.
In the second quarter of 1998, two customers of the Company's Enhanced Calling
Services product group initiated Chapter 11 bankruptcy proceedings. Although the
Company continued receiving payments from both customers through the first
quarter of 1998, it recorded no revenue from either of these customers in the
second quarter of 1998 and does not anticipate deriving significant revenues
from either of these customers in the future. In addition, the Company has also
discontinued certain unprofitable prepaid calling card programs with a customer.
Revenues in the Company's Enhanced Calling Services product group would have
increased by 16.1% in the three month period ended June 30, 1998 as compared
with same period in 1997 if revenues from these three customers were excluded
from both periods.
Gross profit margins were 69.0% and 67.6% for three month periods ended June 30,
1998 and 1997 and 68.1% and 67.7% for the six month periods ended June 30, 1998
and 1997. Improving gross margins resulted from the acquisition of ATS which has
higher gross margins than the Company's existing product groups. The Company has
also benefitted from general industry trends in which long distance transport
and local access service costs have decreased as a result of increased capacity
and competition among long distance and local exchange carriers.
Selling, general and administrative costs as a percent of revenues were 62.9%
and 44.3% for the three month periods ended June 30, 1998 and 1997 and 51.8% and
44.5% for the six month periods ended June 30, 1998 and 1997. A majority of the
increase in these costs in 1998 results from adjustments of approximately $16.1
million recorded in the second quarter of 1998 reflecting approximately $8.4
million of charges associated with uncollectible accounts receivable related
primarily to the two financially distressed customers discussed above, $2.3
million of start-up costs, primarily executive compensation, incurred in the
start-up of its Orchestrate.com subsidiary, $1.8 million of asset impairment and
other costs. Excluding these costs and charges from 1998 amounts, selling,
general and administrative costs as a percent of revenues are 49.6% and 45.1%
for the three and six month periods ended June 30, 1998, respectively. The
remaining increase in selling, general and administrative costs in 1998 is due
to the acquisition of ATS which has higher selling, general and administrative
costs as a percent of revenue than the Company's existing businesses. Also, the
Company increased staffing and added other administrative and operational
infrastructure necessary to support both current and anticipated growth in the
Company.
11
Depreciation and amortization was $11.8 million and $21.8 million or 9.7% and
9.1% of revenues in the three and six month periods ended June 30, 1998,
respectively, and $6.9 million and $13.1 million or 7.1% and 6.8% of revenues in
the three and six month periods ended June 30, 1997, respectively. Increased
depreciation and amortization expense results mainly from depreciation
associated with increased purchases of computer telephony equipment and other
capital expenditures to support new business growth and amortization of goodwill
and other intangibles acquired in connection with the acquisitions of ATS, XSL,
XSG and Voice-Tel Entities.
Net interest expense increased to $3.7 million and $6.5 million in the three and
six month periods ended June 30, 1998, respectively, up from $0.8 million and
$1.7 million in the same periods of 1997. Increased interest expense results
from interest on the Company's convertible subordinated notes issued in June
1997 and borrowings associated with Xpedite's purchase of XSL and XSG.
In 1998, the Company's effective income tax rate varied from the statutory rate
due to non-deductible goodwill amortization and merger costs. In 1997, the
Company's effective income tax rate varied from the statutory rate due to non
deductible merger costs incurred in connection with the Voice-Tel Acquisitions,
certain non-taxable investment income and income of Voice-Tel Entities which had
elected to be treated as S Corporations or partnerships under U.S. tax law prior
to their acquisition by the Company.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was $5.8 million in the six month period ended June
30, 1998. Net cash provided by operations in the same period of 1997 was $16.3
million. Excluding payments for restructuring, rebranding and other special
charges in both periods, net cash provided by operations was $23.7 million in
1998 and $29.5 million in 1997, respectively. Lower cash from operations before
payments for restructuring, rebranding and other special charges in 1998
resulted primarily from higher selling, general and administrative costs.
Investing activities provided cash of approximately $15.1 million and $1.4
million in the six month periods ended June 30, 1998 and 1997. The Company
liquidated short-term investments in marketable securities of $102.6 million and
$36.1 million in the six month periods ended June 30, 1998 and 1997 to fund
capital expenditure programs, acquisitions and strategic investment activities.
