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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 8-K
_______________
Current Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act
of 1934.
Date of Report: September 26, 1997
PREMIERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Georgia 0-27778 59-3074176
(State or other jurisdiction Commission (I.R.S. Employer
of incorporation or organization) File Number Identification No.)
3399 Peachtree Road, N.E., The Lenox Building, Suite 400, Atlanta, Georgia 30326
(Address of principal executive office)
(Registrant's telephone number, including area code): (404) 262-8400
<PAGE>
ITEM 5. OTHER EVENTS
On April 30, 1997, Premiere Technologies, Inc. (the "Company" or
"Premiere") completed the acquisitions (the "Wave One Acquisitions"), in
separate transactions, of (i) Voice-Tel Enterprises, Inc. ("VTE"); (ii) VTN,
Inc. ("VTN"), the general partner of Voice-Tel Network Limited Partnership
("VTNLP"), an affiliate of VTE, and the limited partner interest in VTNLP; and
(iii) certain independently owned and operated franchisees of VTE (collectively,
the "Wave One Franchisees"). On June 13, 1997, the Company completed the
acquisitions (the "Wave Two Acquisitions", and together with the Wave One
Acquisitions the "Voice-Tel Acquisitions"), in separate transactions, of certain
additional independently owned and operated franchisees of VTE (referred to
individually as a "Wave Two Franchisee" and collectively as the "Wave Two
Franchisees"). The Company filed the required financial statements of VTE, VTN
and the Wave One and Wave Two Franchisees that met the significance tests of
Rule 3-05 of Regulation S-X promulgated by the Securities and Exchange
Commission (the "Commission") (referred to collectively as the "Significant
Franchisees") and the required pro forma information relating to the Company and
each of the Significant Franchisees as part of a Current Report on Form 8-K
dated April 30, 1997, as amended by the Company's Current Report on Form 8-K/A
dated June 16, 1997, and a Current Report on Form 8-K dated May 16, 1997, as
amended by the Company's Current Report on Form 8-K/A dated June 25, 1997.
The acquisitions of all but 15 of the Wave One and Wave Two Franchisees
acquired and the acquisition of the limited partner interest in VTNLP have been
accounted for under the pooling-of-interests method of accounting.
Accordingly, the Company is filing restated financial statements prepared
in accordance with Regulation S-X and restated Management's Discussion and
Analysis of Financial Condition and Results of Operations prepared in accordance
with Regulation S-K for the three years ended December 31, 1996 and as of
December 31, 1996 and 1995, giving effect to the Voice-Tel Acquisitions. In
addition, the Company has restated its financial statements for the fiscal year
ended December 31, 1994 to include 12 months of operations.
The Company hereby restates both Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Financial Statements that
were included in the Company's Annual Report on Form 10-K filed with the
Commission on March 27, 1997 in Exhibits 99.1 and 99.2, respectively.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
11.1 Statement Re: Computation of Earnings Per Share
23.1 Consent of Arthur Andersen LLP
99.1 Management's Discussion and Analysis of Financial Condition and
Results of Operations of Premiere Technologies, Inc., as described in
Item 5 of this Form 8-K.
99.2 Consolidated Financial Statements of Premiere Technologies, Inc., as
described in Item 5 of this Form 8-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PREMIERE TECHNOLOGIES, INC.
By: /s/ Patrick G. Jones
-------------------------
Senior Vice President
of Finance and
Legal and Secretary
Date: September 26, 1997
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Index to Exhibits
Exhibit
- -------
11.1 Statement Re: Computation of Earnings Per Share
23.1 Consent of Arthur Andersen LLP
99.1 Management's Discussion and Analysis of Financial Condition and
Results of Operations of Premiere Technologies, Inc., as
described in Item 5 of this Form 8-K.
99.2 Consolidated Financial Statements of Premiere Technologies,
Inc., as described in Item 5 of this Form 8-K.
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Exhibit 11.1
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996
(in thousands)
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------------
December 31, December 31, December 31,
1994(1)(2) 1995 1996(2)
-------------------- ------------ -------------
<S> <C> <C> <C>
PRIMARY (3)
Earnings applicable to common stock:
Net income $ - $ 4,924 $ 3,016
Preferred dividends(3) - (308) (29)
Interest income (4) - 489 0
------------- -------- ---------
Net income applicable to common stock $ - $ 5,105 $ 2,987
============= ======== =========
Weighted average shares outstanding for primary:
Weighted average shares outstanding - 13,021 27,223
Other shares upon assumed exercise of stock
options and warrants, net (5) - 11,547 1,578
------------- -------- ---------
Weighted average shares - 24,568 28,801
============= ======== =========
Primary net income (loss) per share $ - $ 0.21 $ 0.10
============= ======== =========
FULLY DILUTED
Earnings applicable to common stock:
Net income $ - $ 4,924 $ -
Interest expense from preferred shares - 658 -
------------- -------- ---------
Net income applicable to common stock $ - $ 5,582 $ -
============= ======== =========
Weighted average shares outstanding for fully diluted:
Weighted average shares outstanding - 13,021 -
Other shares upon assumed exercise of stock
options and warrants, net (5) - 11,547 -
Convertible preferred - 3,096 -
------------- -------- ---------
Weighted average shares - 27,664 -
============= ======== =========
Fully diluted net income per share - $ 0.20 $ -
============= ======== =========
</TABLE>
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(1) For the year ended December 31,1994, earnings per share was not calculated
under the modified treasury stock method as the results were antidilutive.
Accordingly, basic earnings per share was used for the year ended December
31, 1994.
(2) Fully diluted net income per share is anti-dilutive. Accordingly, fully
diluted net income per share is not presented.
(3) Dividends on cumulative convertible preferred stock are deducted to arrive
at net income applicable to common stock as the preferred stock is not a
common stock equivalent and is therefore not considered as if converted for
primary earnings per share.
(4) Reflects adjustment to interest expense, net of related income tax effect,
on excess proceeds due to 20% limitation on assumed acquisition of shares
under the modified treasury stock method. Assumed proceeds from stock
options include an income tax benefit as the options are not qualified
options under the Internal Revenue Code.
(5) Options and warrants are assumed exercised using the modified treasury stock
method, except where the effect is anti-dilutive.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Current Report on Form 8-K into Premiere Technologies,
Inc.'s previously filed Registration Statements (File Nos. 333-17593, 333-11281
and 333-29787).
/s/ Arthur Andersen LLP
Atlanta, Georgia
September 25, 1997
<PAGE>
EXHIBIT 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in connection with the Company's
consolidated financial statements and the related notes thereto included
elsewhere herein. Effective December 31, 1994, the Company changed its fiscal
year-end from March 31 to December 31. The Company has changed the fiscal year
ended December 31, 1994 to include 12 months of operations.
OVERVIEW
The Company is a network-based computer telephony company specializing in
the integration of information and telecommunications services. The Company
delivers its services through its advanced computer telephony platform and a
geographically broad-based private frame relay digital messaging network that
integrates digital switching technology with enhanced personal communications
features such as E-mail, fax mail, conference calling and call forwarding. The
Company's platform is modular and scalable, with an open-systems design and an
advanced electronic billing and information system ("EBIS"), which allows the
Company to quickly customize its services to meet the needs of its subscribers
and business partners and to easily expand system capacity.
Premiere's revenues consist of (i) subscriber services from information,
telecommunications and voice messaging services; (ii) license fees from use of
its computer telephony platform by customers of companies that have licensing
relationships with Premiere; and, to a lesser extent, (iii) other revenues,
primarily long-distance charges from hospitality services. Subscriber services
revenues from information and telecommunications services, including Premiere
WorldLink, AFCOM and co-branded services, are based primarily on a per minute
charge. Subscriber services revenues from voice messaging services include
service initiation fees, monthly voice mailbox fees and usage fees. License fees
are contracted on a long-term basis and are generally based on a per minute
charge and, in certain circumstances, a per usage charge. Other revenue charges
are based on long-distance rates established by the Company, depending upon the
originating location of the call, and other various methods.
Cost of services consists primarily of transmission costs. Licensees
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 the 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 expenses.
Depreciation and amortization include depreciation of computer and network
operations 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 and the WorldCom strategic alliance contract
intangible, which are amortized over 5 and 25 years, respectively.
Premiere electronically bills most subscriber services revenue from
information and telecommunications services directly to the subscriber's credit
card or bank account using the EBIS. The Company bills subscribers at least
monthly and in certain instances more frequently if a particular subscriber
exceeds pre set spending limits. Because substantially all of the Company's
information and telecommunication services are billed electronically through the
EBIS, the Company believes it has shortened the collection
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cycle compared to a traditional 30-day non electronic billing arrangement.
License fees are generally billed and invoiced on a 30-day basis. Voice
messaging services revenue and license fees are billed and invoiced on a 30-day
basis.
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 the estimates. The Company periodically
reviews the values assigned to long-lived assets, such as property and equipment
and software costs, to determine whether any impairments are other than
temporary. Management believes that the long-lived assets in the accompanying
balance sheets are appropriately valued.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship of certain statements of operations items to total revenues.
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
--------------- ------------- ---------------
<S> <C> <C> <C>
REVENUES:
Subscriber services.................. 94.5% 92.1% 89.1%
License fees......................... 3.1 6.5 9.7
Other revenues....................... 2.4 1.4 1.2
----- ----- -----
Total revenues.................... 100.0 100.0 100.0
COST OF SERVICES......................... 22.6 22.8 23.3
----- ----- -----
GROSS MARGIN............................. 77.4 77.2 76.7
----- ----- -----
OPERATING EXPENSES:
Selling, general and administrative.. 76.6 56.8 55.7
Depreciation and amortization........ 8.8 8.6 8.2
Restructuring and other special
changes........................... 0.0 0.0 7.8
Accrued litigation and settlement
costs............................. 0.0 2.8 0.9
----- ----- -----
Total operating expenses.......... 85.4 68.2 72.6
OPERATING INCOME (LOSS).................. (8.0) 9.0 4.1
----- ----- -----
OTHER INCOME (EXPENSE):
Interest income...................... 0.4 0.5 2.0
Interest expense..................... (4.8) (4.4) (2.8)
Other, net........................... 0.4 0.4 (0.2)
----- ----- -----
Total other income (expense)...... (4.0) (3.5) (1.0)
----- ----- -----
NET INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY LOSS............... (12.0) 5.5 3.1
PROVISION FOR (BENEFIT FROM)
INCOME TAXES............................... (0.9) 0.1 0.9
----- ----- -----
NET INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS......................... (11.1) 5.4 2.2
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET OF
TAX EFFECT OF $37,880...................... 0.0 0.0 0.1
----- ----- -----
NET INCOME (LOSS)........................... (11.1)% 5.4% 2.1%
===== ===== =====
</TABLE>
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues increased 56.3% from $91.0 million in the year
ended December 31, 1995 to $142.2 million in the year ended December 31, 1996.
Subscriber services revenues increased 51.1% from $83.8 million in the year
ended December 31, 1995 to $126.6 million in the year ended December 31, 1996.
This increase was due primarily to strong demand for the Company's calling card
programs and voice messaging services. License fees increased 133.9% from $5.9
million in the year ended December 31, 1995 to $13.8 million in the year ended
December 31, 1996. This increase was due primarily to the establishment of
additional licensing relationships and increased revenues from existing
licensees. Other revenues increased 30.8% from $1.3 million for the year ended
December 31, 1995 to $1.7 million for the year ended December 31, 1996. This
increase was attributable primarily to nonrecurring system design and
development revenues.
On August 6, 1996, Communications Network Corporation ("CNC"), a licensing
customer of the Company, was placed into bankruptcy under Chapter 11 of the
Bankruptcy Code. CNC accounted for 19.6% and 1.9% of the Company's licensing
revenues and total revenues, respectively, during the year ended December 31,
1996. CNC owed the Company approximately $627,000 as of December 31, 1996.
However, CNC's transmission provider, WorldCom Network Services, Inc. d/b/a/
WilTel ("WilTel"), is also obligated to pay this amount to the Company. The
Company believes that through a combination of new licensing agreements, the
strategic alliance agreement with WorldCom and increased revenues from existing
licensees, the Company has replaced all of the anticipated CNC revenue.
Cost of Services. Cost of services increased 59.6% from $20.8 million in
the year ended December 31, 1995 to $33.2 million in the year ended December 31,
1996 and increased as a percentage of revenues from 22.8% in the year ended
December 31, 1995 to 23.3% for the same period of 1996. This increase in cost of
services was due primarily to the increase in subscriber services revenue.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 53.2% from $51.7 million in the year ended
December 31, 1995 to $79.2 million in the year ended December 31, 1996 and
decreased as a percentage of revenues from 56.8% to 55.7%. The increase in
selling, general and administrative expenses was due primarily to greater
expenditures on print advertising and other selling and marketing costs related
to the increase in subscribers and revenues, including commissions, and an
increase in bad debt expense during the fourth quarter of 1996.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 46.8% from $7.9 million in the year ended December 31, 1995 to
$11.6 million in the year ended December 31, 1996. This increase
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was due to depreciation of additional equipment acquired during the period and
the amortization of the strategic alliance contract intangible.
Charge for Purchased Research and Development. This is a charge in an
amount equal to the estimated value of in-process research and development
projects acquired in the acquisition of TeleT. See Note 3 of Notes to
Consolidated Financial Statements.
Accrued Litigation and Settlement Costs. This is a charge for the estimated
legal fees and other costs that the Company expected to incur to resolve the
patent infringement suit filed by AudioFAX. On February 11, 1997, the Company
entered into a long-term nonexclusive license agreement with AudioFAX settling
the litigation. The charge was adequate to cover the actual costs of litigation
and the cost of the license agreement is not expected to have a material effect
on the Company's earnings. See Note 11 of Notes to Consolidated Financial
Statements.
Income Taxes. Income taxes increased from a provision of $44,000 in the
year ended December 31, 1995 to a provision of $1.4 million in the year ended
December 31, 1996. In the year ended December 31, 1995, the Company's effective
income tax rate was less than the statutory rate due to the use of net operating
loss carryforwards. At December 31, 1996, the Company had a total deferred tax
asset of $12.0 million, principally due to net operating losses for tax purposes
generated upon the exercise by employees of nonqualified stock options, which
generated compensation expense for tax purposes in excess of compensation
expense as recorded by the Company in accordance with GAAP. In accordance with
GAAP, the related tax benefit of this deduction was credited to additional paid-
in capital and, accordingly, did not reduce operating tax expense recognized by
the Company.
Net Income (Loss). The Company recognized net income of $4.9 million in the
year ended December 31, 1995 and $3.0 million in the year ended December 31,
1996. Excluding the charges for in-process research and development and accrued
litigation costs and the related tax effect, net income would have increased
60.9% from $6.4 million in the year ended December 31, 1995 to $10.3 million in
the year ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Total revenues increased 47.2% from $61.8 million in the year
ended December 31, 1994 to $91.0 million in the year ended December 31, 1995.
Subscriber services revenues increased 43.5% from $58.4 million in the year
ended December 31, 1994 to $83.8 million in the year ended December 31, 1995.
This increase was due primarily to strong demand for the Company's calling card
programs and voice messaging services. License fees increased 210.5% from $1.9
million in the year ended December 31, 1994 to $5.9 million in the year ended
December 31, 1995 due to the establishment of additional licensing relationships
and increased revenues from existing licensees. A marked portion of this
increase was due to the Company's relationship with CNC which accounted for
approximately $1.5 million of the increase in license fees from the year ended
December 31, 1995 compared to year ended December 31, 1994. Other revenues
decreased 13.3% from $1.5 million for the year ended December 31, 1994 to $1.3
million for the year ended December 31, 1995.
Cost of Services. Cost of services increased 48.6% from $14.0 million in
the year ended December 31, 1994 to $20.8 million in the year ended December 31,
1995 and increased as a percentage of revenues from 22.6% in the year ended
December 31, 1994 to 22.8% for the same period of 1995. The increase in cost of
services was due primarily to the increase in subscriber services revenue.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 9.3% from $47.3 million in the year ended
December 31, 1994 to $51.7 million in the year ended December 31, 1995 and
decreased as a percentage of revenues from 76.6% to 56.8%. The increase in
selling, general and administrative expenses was due primarily to greater
expenditures on print advertising and other selling and marketing costs related
to the increase in subscribers and revenues.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 46.3% from $5.4 million in the year ended December 31, 1994 to
$7.9 million in the year ended December 31, 1995. This increase was due to
depreciation of additional equipment acquired during the period.
Accrued Litigation and Settlement Costs. In 1995, VTE settled a lawsuit for
$2.5 million plus interest at 8%. VTE commenced this action to seek a
declaratory judgment that no joint venture agreement or other relationship
existed with the defendant relative to the development of any international
voice messaging markets. The charge was adequate to cover the actual costs of
litigation and the cost of settlement and is not expected to have a material
effect on VTE's earnings. See Note 11 of Notes to the Consolidated Financial
Statements.
Income Taxes. Income taxes increased from a benefit of $556,000 in the
year ended December 31, 1994 to a provision of $44,000 in the year ended
December 31, 1995, reflecting the Company's net loss in the year ended December
31, 1994 and net income in the year ended December 31, 1995. The Company's
effective income tax rate was less than the statutory rate due to the use of net
operating loss carryforwards. At December 31, 1995, the Company had a deferred
tax asset of $5.1 million, principally due to net operating losses for tax
purposes generated upon the exercise by employees of nonqualified stock options,
which generated compensation expense for tax purposes in excess of compensation
expense as recorded by the Company in accordance with GAAP. In accordance with
GAAP, the related tax benefit of this deduction was credited to additional paid-
in capital and, accordingly, did not reduce operating tax expense recognized by
the Company.
Net Income (Loss). The Company recognized a net loss of $6.8 million in
the year ended December 31, 1994 and net income of $4.9 million in the year
ended December 31, 1995. This increase reflects a growth in margin contribution
from increased calling card and voice mailbox subscribers and licensees, and the
resulting increase in revenues. Excluding the charge for accrued litigation
costs and the related tax effect, net income would have increased from a net
loss of $6.8 million in the year ended December 31, 1994 to $6.4 million in
the year ended December 31, 1995.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting ("SFAS") No. 128 ("SFAS 128"), Earnings Per
Share, which is effective for fiscal years ending after December 15, 1997. Early
adoption is not permitted. SFAS 128 may significantly change reported earnings
per share for companies with complex capital structures, such as the Company, as
compared to the modified treasury stock method. See Note 2 of Notes to
Consolidated Financial Statements.
In addition, during 1997 the FASB has issued SFAS No. 130, "Report for
Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Company does not believe that these
statements will have a material effect on the financial statements.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $3.7 million in the
year ended December 31, 1994, $10.6 million in the year ended December 31, 1995
and $31.5 million in the year ended December 31, 1996. Cash provided by
operating activities for the year ended December 31, 1994 reflects the
Company's attainment of a level of operating revenues sufficient to cover its
operating costs due to increased subscribers to the Company's services. The
increase in cash provided by operating activities in the year ended December 31,
1995, as compared to earlier periods, reflects the acceleration of the growth of
the Company's subscriber base during that period and the relatively greater
contribution from license fees with their associated higher gross margin. The
increase in cash provided by operating activities in the year ended December 31,
1996 reflects the acceleration of the growth of the Company's subscriber base
during the period and increased income from the investment of the net proceeds
from the Company's initial public offering.