Capital expenditures of $33.1 million in 1998 consisted mainly of purchases of
telecommunications equipment in connection with programs to upgrade and expand
operating infrastructure, including build-out of the Company's London and
Toronto data centers, expansion of the Company's administrative headquarters and
implementation of new management information systems. Cash paid for acquisitions
of approximately $46.4 in 1998 consisted mainly of the acquisition of ATS, the
cash portion of which was approximately $29.3 million. Remaining cash paid for
acquisitions resulted principally from the acquisition of Xpedite's German
affiliate, XSG, which was acquired in January 1998. Cash paid for acquisitions
in 1997 of approximately $16.2 million represents cash paid for acquisitions of
Voice-Tel Entities accounted for as purchases. The Company made strategic
investments of $8.0 million in the six month period ended June 30, 1998 in
businesses involved in emerging technologies which the Company believes will
further its strategic plan. Such investments included increases in the Company's
equity ownership in Endeavor Technologies and USA.NET, and new equity
investments in Intellivoice, a company involved with developing voice activation
technology, and Live Content, a company engaged in certain Internet related
technology.
The Company used cash of approximately $6.1 million in financing activities in
the six month period ended June 30, 1998. Principal uses of cash were to repay
borrowings under term notes and capital lease obligations assumed in connection
with the Voice-Tel acquisitions. In addition, the Company repurchased 306,500
shares of its Common Stock for approximately $2.6 million. Financing activities
provided $118.1 million in the six month period ended June 30, 1997. The
principal source of cash from financing activities in 1997 was the issuance of
convertible subordinated notes in June 1997. The net proceeds to the Company
after exercise of the Underwriter's over-allotment option in July 1997 was
approximately $167.0 million. The notes bear interest at 5.75% and mature in
2004. The Company also repaid $22.7 million of borrowings in 1997 assumed in
connection with the Voice-Tel Acquisitions. Cash distributions of $5.2 million
in 1997 result from distributions made in periods prior to the Company's
acquisitions of the Voice-Tel Entities. Such distributions were made to
reimburse S Corporation shareholders for taxes paid on the proportionate share
of taxable income of such companies they were required to report in their
individual income tax returns.
At June 30, 1998, the Company's principal commitments involve certain
indebtedness, lease obligations and minimum purchase requirements under supply
agreements with telecommunications providers. The Company is in compliance under
all such agreements at this date.
Management believes that cash and marketable securities on-hand of approximately
$99.0 million and cash generated by operating activities will be adequate to
fund growth in the Company's existing businesses for the forseeable future.
However, the Company will be required to repay or refinance certain indebtedness
assumed in connection with its acquisition on February 27, 1998 of Xpedite. Such
indebtedness consists of a revolving line of credit which approximates $130
million and matures December 16, 1998. Management is currently evaluating
alternatives in this regard.
RESTRUCTURING, REBRANDING AND OTHER SPECIAL CHARGES
The Company recorded charges against income of approximately $27.7 million in
the first quarter of 1998 in connection with the Xpedite merger. Such charges
consist of transaction costs, principally investment banking and professional
fees, which must be expensed under the pooling of interests method of
accounting. In addition, the Company has accrued the estimated costs to exit
certain facilities and discontinue certain business processes and activities
which are duplicative or redundant in the combined operations of Premiere and
Xpedite. These costs consist of severance associated with workforce reduction,
lease termination costs resulting from exiting certain facilities and asset
impairments resulting from management's decision to upgrade certain network
based telecommunications equipment in order to more efficiently integrate the
Premiere and Xpedite telecommunications networks. The Company also recorded the
costs to settle a patent infringement claim made against Xpedite. This
settlement was paid in April 1998.
Xpedite recorded restructuring and other special charges of approximately $16.5
million before income taxes in the fourth quarter of 1997. Such amounts result
principally from transaction costs incurred by Xpedite in connection with its
merger with the Company, including legal and professional fees and a $9.5
million transaction "break-up" fee paid by Xpedite to a company which was party
to an unsuccessful attempt to acquire Xpedite. In addition, Xpedite recorded
charges for severance and asset impairment costs associated with closing its
existing United Kingdom ("UK") based operation. These actions were an integral
part of Xpedite management's plan to restructure its European operations by
acquiring its UK affiliate, XSL, and centralizing administration of European
business operations in the newly acquired organization.
In connection with the VoiceCom Acquisition, the Company recorded restructuring
and other special charges of approximately $28.2 million in the third quarter of
1997. Such amounts consisted of transaction costs, asset impairments, costs to
terminate or restructure certain contractual obligations and other costs.
Transaction costs associated with the VoiceCom acquisition were expensed as
required by the pooling-of-interests method of accounting. Other restructuring
and special charges recorded in the third quarter result principally from
management's plan to restructure VoiceCom's operations by reducing its
workforce, exiting certain facilities, discontinuing duplicative product
offerings and terminating or restructuring certain contractual obligations.