The Company's investing activities used cash of $16.7 million for the year
ended December 31, 1994, $11.5 million for the year ended December 31, 1995 and
$92.7 million for the year ended December 31, 1996. The Company's investing
activities for the year ended December 31, 1994 consisted primarily of
purchases of investments for $3.5 million financed by
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the Company's sale of Series 1994 Preferred Stock (which was converted into
Series A Preferred Stock in December 1995), and purchases of property and
equipment of $13.3 million funded primarily through the issuance of debt. Cash
used in investing activities for the year ended December 31, 1995 consisted
primarily of purchases of property and equipment of $12.2 million funded
primarily through the issuance of debt. The Company's investing activities for
the year ended December 31, 1996 consisted primarily of purchases of investments
in the amount of $63.8 million. Additionally, the Company purchased property and
equipment of $21.9 million. The Company also used cash to partially fund certain
acquisitions and strategic alliances during the year ended December 31, 1996.
See Notes 2 and 3 of Notes to Consolidated Financial Statements.
The Company's financing activities provided cash of $12.1 million in the
year ended December 31, 1994, $3.2 million for the year ended December 31, 1995
and $67.9 million for the year ended December 31, 1996. Cash provided by
financing activities for the year ended December 31, 1994 reflects proceeds from
issuance of debt to finance purchases of property and equipment and from
proceeds from issuance of preferred stock. Cash provided by financing
activities for the year ended December 31, 1995 reflects proceeds from the
issuance of debt to finance purchases of property and equipment and exercises of
stock options. Cash provided in the year ended December 31, 1996 was primarily
from the net proceeds of the Company's initial public offering in March 1996.
Additionally, proceeds from the repayment of the above-mentioned subscriptions
for common stock also provided cash of $2.4 million in 1996. These sources of
cash were partially offset in 1996 by the repayment of notes payable outstanding
at December 31, 1995 as well as payment of dividends on Preferred Stock. See
Notes 2, 4 and 6 of Notes to Consolidated Financial Statements.
At December 31, 1996, the Company had working capital of $53.6 million. At
December 31, 1995, the Company had a working capital deficit of $9.7 million.
The Company has financed its cash requirements through a combination of equity
and debt financing and through cash flows from operating activities. In May
1992, the Company borrowed $1.0 million (the "First Sirrom Note") from Sirrom
Capital Corporation ("Sirrom"), an independent lender unaffiliated with the
Company, which was used to fund the Company's operations and for capital
expenditures. In December 1993, the Company borrowed an additional $1.0 million
from Sirrom (the "Second Sirrom Note") (the First Sirrom Note and Second Sirrom
Note are referred to as the "Notes"). In connection with entering into the
Notes, the Company granted Sirrom warrants to purchase an aggregate of 568,392
shares of common stock at $0.042 per share, the terms of which do not require
the cancellation or exercise of the warrants upon repayment of the Notes. The
Company used $2.0 million of the net proceeds of its initial public offering to
retire the Notes in March 1996. In January 1994, the Company issued 8%
cumulative Series A Preferred Stock to NationsBanc Capital Corporation
("NationsBanc"), from which it realized net proceeds of $3.9 million. In
connection with the issuance of the Company's Series A Preferred Stock, all of
the Company's outstanding 1993 Preferred Stock and Debentures were converted
into common stock. A portion of the net proceeds of the Second Sirrom Note and
the issuance of the Series A Preferred Stock was used to fund operations. The
Company invested the remainder of the proceeds of the Second Sirrom Note and the
Series A Preferred Stock, amounting to $3.5 million, in short-term interest-
bearing securities. On January 19, 1996, the Company exercised its right to
redeem the Series A Preferred Stock from NationsBanc. On February 1, 1996,
NationsBanc elected to convert all of the Series A Preferred Stock into common
stock. Thus, effective February 1, 1996, all outstanding shares of Series A
Preferred Stock were converted into 3,095,592 shares of common stock. In
connection with the conversion, the Company paid NationsBanc $677,000 in accrued
but unpaid dividends and interest on the Series A Preferred Stock during the
year ended December 31, 1996. In connection with the Company's initial public
offering, the Company issued 4,570,000 shares of its $0.01 par value common
stock in March 1996. The Company received net proceeds of $74.6 million after
the underwriting discount and expenses of the offering.
The Company's principal commitments consist of various notes due to
shareholders and banks. These notes are primarily used to fund investments in
switching and voice messaging equipment needed to accomodate the increase in
calling card and voice messaging subscribers and licensees. The Company believes
that cash on hand, cash from operations and other working capital will be
sufficient to fund the Company's capital requirements. The Company may,
depending upon conditions in the capital markets and other factors, consider
other capital transactions to increase the Company's financial flexibility.
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FORWARD-LOOKING STATEMENTS
The Company may from time to time make written or oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission (the "Commission") and its reports to
shareholders. Statements made in this Annual Report, other than those concerning
historical information, should be considered forward-looking and subject to
various risks and uncertainties. Such forward-looking statements are made based
on management's belief as well as assumptions made by, and information currently
available to, management pursuant to "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results may
differ materially from the results anticipated in these forward-looking
statements due to, among other things, the factors discussed in the Company's
current reports on Form 8-K filed during 1997 with the Securities and Exchange
Commission.
-8-
<PAGE>
EXHIBIT 99.2
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Premiere Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of PREMIERE
TECHNOLOGIES, INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31,
1995 and 1996 and the related consolidated statements of operations,
shareholders' (deficit) equity and cash flows for the years ended December 31,
1994, 1995 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Premiere
Technologies, Inc. and subsidiaries as of December 31, 1995 and 1996 and the
results of their operations and their cash flows for the years ended December
31, 1994, 1995 and 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
September 25, 1997
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1995 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................................... $ 5,779 $ 12,429
Investments......................................................................................... 3,516 67,334
Accounts receivable (less allowance for doubtful accounts of $513 and $1,140, respectively)......... 5,758 6,605
Prepaid expenses and other.......................................................................... 4,546 8,614
Deferred tax asset.................................................................................. 3,002 4,150
-------- --------
Total current assets.......................................................................... 22,601 99,132
-------- --------
PROPERTY AND EQUIPMENT................................................................................. 48,407 67,747
Less: accumulated depreciation..................................................................... (18,448) (26,836)
-------- --------
Net property and equipment.................................................................... 29,959 40,911
-------- --------
OTHER ASSETS:
Deferred tax asset.................................................................................. 2,086 7,817
Strategic alliance contract intangible, net (Note 2)................................................ 0 29,814
Other............................................................................................... 8,080 6,885
-------- --------
$ 62,726 $184,559
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................................... $ 7,782 $ 11,443
Accrued sales taxes................................................................................. 2,981 3,194
Other accrued expenses.............................................................................. 10,594 15,621
Unearned revenue.................................................................................... 353 452
Current maturities of long-term debt................................................................ 7,474 11,137
Current portion of capital lease obligations........................................................ 3,131 3,735
-------- --------
Total current liabilities..................................................................... 32,315 45,582
-------- --------
LONG-TERM LIABILITIES:
Long-term debt...................................................................................... 23,359 17,994
Obligations under capital leases.................................................................... 10,569 7,385
Deferred tax liability.............................................................................. 1,472 2,471
Other accrued liabilities........................................................................... 1,421 1,764
-------- --------
Total long-term liabilities................................................................... 36,821 29,614
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Series A convertible, redeemable 8% cumulative preferred stock, $0.01 par value; 5,000,000 shares
authorized, 128,983 and 0 shares issued and outstanding, respectively, converted to common
stock......................................................................................... 3,907 0
Common stock, $0.01 par value; 150,000,000 shares authorized, 13,020,618 and 31,064,579
shares issued and outstanding, respectively................................................... 194 312
Additional paid-in-capital.......................................................................... 15,151 133,073
Subscriptions receivable............................................................................ (2,437) 0
Stock warrants outstanding.......................................................................... 244 0
Accumulated deficit................................................................................. (23,469) (24,022)
-------- --------
Total shareholders' equity.................................................................... (6,410) 109,363
-------- --------
$ 62,726 $184,559
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
-3-
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(in thousands)
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Subscriber services............................. $ 58,387 $ 83,775 $ 126,631
License fees.................................... 1,935 5,935 13,778
Other revenues.................................. 1,468 1,306 1,745
------------- ------------- -------------
Total revenues............................... 61,790 91,016 142,154
COST OF SERVICES.................................... 13,989 20,794 33,193
------------- ------------- -------------
GROSS MARGIN........................................ 47,801 70,222 108,961
------------- ------------- -------------
OPERATING EXPENSES:
Selling, general and administrative............. 47,336 51,671 79,240
Depreciation and amortization................... 5,424 7,852 11,585
Charge for purchased research and development... 0 0 11,030
Accrued litigation and settlement costs......... 0 2,500 1,250
------------- ------------- -------------
Total operating expenses..................... 52,760 62,023 103,105
OPERATING INCOME (LOSS)............................. (4,959) 8,199 5,856
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income................................. 272 489 2,808
Interest expense................................ (2,960) (4,033) (3,943)
Other, net...................................... 245 313 (286)
------------- ------------- -------------
Total other income (expense)................. (2,443) (3,231) (1,421)
------------- ------------- -------------
NET INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY LOSS.................... (7,402) 4,968 4,435
PROVISION FOR (BENEFIT FROM) INCOME
TAXES........................................... (556) 44 1,360
------------- ------------- -------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS............................................ (6,846) 4,924 3,075
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT,
NET OF TAX EFFECT OF $37........................ 0 0 59
------------- ------------- -------------
NET INCOME (LOSS)................................... (6,846) 4,924 3,016
PREFERRED STOCK DIVIDENDS........................... 320 308 29
------------- ------------- -------------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS............................. $ (7,166) $ 4,616 $ 2,987
============= ============= =============
PRO FORMA INCOME (LOSS) ATTRIBUTABLE
TO COMMON SHAREHOLDERS FOR:
Primary earnings per share...................... $ (7,001) $ 5,105 $ 2,987
============= ============= =============
Fully diluted earnings per share................ - 5,582 -
============= ============= =============
PRO FORMA INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARES:
Primary......................................... (0.54) 0.21 0.10
============= ============= =============
Fully Diluted................................... - 0.20 -
============= ============= =============
SHARES USED IN COMPUTING EARNINGS PER
COMMON AND COMMON EQUIVALENT
SHARES (in thousands): Primary................. 13,012 24,658 28,801
============= ============= =============
Fully Diluted........... - 27,644 -
============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-4-
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(in thousands)
<TABLE>
<CAPTION>
SERIES A
(FORMERLY
SERIES STOCK
1994) ADDITIONAL SUBSCRIP- WARRANTS ACCUMU-
PREFERRED COMMON PAID-IN TIONS OUT- LATED
STOCK STOCK CAPITAL RECEIVABLE STANDING DEFICIT
----------- -------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........ 849 96 10,602 (120) 159 (17,293)
Issuance of stock warrants........ 0 0 0 0 85 0
Issuance of Series A (formerly
Series 1994) preferred stock,
net of related offering
expenses of $93,500............. 3,907 0 0 0 0 0
Conversion of Series A preferred
stock........................... (849) 16 833 0 0 0
Conversion of subordinated
convertible debentures.......... 0 18 747 0 0 0
Subscriptions receivable
payments received............... 0 0 0 45 0 0
Other equity transactions......... 0 0 (2,119) 0 0 (340)
Shareholder distributions,
primarily S-corporation
distributions (Note 8).......... 0 0 0 0 0 (2,111)
Net loss.......................... 0 0 0 0 0 (6,846)
----------- -------- ------------ ----------- ----------- ------------
BALANCE, December 31, 1994........ 3,907 130 10,063 (75) 244 (26,590)
Subscriptions receivable
on loans to shareholders........ 0 56 2,306 (2,362) 0 0
Exercise of stock options......... 0 8 350 0 0 0
Income tax benefit from
exercise of stock options....... 0 0 2,622 0 0 0
Other equity transactions......... 0 0 (190) 0 0 (323)
Shareholder distributions,
primarily S-corporation
distributions (Note 8).......... 0 0 0 0 0 (1,480)
Net income........................ 0 0 0 0 0 4,924
----------- -------- ------------ ----------- ----------- ------------
BALANCE, December 31, 1995........ 3,907 194 15,151 (2,437) 244 (23,469)
Conversion of Series A
Preferred Stock to common
stock........................... (3,907) 31 3,876 0 0 0
Conversion of stock warrants
to common stock................. 0 6 238 0 (244) 0
Subscriptions receivable on
loans to shareholders........... 0 0 0 2,437 0 0
Issuance of common stock:
Initial public offering......... 0 46 74,571 0 0 0
TeleT Communications LLC........ 0 5 7,495 0 0 0
Strategic alliance contract
intangible...................... 0 21 25,174 0 0 0
Income tax benefit from
exercise of stock options....... 0 0 6,886 0 0 0
Exercise of stock options......... 0 9 308 0 0 0
Other equity transactions......... 0 0 (626) 0 0 (19)
Shareholder distributions,
primarily S-corporation
distributions (Note 8).......... 0 0 0 0 0 (3,550)
Net income........................ 0 0 0 0 0 3,016
----------- -------- ------------ ----------- ----------- ------------
BALANCE, December 31, 1996........ $ 0 $ 312 $ 133,073 $ 0 0 $ (24,022)
=========== ======== ============ =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
(DEFICIT)
EQUITY
------------
<S> <C>
BALANCE, December 31, 1993........ $ (5,707)
Issuance of stock warrants........ 85
Issuance of Series A (formerly
Series 1994) preferred stock,
net of related offering
expenses of $93,500............. 3,907
Conversion of Series A preferred
stock........................... 0
Conversion of subordinated
convertible debentures.......... 765
Subscriptions receivable
payments received............... 45
Other equity transactions......... (2,459)
Shareholder distributions,
primarily S-corporation
distributions (Note 8).......... (2,111)
Net loss.......................... (6,846)
------------
BALANCE, December 31, 1994........ (12,321)
Subscriptions receivable
on loans to shareholders........ 0
Exercise of stock options......... 358
Income tax benefit from
exercise of stock options....... 2,622
Other equity transactions......... (513)
Shareholder distributions,
primarily S-corporation
distributions (Note 8).......... (1,480)
Net income........................ 4,924
------------
BALANCE, December 31, 1995........ (6,410)
Conversion of Series A
Preferred Stock to common
stock........................... 0
Conversion of stock warrants
to common stock................. 0
Subscriptions receivable on
loans to shareholders........... 2,437
Issuance of common stock:
Initial public offering......... 74,617
TeleT Communications LLC........ 7,500
Strategic alliance contract
intangible...................... 25,195
Income tax benefit from
exercise of stock options....... 6,886
Exercise of stock options......... 317
Other equity transactions......... (645)
Shareholder distributions,
primarily S-corporation
distributions (Note 8).......... (3,550)
Net income........................ 3,016
------------
BALANCE, December 31, 1996........ $ 109,363
============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-5-
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(in thousands)
<TABLE>
<CAPTION>
1994 1995 1996
-------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $ (6,846) $ 4,924 $ 3,016
-------- ---------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................................... 5,424 7,852 11,585
Amortization of note discount.................................... 11 47 9
Nonrecurring charges............................................. 0 0 11,030
(Loss) gain on sale of assets.................................... 0 6 18
Provision for (benefit from) income taxes........................ (556) 44 1,360
Loss on early extinguishment of debt............................. 0 0 97
Changes in assets and liabilities:
Accounts receivable, net..................................... (1,205) (3,328) (848)
Prepaid expenses and other................................... 919 (4,359) (2,570)
Accounts payable............................................. 2,826 1,707 3,561
Accrued expenses............................................. 3,127 3,703 4,242
-------- ---------- -----------
Total adjustments........................................ 10,546 5,672 28,484
-------- ---------- -----------
Net cash provided by operating activities................ 3,700 10,596 31,500
-------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments, net............................................ (3,461) (15) (63,818)
Purchase of property and equipment, net................................. (13,252) (12,183) (21,905)
Acquisition of TeleT Communications LLC................................. 0 0 (2,870)
Strategic alliance contract intangible.................................. (24) 0 (4,777)
Increase in accrued construction costs.................................. 0 884 562
Due from related parties, net........................................... 0 (232) 60
Software development costs.............................................. 0 0 0
-------- ---------- -----------
Net cash used in investing activities.................... (16,737) (11,546) (92,748)
-------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock, net.......................... 3,907 0 0
Proceeds from issuance of common stock, net............................. 0 0 74,617
Proceeds from payments of subscriptions receivable...................... 45 0 2,437
Proceeds from exercises of stock options................................ 0 358 317
Shareholder distributions, primarily S-corporation distributions........ (2,111) (1,480) (3,550)
Other equity transactions............................................... (2,120) (190) (1,303)
Principal payments under borrowing arrangements......................... (5,306) (7,746) (5,170)
Proceeds from issuance of debt.......................................... 17,725 12,274 2,550
Early extinguishment of debt............................................ 0 0 (2,000)
-------- ---------- -----------
Net cash provided by financing activities................ 12,140 3,216 67,898
-------- ---------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS......................................................... (897) 2,266 6,650
CASH AND CASH EQUIVALENTS, beginning of period............................. 4,410 3,513 5,779
-------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of period................................... $ 3,513 $ 5,779 $ 12,429
======== ========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................................. $ 2,708 $ 3,967 $ 3,933
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Stock issued for subscriptions receivable............................... $ 0 $ 2,362 $ 0
Equity issued for TeleT Communications LLC.............................. $ 0 $ 0 $ 7,500
Equity issued for strategic alliance contract intangible................ $ 0 $ 0 $ 25,195
NONCASH TRANSACTIONS:
Assets acquired with TeleT Communications LLC acquisition............... $ 0 $ 0 $ 627
Liabilities assumed with TeleT Communications LLC acquisition........... $ 0 $ 0 $ 100
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-6-
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
1. ORGANIZATION AND NATURE OF BUSINESS
Premiere Technologies, Inc. (the "Company" or "Premiere") was incorporated
in Florida in July 1991. On December 18, 1995, Premiere merged into a wholly
owned Georgia subsidiary in order to effect a reincorporation from Florida to
Georgia (the "Reincorporation Merger"). The Company's principal business
operations are carried out primarily through its wholly owned subsidiaries,
Premiere Communications, Inc. ("PCI" or "Premiere Communications"), which was
organized in October 1991 and began operations in January 1992, and Voice-Tel
Enterprises, Inc. ("VTE"). Through Premiere Communications, the Company provides
a comprehensive, integrated suite of information and telecommunications services
to a wide range of users. The Company delivers its services through its computer
telephony platform, which provides users with a single, user-friendly point of
access to the Company's services. The platform is accessible from virtually any
telephone in the world and is also designed to communicate with PCs, facsimile
machines and pagers. The Company's proprietary software, together with the
modular and scalable architecture and open-systems design of the platform,
enables the Company to customize its services at the individual subscriber level
and to easily expand system capacity.
On June 12, 1997, the Company announced the completion of the previously
announced acquisition of Voice-Tel Enterprises, Inc. ("VTE"), its affiliate
Voice-Tel Network Limited Partnership ("VTNLP"), VTN, Inc. ("VTN"),the general
partner of VTNLP, and substantially all of the approximately 100 independently
owned and operated Voice-Tel franchise businesses (the "Franchisees"). The
acquisitions of VTE, VTNLP, VTN, and the Franchisees are sometimes referred to
collectively as the "Voice-Tel Acquisitions." See Note 3 - Acquisitions.