The Company recorded approximately $45.4 million of restructuring and other
special charges before income taxes in the second quarter of 1997 in connection
with the Voice-Tel Acquisitions. Those charges result from management's plan to
restructure the operations of the Voice-Tel Entities under a consolidated
business group model and discontinue its franchise operations. This initiative
involves substantial reduction in the administrative workforce, abandoning
duplicative facilities and assets and other costs necessary to discontinue
redundant business activities.
THE YEAR 2000 ISSUE
Introduction. The term "Year 2000 issue" is a general term used to describe
- ------------
the various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software has historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000s" from dates in the "1900s." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
The Company's State Of Readiness. The Company has formed a Year 2000 Executive
- --------------------------------
Committee comprised of five members of senior management and a Year 2000 Task
Force comprised of technical representatives from each of the Company's
operating subsidiaries. The Year 2000 Executive Committee and the Task Force are
charged with evaluating the Company's Year 2000 issue and taking appropriate
actions so that the Company will incur minimal disruption from the Year 2000
issue ("Year 2000 ready"). The Year 2000 Task Force is currently developing and
implementing a comprehensive initiative (the "Initiative") to make the Company's
software applications and/or systems ("Software Applications") and hardware
platforms ("Hardware Platforms") Year 2000 ready. The Initiative covers the
following seven phases: (i) inventory of all Software Applications and Hardware
Platforms, (ii) assessment of repair requirements, (iii) repair of Software
Applications and Hardware Platforms, (iv) testing of individual Software
Applications and Hardware Platforms to determine correct manipulation of dates
and date-related data (v) certification by users within the Company that
Software Applications and Hardware Platforms correctly handle dates and date-
related data, (vi) system integration testing of multiple Software Applications
and Hardware Platforms to determine correct manipulation of dates and date-
related data, and (vii) creation of contingency plans in the event of Year 2000
failures. The Company is aware that some of its Hardware Platforms contain
embedded microprocessors and it has taken the repair of the embedded
microprocessors into consideration in developing the Initiative.
The Company has retained a nationally recognized independent consultant
("Consultant") to assist in finalizing the Initiative. If the Consultant
determines that the Initiative will not adequately lead to the Company's Year
2000 readiness, the Consultant will provide the Company with assistance in
adjusting the Initiative so that the Company can appropriately address its Year
2000 issues. The Company will periodically review its progress with respect to
the Initiative as the Year 2000 is approached and reached. This periodic review
by the Company will include necessary adjustments to the Initiative.
The Company has completed the first six phases of the Initiative for certain of
its Software Applications and Hardware Platforms. While each of the Company's
operating subsidiaries is at a different stage of completion of the Initiative,
the Initiative calls for a majority of the Company's operating subsidiaries to
complete the first six phases of the Initiative by June 30, 1999. The system
integration testing of Software Applications and Hardware Platforms required by
phase (vi) of the Initiative has begun with respect to some of the Company's
business activities. The Initiative calls for initiation of such testing
throughout the Company by no later than the end of the first quarter of 1999.
In the process of assessing the Year 2000 readiness of Software Applications and
Hardware Platforms as required by phase (ii) of the Initiative, the Company has
communicated with many of its suppliers of Software Applications and Hardware
Platforms to determine (1) whether the Software Applications and Hardware
Platforms provided to the Company will correctly manipulate dates and date-
related data as the Year 2000 is approached and reached, and (2) whether the
suppliers will solve their Year 2000 problems in order to continue providing the
Company products and services as the Year 2000 is approached and reached. The
Company has received written verification from a number of suppliers that
Software Applications and Hardware Platforms will correctly manipulate dates and
date-related data as the Year 2000 is approached and reached. If a supplier
informs the Company that it will not appropriately rectify its Year 2000 issues,
then the Company will use that information to develop appropriate contingency
plans as required by phase (vii) of the Initiative. As a general matter, the
Company is vulnerable to a significant supplier's inability to remedy its own
Year 2000 issues. Other than the Company's own remediation efforts, there can be
no assurance that the Software Applications and Hardware Platforms supplied by
third parties on which the Company's business relies will correctly manipulate
dates and date-related data as the Year 2000 is approached and reached. Such
failures could have a material adverse effect on the Company's financial
condition and results of operations.
To operate its business, the Company relies upon providers of telecommunication
services, government agencies, utility companies, and other third party service
providers ("External Providers"), over which it can assert little control. If
the inability of any of these entities to correct their Year 2000 issues results
in a failure to provide the Company services, the Company's operations may be
materially adversely impacted and may result in a material adverse effect on the
Company's financial condition and results of operations. The Company depends
upon telecommunications carriers to conduct its business and is heavily
dependent upon the ability of such telecommunications carriers to correctly fix
their Year 2000 issues. If telecommunications carriers and other External
Providers do not appropriately rectify their Year 2000 issues, the Company's
ability to conduct its business may be materially impacted, which could result
in a material adverse effect on the Company's financial condition and results of
operations.
A significant portion of the Company's business is conducted outside of the
United States. External Providers located outside of the United States may face
significantly more severe Year 2000 issues than similar entities located in the
United States. If such External Providers located outside the United States are
unable to rectify their Year 2000 issues, the Company may be unable to
effectively conduct the international portion of its business, which could
result in a material adverse effect on the Company's financial condition and
results of operations.
Costs to Address the Company's Year 2000 Issues. Thus far the majority of
- ------------------------------------------------
the work on the Initiative has been performed by the Company's employees, which
has limited the cost spent to date. The Company estimates that the total
historical and future costs of implementing the Initiative will be approximately
$40 million, the majority of which relate to capital expenditures. However,
because the Initiative may undergo changes as a result of many factors,
including but not limited to, the results of any phase of the Initiative, the
Company's periodic review of its progress or recommendations of the Consultant,
the Company's estimate of the total cost of implementation may be revised as the
Initiative progresses. In the event such costs need to be revised, such revised
costs could have a material adverse effect on the Company's financial condition
and results of operations. The Company will fund the costs of implementing the
Initiative from cash flows. The Company has not deferred any specific
information technology project as a result of the implementation of the
Initiative. The Company does not expect that the opportunity cost of
implementation of the Initiative will have a material effect on the financial
condition of the Company or its results of operations.
Risks Presented by Year 2000 Issues. Until system integration testing is
- -----------------------------------
substantially in process, the Company cannot fully estimate the risks of its
Year 2000 issue. As a result of system integration testing, the Company may
identify business activities that are at risk of Year 2000 disruption. The
absence of any such determination at this point represents only the status
currently in the implementation of the Initiative, and should not be construed
to mean that there is no business activity which is at risk of a Year 2000
related disruption. It is possible that one or more disruptions to a major
business activity could have a material adverse effect on the Company's
financial condition and results of operations. In addition, as noted above,
many of the Company's business critical External Providers may not appropriately
address their Year 2000 issues, the result of which could have a material
adverse effect on the Company's financial condition and results of operations.
The Company's Contingency Plans. The Initiative includes the development
- -------------------------------
of contingency plans for business activities that are susceptible to a
substantial risk of a disruption resulting from a Year 2000 related event.
Because the Company has not fully assessed its risk from potential Year 2000
failures, the Company has not yet developed detailed contingency plans specific
to Year 2000 events for any business activity. The Company is aware of the
possibility, however, that certain business activities may be hereafter
identified as at risk. Consistent with the Initiative, the Company is
developing contingency plans for such business activities as and if such
determinations are made.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997 the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." Management is currently studying the impact
the new Standards will have on its financial statement disclosures.
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q, in documents incorporated
herein and elsewhere by management or the Company from time to time, the words
"believes," "anticipates," "expects," "will" and similar expressions are
intended to identify forward-looking statements concerning the Company's
operations, economic performance and financial condition, including in
particular, the Company's business strategy and means to implement the strategy,
goals, the amount of capital expenditures, and the likelihood of the Company's
success in developing and expanding its business. For those statements, the
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. These
statements are based on a number of assumptions and estimates which are
inherently subject to significant risks and uncertainties, many of which are
beyond the control of the Company, and reflect future business decisions which
are subject to change. A variety of factors could cause actual results to differ
materially from those anticipated in the Company's forward-looking statements,
including the following factors: (a) those set forth under the caption "Risk
Factors" in the Company's Registration Statement on Form S-3 (333-50003) and
elsewhere herein; (b) those set forth from time to time in the Company's press
releases and reports and other filings made with the Securities and Exchange
Commission; (c) expected cost savings from the merger (the "Xpedite Merger")
with Xpedite Systems, Inc. ("Xpedite") and any other acquisitions may not be
fully realized or realized within the expected time frame; (d) revenues
following the Xpedite Merger and other acquisitions may be lower than expected,
operating costs or customer loss and business disruption following the Xpedite
Merger and any other acquisitions may be greater than expected; (e) competitive
pressures among enhanced communications services providers may increase
significantly; (f) costs or difficulties related to the integration of the
businesses of Xpedite and Premiere and other businesses, if any, that may be
acquired by Premiere may be greater than expected; (g) general economic or