The Voice-Tel Acquisitions provide interactive digital voice and data
messaging products on a service bureau basis through approximately 200 service
centers in the United States, Puerto Rico, Canada, Australia and New Zealand,
reaching approximately 90% of the United States and 100% of the Canadian,
Australian and New Zealand populations with local access. VTNLP, an affiliate of
VTE acquired by the Company, owns and leases various components of and operates
a digital frame relay network that connects and provides message transmission
capabilities to and from the local voice messaging centers.
The Company acquired substantially all of the assets and business
operations of TeleT Communications LLC ("TeleT") on September 18, 1996 through
its wholly owned subsidiary, PTEK Acquisition Corporation (the "Sub"), which was
formed in 1996. The Sub was subsequently merged into Premiere Communications on
December 31, 1996. Additionally, on November 13, 1996, the Company acquired all
of the outstanding shares of EBIS Communications, Inc. that it did not already
own. See Note 3 - Acquisitions.
The Company issued 4,570,000 shares of its $0.01 par value common stock in
an initial public offering in March 1996. Proceeds to the Company, net of the
underwriting discount and expenses of the offering, were $74.6 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
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
disclosures 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 those estimates.
PRESENTATION
The consolidated financial statements of the Company have been prepared to
give retroactive effect to the acquisitions of VTE, VTN and the Franchisees
which qualified for pooling-of-interests treatment under GAAP. The accompanying
consolidated statements of Premiere Technologies, Inc. and subsidiaries do not
extend through the dates of consumation. However, as required under SEC rules
and interpretations and allowed under GAAP, the financial statements have been
retroactively restated.
Certain prior years' data presented in the consolidated financial
statements have been reclassified to conform with the current year presentation.
The Company declared a 24-to-1 stock split through the declaration of a stock
dividend for each share of common stock outstanding on December 18, 1995. All
references to the number of common shares and per share amounts have been
restated to reflect the effect of the split.
In connection with the Reincorporation Merger, the designation of the
Series 1994 preferred stock was changed to Series A preferred stock.
-7-
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For financial reporting purposes, cash and cash equivalents include cash
on hand and highly liquid money market investments. See Note 11 of Notes to
Consolidated Financial Statements for property purchased under capital leases.
INVESTMENTS
The Company follows the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 mandates that a
determination be made of the appropriate classification for debt and equity
securities at the time of purchase and a reevaluation of such designation as of
each balance sheet date. At December 31, 1995 and 1996, investments consisted of
commercial paper, United States Treasury bills with maturities within 90 days,
municipal bonds, coupon municipals, auction rate preferred investments with
various maturities and other equity instruments. Management considers all debt
instruments as "held to maturity" and all equity instruments as "available for
sale." Debt instruments are carried at cost, and equity instruments are carried
at the lower of cost or market. As cost approximates market, there were no
unrealized gains or losses at December 31, 1995 or 1996.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is provided
for using the straight-line method over the estimated useful lives of the
assets, commencing when the assets are placed in service. The estimated useful
lives are ten years for furniture and fixtures, seven years for office equipment
and five years for computer equipment. The cost of installed equipment includes
expenditures for installation. Assets recorded under capital leases and
leasehold improvements are depreciated over the shorter of their useful lives or
the term of the related lease. Accrued construction costs consist of payables
and accruals related to property, equipment and leasehold improvements under
construction.
DEFERRED CHARGES
The Company has capitalized costs related to the development of proprietary
software which is licensed to other long-distance carriers and which is used
internally for processing communications card calls. All costs in the software
development process that are classified as research and development are expensed
as incurred until technological feasibility has been established. Once
technological feasibility has been established, such costs are considered for
capitalization. The Company's policy is to amortize capitalized software costs
by the greater of (a) the ratio that current gross revenues for a product bear
to the total of current and anticipated future gross revenues for that product
or (b) the straight-line method over the remaining estimated life of the
product, including the period being reported on. It is reasonably possible that
those estimates of anticipated future gross revenues, the remaining economic
life of the product or both will be reduced significantly in the near term due
to competitive pressures. Additionally, as part of the TeleT acquisition, the
Company recorded software development costs for technologically feasible in-
process research and development. The valuation of this acquired developed
software was $500,000 as of the date of the acquisition, based on an independent
appraisal. The total accumulated amortization for all capitalized software
development was $109,652 and $180,536 at December 31, 1995 and 1996,
respectively.
-8-
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LONG-LIVED ASSETS
In 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. The effect of adopting SFAS No. 121 was not material.
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment, software costs and intangibles, to determine
whether any impairments are other than temporary. Management believes that the
long-lived assets in the accompanying balance sheets are appropriately valued.
In November 1996 the Company entered into a strategic alliance agreement
with WorldCom, the fourth largest long-distance carrier in the United States, in
which WorldCom is required, among other things, to provide the Company with the
right of first opportunity to provide enhanced computer telephony services for a
period of at least 25 years. In connection with this agreement, the Company
issued to WorldCom 2,050,000 shares of common stock valued at approximately
$25.2 million (based on an independent appraisal) and paid WorldCom $4.7
million in cash. As required by SFAS No. 121, this intangible has been reviewed
for possible impairment based on events or changes in circumstances that
indicate the carrying value may not be recoverable. Based on such review,
management believes that this intangible asset is appropriately valued. This
intangible will be reviewed periodically, and there can be no assurance that
future reviews will not require a write-down of this asset.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees." Effective in 1995, the Company adopted the disclosure option of
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires
that companies which do not choose to account for stock-based compensation as
prescribed by the statement shall disclose the pro forma effects on earnings and
earnings per share as if SFAS No. 123 had been adopted. Additionally, certain
other disclosures are required with respect to stock compensation and the
assumptions used to determine the pro forma effects of SFAS No. 123. See
Note 9 -Stock Options, Warrants and Benefit Plans.
REVENUE RECOGNITION
The Company recognizes revenues when services are provided. Subscriber
services revenues consist of services related to the Company's communications
cards, including Premiere WorldLink, AFCOM and co-branded cards and voice
messaging services. Subscriber services revenues from communications cards are
based primarily on per minute charges. Subscriber services revenues from voice
messaging services include service initiation fees, monthly voice mailbox fees
and usage fees. License fees represent charges to companies which have license
relationships with the Company for the use of the Company's computer telephony
platform. License fees are contracted on a long-term basis with each licensee
and are generally based on a per minute charge and, in certain circumstances, a
per service charge.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." In accordance with this statement, deferred income taxes are
recorded using enacted tax laws and rates for the years in which the taxes are
expected to be paid. Deferred income taxes are provided for items when there is
a temporary difference in recording such items for financial reporting and
income tax reporting. See Note 12 - Income Taxes.
Many of the Franchisees included herein that were acquired in conjunction
with the pooling-of-interests transactions discussed in Notes 1 and 3 were
either S Corporations or partnerships. In accordance with SFAS No. 109 and APB
No. 16, no tax provision relating to these entities has been included in the
accompanying financial statements as these Franchisees would not have recorded a
provision had they been stand-alone entities.
-9-
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PRO FORMA NET INCOME (LOSS) PER SHARE
Primary net income (loss) per share is computed under the modified treasury
stock method using the weighted average number of shares of common stock and
dilutive common stock equivalent shares ("CSEs") from stock options outstanding
during the period at the weighted average market value of stock prices during
the period. For periods prior to the Company's initial public offering, earnings
per share were calculated pursuant to Securities and Exchange Commission Staff
Accounting Bulletins. Under the modified treasury stock method, proceeds from
the exercise of CSEs consist of the exercise price of the CSEs, as well as the
related income tax benefit to the Company. CSE proceeds are assumed to be
applied first to repurchase up to 20% of the Company's common stock and then to
repay outstanding long-term indebtedness. Any remaining CSE proceeds are assumed
to be invested in United States government securities.
In determining the Company's primary net income (loss) per share under the
modified treasury stock method, net income (loss) per share applicable to common
shareholders has been adjusted on a pro forma basis to reflect the decrease in
interest expense related to a capitalized lease obligation and to notes payable
outstanding during the period. To the extent that excess proceeds from the
assumed exercise of outstanding options and tax benefits from the assumed
exercise were in excess of the capitalized lease obligation and the notes
payable, an increase in interest income related to the investment of such excess
proceeds in United States government securities is reflected in adjusted net
income per share applicable to common shareholders. The pro forma net interest
adjustment to primary net income (loss) per share under the modified treasury
stock method was approximately $490,000 for the year ended December 31, 1995.
For the year ended December 31, 1994, earnings per share were not calculated
under the modified treasury stock method as the results were antidilutive.
Accordingly, basic earnings per share was used for the year ended December 31,
1994.
Fully diluted net income per common and common equivalent shares is
computed by including convertible instruments which are not CSEs in the weighted
average per share calculation (using the modified treasury stock method) at
period-end market value of stock prices. To the extent that the convertible
securities are antidilutive, they are not included in the fully diluted net
income (loss) per common and common equivalent shares. To the extent that
period-end market value of stock prices is less than the average market value
for the period, then the average market value is used for fully diluted net
income (loss) per common and common equivalent shares. For all periods
presented except the year ended December 31, 1996, the fully diluted
calculation is antidilutive. Accordingly, fully diluted earnings per share
data is only presented for the year ended December 31, 1995.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") released
SFAS No. 128 ("SFAS 128"), Earnings Per Share, which is effective for fiscal
years ending after December 15, 1997. Early adoption is not permitted. SFAS 128
may significantly change reported earnings per share for companies with complex
capital structures, such as the Company, as compared to the modified treasury
stock method. The pro forma effect of giving treatment to SFAS 128 is as
follows:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995 December 31, 1996
----------------------------------------------------------------------------
Historical Pro forma Historical Pro forma Historical Pro forma
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic or primary as applicable $(0.54) $(0.55) $0.21 $0.35 $0.10 $0.11
Fully dilutive (1) $ -- $ -- $0.20 $0.25 $ -- $0.10
</TABLE>
- -----------
(1) Fully dilutive earnings per share is not presented where antidilutive.