business conditions, internationally, nationally or in the local jurisdiction in
which Premiere is doing business, may be less favorable than expected; (h)
legislative or regulatory changes may adversely affect the business in which
Premiere is engaged; (i) changes that may occur in the securities markets; (j)
the Company's ability to manage the Company's growth and to respond to rapid
technological change and risk of obsolescence of the Company's products,
services and technology; (k) the success of the Company's strategic
relationships, including the amount of business generated and the viability of
the strategic partner; (l) the impact of possible adverse litigation; (m) market
acceptance of new products and services, including Orchestrate; (n) development
of effective marketing, pricing and distribution strategies for new products and
services, including Orchestrate; (o) risks associated with interruption in the
Company's services due to the failure of the communications platforms and
networks utilized in providing the Company's services; and (p) risks associated
with the Year 2000 issue, including Year 2000 problems that may arise on the
part of third parties which may effect the Company's operations. The Company
cautions that such factors are not exclusive. Consequently, all of the forward-
looking statements made in this Prospectus are qualified by these cautionary
statements and readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
such forward-looking statements that may be made to reflect events or
circumstances after the date hereof, or thereof, as the case may be, or to
reflect the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
12
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since June 25, 1998, the Company and certain of its current and former
officers, two of whom are currently directors and one of whom was previously a
director, have been named as defendants in multiple shareholder class action
lawsuits filed in the United States District Court for the Northern District of
Georgia. Plaintiffs seek to represent a class of individuals who purchased the
Company's Common Stock during various periods, including as early as April 2,
1997 through June 10, 1998. Plaintiffs allege the defendants made positive
public statements concerning the Company's growth and acquisitions. In
particular, plaintiffs allege the defendants spoke positively about the
Company's acquisition of Voice-Tel, Xpedite, ATS, TeleT, and VoiceCom as well as
its venture with UniDial Communications, its investment in USA.NET, Inc. and the
roll out of Orchestrate. Plaintiffs allege these public statements were
fraudulent because the defendants knowingly failed to disclose that the Company
allegedly was not successfully consolidating and integrating these acquisitions.
Alleged evidence of scienter include sales by certain individual defendants
during the class period and the desire to keep the Common Stock price high so
that future acquisitions could be made using the Company's Common Stock.
Plaintiffs allege the truth was purportedly revealed on June 10, 1998, when the
Company announced it would not meet analysts' estimates of second quarter 1998
earnings because, in part, of the financial difficulties experienced by a
licensing customer and by a strategic partner in the Company's enhanced calling
services product group, revenue shortfalls in its voice messaging product group,
as well as other unanticipated costs and one-time charges totaling approximately
$17.1 million on a pre-tax basis. Plaintiffs allege the Company admitted it had
experienced difficulty in achieving its anticipated revenue and earnings from
its voice messaging product group due to difficulties in consolidating and
integrating its sales function. Plaintiffs allege violation of Section 10(b) of
the Securities Exchange Act of 1934 against all defendants and violation of
Section 20(a) of the Securities Exchange Act of 1934 against the individual
defendants as "controlling persons." The Company believes the alleged claims in
these lawsuits are without merit. The Company intends to defend these lawsuits
vigorously. Due to inherent uncertainties of the litigation process and the
judicial system, the Company is unable to predict the outcome of this
litigation. If the outcome of any of this litigation is adverse to the Company,
it could have a material adverse effect on the Company's business, financial
condition and results of operations.
On January 21, 1997, Eric Bott, E.B. Elliott and Cost Recovery Systems,
Inc. ("CRS") filed a complaint against the Company, PCI and the Company's
president, Boland T. Jones, in the Superior Court of Fulton County, Georgia
("Civil Action"). As of December 2, 1997, the Company, PCI and Mr. Jones entered
into a settlement agreement with Mr. Bott which settled and disposed of Mr.
Bott's claims in connection with this litigation. on December 12, 1997, Mr.
Elliott and CRS filed a Second Amended Complaint against Premiere and Boland T.
Jones in the Civil Action. The first count seeks an accounting of commissions
that Mr. Elliott and CRS allege may be due to them under a sales commission
agreement between CRS and Premiere. The second count seeks options for 72,000
shares of Premiere Common Stock that Mr. Elliott and CRS claim are due to them,
or damages in the alternative. The third count seeks to recover the Plaintiffs'
reasonable attorneys' fees. In the Second Amended Complaint, the remaining
plaintiffs have dropped their prior request for punitive damages. PCI has
filed a motion for summary judgment which is currently pending. The Company
believes it has meritorious defenses to Mr. Elliott's and CRS' remaining
allegations, but due to the inherent uncertainties of the litigation process,
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, financial condition and results of operations.
The settlement with Mr. Bott will not have a material adverse effect on the
Company's business, financial condition or results of operations.
On August 6, 1996, CNC, a licensing customer of the Company, was placed
into bankruptcy (the "Bankruptcy Case") 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
13
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 "Intervention Suit"). The
District Court has denied CNC's requests to intervene and to file a third party
action and has transferred the remainder of the Intervention Suit to the
Bankruptcy Case. Based upon the bankruptcy examiner's findings and the
subsequently appointed bankruptcy trustee's investigation of potential actions
directed at PCI, including an avoidable preference claim under the Bankruptcy
Code of an amount up to approximately $950,000, the bankruptcy trustee (the
"Trustee") and PCI have reached a tentative settlement on all issues, subject to
Bankruptcy Court approval. The terms of the proposed settlement have been
incorporated into a motion requesting approval of the settlement and a proposed
plan of reorganization (the "Plan") filed by the Trustee. On June 23, 1998, the
Bankruptcy Court approved the settlement whereby PCI obtained a release from the
Trustee and the Trustee dismissed the Intervention Suit in consideration of PCI
making a cash payment of $1.2 million to the Trustee. If the Plan is
subsequently approved by the Bankruptcy Court, PCI will make an additional cash
payment of up to $300,000 to the Trustee in consideration of PCI obtaining
certain allowed subordinated claims and the Court granting an injunction in
Premiere's favor against possible nuisance suits relating to the CNC business.
The Company has previously recorded a reserve for the settlement and Plan
payment.
On November 26, 1997, Wael Al-Khatib ("Al-Khatib"), the sole shareholder
and former president of CNC, and his company, Platinum Network, Corp.
("Platinum") (Al-Khatib and Platinum are collectively referred to herein as
"Plaintiffs"), filed a complaint against PCI, WorldCom Network Services, Inc.
f/k/a WilTel, Inc., Bernard J. Ebbers, David F. Meyers, Robert Vetera, Joseph
Cusick, William Trower, Don Wilmouth, Digital Communications of America, Inc.,
Boland Jones, Patrick Jones, and John Does I-XX (the "Defendants") in the United
States District Court for the Eastern District of New York (the "Al-Khatib
lawsuit"). Plaintiffs contend that PCI, certain officers of PCI and the other
Defendants engaged in a fraudulent scheme to restrain trade in the debit card
market nationally and in the New York debit card sub-market and made
misrepresentations of fact in connection with the alleged scheme. The Plaintiffs
are seeking at least $250 million in compensatory damages and $500 million in
punitive damages from PCI and the other Defendants. Pursuant to the local rules
of the District Court, PCI has filed a letter stating the reasons it believes
the lawsuit should be dismissed. On May 1, 1998, PCI filed a motion to dismiss
for failure to state a claim and such motion to dismiss is currently pending.
The individual PCI defendants, Mr. Boland Jones and Mr. Patrick Jones, filed a
separate motion to dismiss based upon lack of personal jurisdiction and such
motion to dismiss is currently pending. PCI believes that it has meritorious
defenses to the Plaintiffs' allegations and will vigorously defend the same. Due
to the inherent uncertainties of the litigation process and the judicial system,
the Company is not able to predict the outcome of this litigation. If this
litigation is not resolved in the PCI's favor, it could have a material adverse
effect on the Company's business, financial condition and results of operations.
On July 8, 1997 various limited partners purporting to act on behalf of
Telentry Research Limited Partnership, Telentry Development Limited Partnership,
Telentry XL Limited Partnership, Telentry Research Limited Partnership II and
Telentry Development Limited Partnership II (collectively, the "Telentry
Partnerships") filed a complaint in the Superior Court of New Jersey for Morris
County against Xpedite and two other defendants. The complaint alleges, inter
alia, that Xpedite is in breach of its obligations to make royalty payments
under a series of license agreements between Xpedite and the Telentry
Partnerships. In this action, the plaintiffs seek damages of approximately $2.0
million and an accounting of royalties. The Company believes that Xpedite has
meritorious defenses to the plaintiffs' allegations but due to the inherent
uncertainties of the litigation process and the judicial system, the Company is
not able to predict the outcome of this litigation. If this litigation is not
resolved in Xpedite's favor, it could have a material adverse effect on the
Company's business, financial condition and results of operations.