In addition, during 1997 the FASB has issued SFAS No. 130, "Report for
Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Company does not believe that these
statements will have a material effect on the financial statements.
REGULATION
The Company is subject to regulation by the FCC and by various state public
service and public utility commissions. As an international presence is
established, the Company will be subject to regulation by various other
regulatory agencies.
SOURCE OF SUPPLIES
The Company does not own a transmission network and, accordingly, relies on
both facilities-based and nonfacilities-based long-distance carriers and other
companies to provide transmission of its subscribers' long-distance calls.
Although management feels that alternative telecommunications facilities could
be found in a timely manner, disruption of these services for more than a brief
period would have an adverse effect on operating results. During 1995 and 1996,
certain carriers utilized by the Company experienced regional network outages.
The effect of these outages on the Company was not material.
-10-
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DEPENDENCE ON CONTRACTUAL RELATIONSHIPS
The Company has licensing relationships with companies that have chosen to
outsource part or all of their communications card services to Premiere.
License fees accounted for approximately 6.5% and 9.7% of Premiere's 1995 and
1996 revenues, respectively. One licensee, Communications Network Corporation
("CNC"), accounted for approximately 25.3% of Premiere's year ended 1995 license
fees and approximately 1.6% of the Company's total 1995 revenues. CNC accounted
for approximately 19.6% of Premiere's 1996 license fees and approximately 1.9%
of the Company's total 1996 revenues. On August 6, 1996, CNC was placed into
bankruptcy under Chapter 11 of the Bankruptcy Code. CNC owed the Company
approximately $627,000 as of December 31, 1996. However, CNC's transmission
provider, WorldCom Network Services, d/b/a WilTel ("WilTel"), is also obligated
to pay this amount to the Company. In addition, WorldCom accounted for
approximately 43.5% of the Company's 1996 license fees and approximately 4.2%
of the Company's total 1996 revenues.
The Company intends to increase its number of licensees and its licensee
transaction volume in the future. The Company's success depends in part upon the
ultimate success or failure of its licensees. The telecommunications industry is
intensely competitive and rapidly consolidating. The majority of companies that
have chosen to outsource communications card services to Premiere are small or
medium-sized telecommunications companies that may be unable to withstand the
intense competition in the telecommunications industry. During the past 12
months, one licensee, in addition to CNC, ceased doing business with the Company
primarily due to financial difficulties. Licensees that ceased doing business
with the Company due to financial difficulties contributed in the aggregate
approximately $2.9 million of Premiere's 1996 revenues. Although the Company was
able to add new licensees in 1996, there can be no assurance that the failure of
one or more of the Company's licensees to develop and sustain a market for the
Company's services, or termination of one or more of the Company's licensing
relationships, will not have a material adverse effect on the Company's
business, operating results or financial condition.
Historically, the businesses acquired in the Voice-Tel Acquisitions have
relied on sales through Amway for a substantial portion of their revenue. Such
sales accounted for approximately 44.5% and 32.9% of the Company's revenue for
1995 and 1996, respectively. Although Amway has indicated a desire to continue
to use the Company for its voice messaging services following the Voice-Tel
Acquisitions, there is no assurance that the relationship will continue at
historical levels or at all, nor is there any assurance of long term price
protection for services provided to Amway. Loss or natural diminution in the
Amway relationship, or a decrease in average sales price without an offsetting
increase in volume, could have a material adverse effect on the results of
operation and financial condition of the Company.
DEPENDENCE ON SWITCHING FACILITIES, COMPUTER TELEPHONY PLATFORMS AND FRAME RELAY
NETWORK; DAMAGE, FAILURE AND DOWNTIME
The Company currently maintains switching facilities and computer telephony
platforms in Atlanta, Georgia, and Dallas, Texas, and a point-of-presence
("POP") site in London, England and a frame relay network in Cleveland, Ohio.
The Company's network service operations are dependent upon its ability to
protect the equipment and data at its switching facilities against damage that
may be caused by fire, power loss, technical failures, unauthorized intrusion,
natural disasters, sabotage and other similar events. The Company has taken
precautions to protect itself and its subscribers from events that could
interrupt delivery of the Company's services. These precautions include physical
security systems, uninterruptible power supplies, on-site power generators
sufficient to continue operation of the Company's network in the event of a
power outage for four days, upgraded backup hardware and chemical fire
protection systems. The Company's network is further designed such that the data
on each network server is duplicated on a separate network server.
Notwithstanding such precautions, there can be no assurance that a fire, act of
sabotage, technical failure, natural disaster or a similar event would not cause
the failure of a network server and its backup server, other portions of the
Company's network, or the facilities as a whole, thereby resulting in an outage
of the Company's services and having a material adverse effect on the Company.
FACTORS IMPACTING FUTURE SUCCESS
The future success of the Company is dependent upon a number of factors,
including the effect of rapid technological changes affecting the markets for
Premiere's products and services and management's ability to effectively respond
to those changes, including the development, implementation, marketing and
support of new or improved products and services to respond to the changing
environment; the success of Premiere's marketing arrangements, including its
strategic and licensing relationships with various parties including WorldCom;
the effects of intense competition in information and telecommunications
services markets, including, among other things, the consequent effects on the
prices that Premiere may charge for its products and services; the outcome of
-11-
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
pending litigation; the risks of potential claims of trademark, patent or
copyright infringement from competitors and other parties, including the expense
of defending claims that Premiere may consider unmeritorious; management's
ability to integrate the operations of TeleT, which was acquired in September
1996, or the operations of any other entity that Premiere may acquire in the
future without, among other things, incurring unexpected obligations or
experiencing unexpected management distractions; the effects in connection with
any potential acquisition of the write-off of acquisition expenses, the write-
off of software development costs and the amortization of expenses related to
goodwill and other intangible assets; Premiere's ability to expand successfully
internationally; the effect of regulatory changes in the telecommunications
industry; and the risk of dependence on key managerial personnel. In addition,
the market price of Premiere's stock may from time to time be significantly
volatile as a result of, among other things: Premiere's operating results; the
operating results of other information and telecommunications companies; future
issuances by Premiere of securities, including options to purchase its stock;
and changes in the performance of the stock market in general.
3. ACQUISITIONS
VOICE-TEL ACQUISITIONS
On June 12, 1997, the Company announced the acquisitions of VTE, VTNLP,
VTN, and the Franchisees. 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 transactions were structured as tax-free mergers or shares
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 operations of the Voice-Tel
Acquisitions that qualified for pooling-of-interests treatment. See Note 13
Subsequent Events for discussion of the Voice-Tel Acquisitions.
The Company purchased 15 of the Franchisees and the limited partner
interest in VTNLP for an aggregate of $13.9 million in cash and approximately
94,000 shares of its common stock. The excess of the purchase price over the
fair value of the net assets acquired will be recorded as an intangible asset as
of the acquisition dates.
The reconciliation below details the effects of the pooling-of-interests
described above on the previously reported revenues, net income and earnings per
share of the Company.
(In thousands, except per share data) 1994 1995 1996
- ------------------------------------- ---- ---- ----
Revenue:
Premiere, as previously reported $ 9,995 $22,326 $ 52,079
Voice-Tel Acquisitions 58,211 77,570 100,728
Effects of intercompany transactions (6,416) (8,880) (10,653)
------- ------- --------
Premiere, as restated $61,790 $91,016 $142,154
------- ------- --------
Net Income:
Premiere, as previously reported $ (180) $ 1,918 $ (956)
Voice-Tel Acquisitions (6,975) 2,515 3,307
Effects of intercompany transactions 309 491 665
------- ------- --------
Premiere, as restated $(6,846) $ 4,924 $ 3,016
------- ------- --------
Earnings Per Share:
Premiere, as previously reported $ 0.01 $ 0.10 $ (0.05)
------- ------- --------
Premiere, as restated $ (0.54) $ 0.21 $ 0.10
------- ------- --------
Intercompany transactions primarily represent royalty payments and related
credits between VTE, VTN, VTNLP and the Franchisees prior to the
combination of the Voice-Tel Acquisitions with the Company.
TELET ACQUISITION
On September 18, 1996, the Company, through the Sub, acquired substantially
all of the assets and business operations of TeleT for (i) 498,187 shares of
the Company's $0.01 par value common stock (the "Shares"), for which $4,982 was
recorded to common stock and $7,495,018 was recorded to additional paid-in
capital, (ii) $2,870,000 in cash and (iii) the assumption of approximately
$100,000 in liabilities (the "Acquisition"). TeleT is an Internet-based
technology development company focused on applications that create an
interchange between telephone and computer resources. The Acquisition was made
pursuant to an Asset Purchase Agreement dated as of September 18, 1996 by and
among the Company, the Sub, TeleT and the Members of TeleT. The Company
financed the cash portion of the purchase price from working capital.
An aggregate of 75,000 of the Shares were placed in escrow pursuant to an
Escrow Agreement among the Company and the Members of TeleT to secure certain
indemnification obligations of those Members. All Shares issued are subject to
lock-up agreements prohibiting the sale of such Shares for a weighted average
period of one year following the closing of the Acquisition. Pursuant to the
Acquisition, the Company granted registration rights to the holder of 320,833 of
the Shares. The registration rights are subordinate to the lock-up restrictions
applicable to such Shares. Also pursuant to the Acquisition, Premiere entered
into employment agreements with the two senior executives of TeleT.