On February 23, 1998, Rudolf R. Nobis and Constance Nobis filed a complaint
in the Superior Court of Union County, New Jersey against 15 named defendants,
including Xpedite and certain of its alleged current and former officers,
directors, agents and representatives. The plaintiffs allege that the 15 named
defendants and certain unidentified "John Doe defendants" engaged in wrongful
activities in connection with the management of the plaintiffs' investments with
Equitable Life Assurance Society of the United States and/or Equico Securities,
Inc. (collectively "Equitable"). More
14
specifically, the complaint asserts wrongdoing in connection with the
plaintiffs' investment in securities of Xpedite and in unrelated investments
involving insurance-related products. The defendants include Equitable and
certain of its current or former representatives. The allegations against
Xpedite are limited to plaintiffs' investment in Xpedite. The plaintiffs have
alleged that two of the named defendants, allegedly acting as officers,
directors, agents or representatives of Xpedite, induced the plaintiffs to make
certain investments in Xpedite but that the plaintiffs failed to receive the
benefits that they were promised. The plaintiffs allege that Xpedite knew or
should have known of alleged wrongdoing on the part of other defendants. The
plaintiffs' claims against Xpedite include breach of contract, breach of
fiduciary duty, unjust enrichment, conversion, fraud, conspiracy, interference
with economic advantage and liability for ultra vires acts. The plaintiffs seek
an accounting of the corporate stock in Xpedite, compensatory damages of
approximately $4.85 million, plus $200,000 in "lost investments," interest
and/or dividends that have accrued and have not been paid, punitive damages in
an unspecified amount, and for certain equitable relief, including a request for
Xpedite to issue 139,430 shares of common stock in the plaintiffs' names,
attorneys' fees and costs and such other and further relief as the Court deems
just and equitable. Xpedite has filed an answer denying the material allegations
of the complaint and asserting various affirmative defenses and intends to file
a motion to dismiss the counts of the complaint against it. The Company believes
that Xpedite has meritorious defenses to the plaintiffs' allegations, but due to
the inherent uncertainties of the litigation process and the judicial system,
the Company is not able to predict the outcome of this litigation. If the
outcome of this litigation is adverse to Xpedite, it could have a material
adverse effect on the Company's business, financial condition and results of
operations.
On or about May 27, 1998, TCCF, a user of the Company's network management
system, filed for protection under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the Middle District of Florida. WorldCom
Network Services and the Company are two of the largest creditors in this
bankruptcy case. In August 1998, WorldCom Network Services filed a separate
lawsuit in the Federal District Court for the Middle District of Florida against
certain insiders of TCCF alleging payment of improper distributions to the
insiders in excess of $1.0 million and asserting a constructive trust claim
against the amounts received by the insiders. On August 10, 1998, TCCF filed a
motion with the Bankruptcy Court requesting authority to hire counsel for the
purpose of pursuing certain alleged claims against WorldCom Network Services and
the Company, alleging service problems with WorldCom Network Services and the
Company. Due to the inherent uncertainties of the litigation process and the
judicial system, and the lack of specificity of the nature of the claims which
may be asserted by TCCF, the Company is not able to predict with certainty
whether a lawsuit will be filed by TCCF or, if such a lawsuit is filed, whether
the outcome of such litigation will be adverse to the Company. If TCCF pursues
its alleged claims through litigation which is not resolved in the Company's
favor, it could have a material adverse effect on the Company's business,
financial condition and results of operations.
On July 30, 1998, Xfer filed a lawsuit against VoiceCom in the United
States District Court for the Eastern District of Michigan, alleging breach of
contract, tortious interference with business relationships, fraudulent
inducement, and misappropriation of trade secrets allegedly in connection with
the solicitation by VoiceCom of certain telecommunication customer accounts of
Xfer. The plaintiff seeks to recover actual damages in an amount alleged to be
in excess of $100,000, together with costs, interest, attorneys' fees and
punitive damages. The Company believes that VoiceCom has meritorious defenses to
the plaintiff's allegations, but due to the inherent uncertainties of the
litigation process and the judicial system, the Company is unable to predict the
outcome of this litigation. If the outcome of this litigation is adverse to
VoiceCom, it could have a material adverse effect on the Company's business,
financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES.
SHAREHOLDER RIGHTS PLAN
Information with respect to this item may be found under Item 5 of the
Company's Current Report on Form 8-K dated June 23, 1998 (date of earliest event
reported), filed with the Commission on June 26, 1998. Such information is
incorporated herein by reference.
RECENT SALES OF UNREGISTERED SECURITIES
On April 23, 1998, the Company acquired all of the issued and outstanding
shares of the common stock of ATS pursuant to the terms of an Agreement and Plan
of Merger dated April 22, 1998 by and among the Company, ATS, PTEK Missouri
Acquisition Corp. and the shareholders of ATS. In connection with the
acquisition of ATS, the Company issued an aggregate of approximately 712,125
shares of its Common Stock to the former shareholders or owners of ATS. The
shares were issued without registration under the Securities Act of 1933, as
amended (the "Act"), in transactions exempt from registration under Regulation D
and Section 4(2) of the Act and the rules promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the Company's shareholders was held on July 29, 1998.
At the annual meeting, the following nominees were elected to serve as Class I
directors for terms expiring at the annual meeting of shareholders in 2001:
15
Name of Director Votes For Votes Withheld Abstentions Nonvotes
- ----------------- --------- -------------- ----------- --------
Jeffrey A. Allred 32,071,747 2,071,300 0 0
William P. Payne 32,772,833 1,370,214 0 0
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger, dated April 22, 1998, by and among the
Company, American Teleconferencing Services, Ltd. ("ATS"), PTEK
Missouri Acquisition Corp. and the shareholders of ATS (incorporated
herein by reference to Exhibit 99.1 of the Company's Current Report on
Form 8-K dated April 23, 1998, and filed with the Commission on April
28, 1998.)
3.1 Articles of Incorporation of Premiere Technologies, Inc., as amended.
3.2 Amended and Restated Bylaws of Premiere Technologies, Inc., as further
amended on August 1, 1998.
4.1 Shareholder Protection Rights Agreement, dated June 23, 1998, between
the Company and SunTrust Bank, Atlanta, as Rights Agent (incorporated
herein by referenced to Exhibit 99.1 of the Company's Current Report
on Form 8-K dated June 23, 1998, and filed with the Commission on June
26, 1998).
10.1 Executive Employment and Incentive Option Agreement, effective as of
July 24, 1997, by and between the Company and Jeffrey A. Allred.
10.2 Premiere Technologies, Inc. 1998 Stock Plan.
11.1 Statements re: computation of per share earnings.
27.1 Financial Data Schedule for the Three and Six Month Periods Ended
June 30, 1998.
27.2 Restated Financial Data Schedule for the Three and Six Month Periods
Ended June 30, 1997.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the quarter for which this
report is filed:
16
ENTITIES FOR WHICH
DATE OF REPORT FINANCIAL
(DATE FILED) ITEMS REPORTED STATEMENTS FILED
-------------- -------------- -------------------
April 13, 1998 Items 5 and 7 - Amendment Premiere Technologies, Inc.
to Current Report on Form Xpedite Systems, Inc.
8-K, dated February 27,
1998, to file
consolidated financial
statements of Xpedite Systems,
Inc. (incorporated by
reference) and supplemental
consolidated financial
statements of Premiere
Technologies, Inc.
April 28, 1998 Item 5 - Announcement None
regarding the Company's
acquisition of American
Teleconferencing Services,
Ltd. and the appointment
of Harvey A. Wagner as
Executive Vice President of
Finance and Administration
and Chief Financial Officer.
May 15, 1998 Item 5 - Announcement regarding None
the Company's share repurchase
program.
June 11, 1998 Item 5 - Announcement regarding None
the Company's second-quarter
and full-year results.
June 26, 1998 Item 5 - Announcement regarding None
the Company's shareholder rights
plan.
17
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.
August 14, 1998 PREMIERE TECHNOLOGIES, INC.
- ---------------
Date
/s/ Harvey A. Wagner
------------------------------------------
Harvey A. Wagner
Executive Vice President of Finance and
Administration
and Chief Financial Officer
(Principal Financial and Accounting Officer
and duly authorized signatory of the Registrant)
18
EXHIBIT INDEX
Exhibit Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger, dated April 22, 1998, by and among the
Company, American Teleconferencing Services, Ltd. ("ATS"), PTEK
Missouri Acquisition Corp. and the shareholders of ATS (incorporated
herein by reference to Exhibit 99.1 of the Company's Current Report on
Form 8-K dated April 23, 1998, and filed with the Commission on April
28, 1998.)
3.1 Articles of Incorporation of Premiere Technologies, Inc., as amended.
3.2 Amended and Restated Bylaws of Premiere Technologies, Inc., as
further amended on August 1, 1998.
4.1 Shareholder Protection Rights Agreement, dated June 23, 1998, between
the Company and SunTrust Bank, Atlanta, as Rights Agent (incorporated
herein by referenced to Exhibit 99.1 of the Company's Current Report
on Form 8-K dated June 23, 1998, and filed with the Commission on June
26, 1998).
10.1 Executive Employment and Incentive Option Agreement, effective as of
July 24, 1997, by and between the Company and Jeffrey A. Allred.
10.2 Premiere Technologies, Inc. 1998 Stock Plan.
11.1 Statements re: computation of per share earnings.
27.1 Financial Data Schedule for the Three and Six Month Period Ended
June 30, 1998.
27.2 Restated Financial Data Schedule for the Three and Six Month Period
Ended June 30, 1997.
19