In connection with the Acquisition, the Company allocated $11.0 million of
the purchase price to incomplete research and development projects.
Accordingly, this cost was expensed as of the Acquisition date. This allocation
represents the estimated value related to the incomplete projects determined by
an independent appraisal. The development of these projects had not yet reached
technological feasibility, and the technology had no alternative future use.
The technology acquired in the acquisition of TeleT required substantial
additional development by the Company.
This Acquisition has been accounted for under the purchase method of
accounting and the results of TeleT's operations since the Acquisition date have
been included with those of the Company.
The table below reflects the historical results of the Company and the
historical results of the Company and TeleT, as adjusted for pro forma purchase
accounting adjustments to reflect additional depreciation and amortization of
acquired software, and the related pro forma income tax effects of the
adjustments. The charge for purchased research and development has been
excluded from the pro forma results of operations since it has no continuing
effect on operations. Pro forma results for fiscal year 1995 are not presented
as the pro forma results do not differ materially from the historical results of
the Company. These pro forma amounts are provided for informational purposes
only and are not necessarily indicative of what actually would have occurred if
the
-12-
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
acquisition had occurred at the beginning of the period presented. In addition,
they are not intended to be projections of future results and do not reflect any
synergies that might be achieved from combined operations.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
--------------------------------------
(in thousands)
Historical As Adjusted
---------- -----------
<S> <C> <C>
Revenues $142,154 $142,405
Net income $ 3,016 $ 9,249
Earnings (loss) per share $ 0.10 $ 0.30
</TABLE>
4. SUBSCRIPTIONS RECEIVABLE
The founders of the Company purchased their shares of common stock by
giving the Company a total of $150,000 in nonrecourse, noninterest-bearing
notes, of which $50,000 were short-term and $100,000 were due no later than June
30, 1999 (the "Founders Notes"). In addition, in November 1995, certain
officers gave to the Company full-recourse notes to finance the exercise of
stock options (the "1995 Notes"). See Note 11 - Commitments and Contingencies.
These notes were paid in full subsequent to the initial public offering in March
1996. The outstanding principal and accrued interest balance of $2,436,703 of
the Founders Notes and the 1995 Notes were reflected as a reduction to
shareholders' equity at December 31, 1995.
5. PROPERTY AND EQUIPMENT
Balances of major classes of property and equipment and the related
accumulated depreciation at December 31, 1995 and 1996 were as follows:
(in thousands)
<TABLE>
<CAPTION>
1995 1996
--------------- ----------------
<S> <C> <C>
Computer equipment $ 32,108 $ 41,971
Furniture and fixtures 902 1,929
Office equipment 148 1,058
Leasehold improvements 456 4,287
Construction in progress 884 1,450
--------------- ----------------
34,498 50,695
Less accumulated depreciation (12,801) (19,728)
--------------- ----------------
Property and equipment, net $ 21,697 $ 30,967
=============== ================
</TABLE>
The assets under capital leases included in property and equipment in the
consolidated balance sheets at December 31, 1995 and 1996 were as follows: (in
thousands)
<TABLE>
<CAPTION>
1995 1996
--------------- ----------------
<S> <C> <C>
Telecommunications equipment $ 13,909 $ 17,052
Less accumulated depreciation (5,647) (7,108)
--------------- ----------------
Property and equipment, net $ 8,262 $ 9,944
=============== ================
</TABLE>
-13-
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. NOTES PAYABLE
Pursuant to a loan agreement dated May 26, 1992, the Company borrowed
$1.0 million from a small business investment company ("SBIC"). The loan was
scheduled to mature in May 1997, with interest accruing at 12.5%. On December
23, 1993, the Company borrowed an additional $1.0 million from the same SBIC.
The additional loan was scheduled to mature in December 1998, with interest
accruing at 12%. The loans were secured by accounts receivable, contract rights,
chattel paper and general intangibles. In connection with the original loan, the
Company issued to the SBIC 424,392 stock warrants at $0.042 per share. The fair
value of the stock at the date of the transaction was estimated by the board of
directors to be $0.042 per share. Accordingly, the Company discounted the note
by $159,147, resulting in an effective interest rate of 17.3%, In December 1993,
the Company issued to the SBIC 144,000 stock warrants at $0.042 per share in
conjunction with the additional loan. The fair value of the stock at the date of
the transaction was estimated by the board of directors to be $0.54 per share.
The loan was discounted by $72,000, resulting in an effective interest rate of
13.0%. Stock warrants of $231,147 are included in stock warrants outstanding in
the accompanying balance sheets at December 31, 1995. Both of these loans were
repaid subsequent to the Company's initial public offering. The previously
mentioned stock warrants were exercised during the year ended December 31, 1996;
thus, the balance of the loans and the stock warrants at December 31, 1996 was
$0.
In October 1996, the Company established a $5 million unsecured revolving
line of credit (the "Facility") with NationsBank, N.A. to facilitate interim
long-term capital equipment financing needs. The interest rate, at the option
of the Company, is prime, adjusted daily, or LIBOR plus 1.75%, adjusted every
30, 60 or 90 days. The Company elected the LIBOR option, for which the rate was
6.625% at December 31, 1996. Interest is payable monthly and principal at
maturity, which is September 30, 1997. Fees associated with the Facility were
$3,000. There is an additional commitment fee of 0.125% on the unused
availability of the Facility, which is payable quarterly. As of March 17, 1997,
the Company had total borrowings of $4.1 million under the Facility.
The Company has the following notes payable and long-term debt at
December 31: (in thousands)
1995 1996
--------- ---------
Notes payable to shareholders or related
parties of shareholders due between July
1997 and June 2001, at interest ranging
from 8% to 16% 16,650 14,851
Notes payable to banks due between
June 1997 and August 2001, at interest
ranging from 6% to 18% 11,032 12,620
Other notes payable due between
September 1995 and April 1998 at
interest ranging from 8% to 13% 3,151 1,660
------- -------
Total notes payable and debt 30,833 29,131
Less current portion (7,474) (11,137)
------- -------
Total long-term notes payable and debt $23,359 $17,994
======= =======
<PAGE>
Current Maturities of Long Term Debt: (in thousands)
1997 $11,137
1998 5,993
1999 10,375
2000 1,612
2001 14
-------
$29,131
=======
7. FINANCIAL INSTRUMENTS
In 1995, the Company adopted SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," which requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet.
The carrying amount of cash and investments approximates fair value because
their maturity is generally less than one year in duration.
The carrying amounts of notes payable and capital lease obligations
approximate fair value at December 31, 1995 and 1996.
8. SHAREHOLDERS' EQUITY
In connection with the Reincorporation Merger, each outstanding share of
common stock was converted into one share of $0.01 par value common stock of the
Georgia corporation, and each outstanding share of the Series 1994 Preferred
Stock was converted into one share of Series A Preferred Stock. Premiere
thereafter declared a 24-to-1 stock split through the declaration of a 23-share
-14-
<PAGE>
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
common stock dividend for each share of common stock outstanding on December 18,
1995.
On January 18, 1996, the Company notified the holder of the Series A
Preferred Stock of the Company's intention to redeem the preferred stock and the
holder elected to convert all of the shares of the Series A Preferred Stock into
3,095,592 shares of $0.01 par value common stock at $93 per share (presplit).
The Series A Preferred Stock was fully cumulative, and the holders of the shares
were entitled to receive dividends at a rate of 8%. The Company accrued $308,419
and $29,337 of dividends payable, plus accrued interest, if applicable, during
the year ended December 31, 1995 and 1996, respectively. The dividends were
payable annually on March 31, commencing on March 31, 1995. All accrued but
unpaid dividends accrue interest after each annual dividend date at a rate of
8%. No dividends were paid during the year ended December 31, 1995, and $676,981
in dividends was paid during the year ended December 31, 1996.
During 1995 and 1996, stock options were exercised under the Company's
stock option plans. None of the options exercised qualified as incentive stock
options, as defined in Section 422 of the Internal Revenue Code (the "Code").
Accordingly, common stock and additional paid-in capital increased from the
proceeds of the exercises totaling $64,001 and $2,656,405, respectively, for the
year ended December 31, 1995 and $8,035 and $308,481, respectively, for the
year ended December 31, 1996. Additionally, $2,621,673 and $6,886,091 were
recorded as an increase in additional paid-in capital due to the tax benefit to
be realized by the Company as a result of the exercise of such options during
the years ended December 31, 1995 and 1996, respectively.
Many of the Franchisees that were merged with the Company were either
S-corporations or partnerships. Accordingly, distributions made to the
shareholders of such S-corporations or partnerships distributed cash in order to
pay tax liabilities owed by the owners.
9. STOCK OPTIONS, WARRANTS AND BENEFIT PLANS
1994 STOCK OPTION PLAN
In March 1994, the board of directors adopted a stock option plan under
which 960,000 shares of common stock were available to be granted (the "1994
Stock Option Plan") to employees, consultants, and others rendering services to
the Company. Options for all of such shares had been granted as of December 31,
1995. Options granted under the 1994 Stock Option Plan are not incentive stock
options ("ISOs") as defined in Section 422 of the Code. The 1994 Stock Option
Plan is administered by a stock option plan committee (the "1994 Stock Option
Plan Committee") consisting of the president of the Company and two members of
the board of directors selected by the president.
The stock option agreements governing options granted under the 1994 Stock
Option Plan provide for an exercise price equal to the fair market value at the
date of the option grant as determined by the 1994 Stock Option Plan Committee
and generally vest ratably over the three years following the grant date.
Generally, the options are nontransferable.
The Company has granted nonqualified options and warrants to purchase
common stock to officers, directors and key employees of the Company as well as
to other individual third parties rendering services to the Company. The
exercise price of the options granted to date has been at the market value of
the shares on the date of grant, which prior to a public trading market for the
Company's common stock was determined by the board of directors based upon
arm's-length trade information and other analysis. Generally, the options vest
over three years and expire eight years from the date of grant.
1995 STOCK PLAN
The board of directors has adopted, and the Company's shareholders have
approved, the Premiere Technologies, Inc. 1995 Stock Plan (the "1995 Stock
Plan"), the primary focus of which is to provide an incentive to key employees
who are in a position to make significant contributions to the Company. Under
the 1995 Stock
-15-
<PAGE>
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Plan, the stock plan committee of the board (the "1995 Stock Plan Committee")
has discretion to award stock options, Stock Appreciation Rights ("SARs") and
restricted stock to employees. A total of 1,500,000 shares of common stock has
been reserved for issuance pursuant to the exercise of options or the grant of
restricted stock awards. Options may be either ISOs, which permit the deferral
of taxable income related to the exercise of such options, or nonqualified
options not entitled to such deferral.
The 1995 Stock Plan is administered by the 1995 Stock Plan Committee.
Subject to the provisions of the 1995 Stock Plan, this committee, at its
discretion, selects the recipients of awards and the number of shares or options
granted thereunder and determines other matters such as (i) vesting schedules,
(ii) the exercise price of options (which cannot be less than 100% of the fair
market value of the common stock on the date of grant for ISOs), (iii) the
duration of awards (which cannot exceed ten years), and (iv) the price of SARs.
DIRECTORS' COMPENSATION
Directors are reimbursed for reasonable expenses incurred by them in
connection with their attendance at board meetings. Directors are also eligible
to receive options, SARs, and restricted stock grants under the 1995 Stock Plan.
Additionally, in December 1991, the Company's board of directors authorized the
issuance of warrants to acquire up to 419,328 shares of common stock for $0.42
per share, the fair value at the date of grant, to each of the Company's
nonmanagement directors. The warrants issued in 1991 vested over a three-year
period, provided that the individual was serving on the board of directors on
such dates. Pursuant to this action of the board of directors, George W. Baker,
a current member of the Company's board of directors, was granted warrants to
acquire 86,832 shares of common stock and former members of the board of
directors were granted warrants to acquire 332,496 shares of common stock.
In May 1993, the board of directors issued warrants to acquire 72,000
shares of common stock at a price of $0.52 per share, the fair value at the date
of grant, to Buford H. Ortale who was, at that time, a member of the Company's
board of directors and is now a holder of approximately 3% of the Company's
outstanding common stock in consideration of his election to the board of
directors and his investment in the Company.
In December 1993, the board of directors granted options to acquire 240,000
and 84,000 shares of common stock at an exercise price of $0.52 per share, the
fair value at the date of grant, to Buford H. Ortale and George L. MacKay,
respectively, who were at the time members of the Company's board of directors.
In July 1995, the board of directors granted each director warrants to
acquire 24,000 shares of common stock for $0.71 per share, the fair value at the
date of grant, which vested in 1995, provided that the director was a member of
the board of directors on that date. In addition, Eduard Mayer was granted
warrants to acquire 86,400 shares of common stock at $0.71 per share, the fair
value at the date of grant, in recognition of his exemplary service on the board
of directors.
In July 1996, the board of directors granted each nonemployee director
warrants to acquire 10,000 shares of common stock for $18.50 per share, the fair
value at the date of grant, which vested at December 31, 1996, provided that the
director was a member of the board of directors on that date.
-16-
<PAGE>
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
OPTION AND WARRANT ACTIVITY
In November 1995, Boland T. Jones, D. Gregory Smith, and Leonard A.
DeNittis exercised options to acquire 2,277,864, 2,277,864 and 996,552 shares of
common stock, respectively. Pursuant to the terms of each of their employment
agreements, the Company loaned such officers $825,000, $825,000 and $688,000,
respectively, to fund the exercise of these options. The loans were evidenced
by recourse promissory notes bearing interest at 6.55%, which were secured by a
pledge of the common stock acquired upon the exercise of the options. These
loans and accrued interest were repaid in full in 1996. Additionally, loans
were made as part of the exercise of these options to assist the officers in
paying the associated taxes. The loans to such officers for taxes totaled
$73,086, $73,086, and $22,048, respectively, and were also repaid in full in
1996.
In July 1995, the board of directors authorized the sale of warrants to
acquire 24,000 shares of common stock at $0.71 per share for $1,000 to an
individual who became the Company's senior vice president of finance and legal
in November 1995.
The Company accounts for its stock-based compensation plans under APB No.
25, under which no compensation expense has been recognized, as all options have
been granted with an exercise price equal to the fair value of the Company's
common stock on the date of grant. The Company adopted SFAS No. 123 for
disclosure purposes in January 1995. For SFAS No. 123 purposes, the fair value
of each option grant has been estimated as of the date of grant using the Black-
Scholes option pricing model with the following weighted average assumptions:
risk-free interest rate of 6.26 percent, expected life of 2.34 years, dividend
rate of zero percent, and expected volatility of 42 percent. Using these
assumptions, the fair value of the stock options granted in 1996 is $8,402,324,
which would be amortized as compensation expense over the vesting period of the
options. Options generally vest over three or four years. Had compensation
cost been determined consistent with SFAS No. 123 utilizing the assumptions
detailed above, the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1995 1996
- ------------------------------------- ------------ ------------
<S> <C> <C>
Net Income (loss):
As Reported................................ $4,924 $3,016
Pro forma.................................. $4,773 $1,657
Primary EPS:
As Reported................................ $ 0.21 $ 0.10
Pro forma.................................. $ 0.16 $ 0.04
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years.
A summary of the status of the Company's stock options plans at December
31, 1994, 1995 and 1996 and for the years then ended is presented in the table
and narrative below:
-17-
<PAGE>
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNDER APB NO. 25:
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
----------- -------------
<S> <C> <C>
Options outstanding, March 31, 1994................... 8,578,464 $0.13 - 0.52
Granted............................................ 54,000 0.54 - 0.71
Exercised.......................................... 0 0
Forfeited.......................................... (240,000) 0.52
-----------
Options outstanding, December 31, 1994................ 8,392,464 $0.13 - 0.71
===========
</TABLE>
In November 1995, the Company granted a total of 4,256,400 options to
employees at $1.61 per share, the fair market value on the grant dates. The
fair market value for the options granted in November 1995 was supported by an
independent appraisal. The remaining 1,009,200 options granted in 1995 were
granted at various dates throughout the year prior to November 1995.
UNDER SFAS NO. 123:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
- ----------------------------------------------------------- ----------------- -------------------
<S> <C> <C>
Options outstanding at December 31, 1994................... 8,392,464 $ 0.39
Granted................................................. 5,265,600 1.44
Exercised............................................... (5,831,688) 0.43
Forfeited............................................... (367,992) 0.45
----------------- -------------------
Options outstanding at December 31, 1995................... 7,458,384 1.07
Granted................................................. 1,299,799 18.89
Exercised............................................... (1,371,938) 0.51
Forfeited............................................... (44,800) 18.03
----------------- -------------------
Options outstanding at December 31, 1996................... 7,341,445 $ 4.27
================= ===================
Exercisable at end of year................................. 1,741,543 $ 1.51
================= ===================
Weighted average fair value of options granted in 1996..... $ 6.46
===================
</TABLE>
Of the 7,341,445 employee and director options outstanding at December 31,
1996, (i) 146,016 options have an exercise price of $0.13, with a remaining
contractual life of 2.5 years, of which all are exercisable, (ii) 1,197,730
options have exercise prices between $0.42 and $0.52, with a weighted average
exercise price of $0.50 and a weighted average remaining contractual life of 4.5
years, of which all are exercisable, (iii) 750,320 options have an exercise
price of $0.71, with a weighted average remaining contractual life of 6.2 years,
of which 64,880 are exercisable, (iv) 3,987,580 options have an exercise price
of $1.61, with a weighted average remaining contractual life of 6.8 years, of
which 1,223,504 are exercisable, (v) 495,350 options have exercise prices
between $15.125 and $19.375, with a weighted average exercise price of $16.61
and a weighted average remaining contractual life of 8.1 years, of which 30,000
are exercisable, (vi) 764,449 options have exercise prices between $20.00 and
$25.25, with a weighted average exercise price of $20.31 and a weighted average
remaining contractual life of 6.7 years, of which 39,400 are exercisable.
In the year ended December 31, 1994, the Company entered into an agreement
with a hotel management company. The agreement, which expired June 30, 1995,
represented a variable stock option plan (with a measurement date upon vesting)
whereby the Company granted stock options to the hotel management company based
on the level of call traffic handled at certain properties. The options were
exercisable at $0.00042 per share and vested over three years. A total of
59,981 options were earned under the agreement. During
-18-
<PAGE>
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the years ended December 31, 1994 and 1995, 25,581 and 16,925 options vested,
respectively. All of the vested options under this agreement were exercised in
1996.
EMPLOYEE BENEFITS
The Company has two employee benefit plans which include components which
were created under Section 401(k) of the Internal Revenue Code.
Effective May 1, 1993 the Company established an employee savings plan
related to VTE, which was created under Section 401(k) of the Internal Revenue
Code. All employees of VTE who are 21 years of age, have completed 90
days of service and worked a minimum of 500 hours annually are eligible to
participate in the plan. Participants may elect to defer up to 15% of their
compensation up to a maximum amount determined pursuant to IRS regulations.
In 1995, the Company adopted a tax-qualified profit-sharing plan for
eligible employees that also includes a 401(k) component (the "Profit Sharing
Plan"). All full-time employees are eligible to participate in the Profit
Sharing Plan upon the attainment of age 21 and completion of three months of
service. Under the Profit Sharing Plan, an employee may elect to defer up to
15% of his compensation and direct the Company to contribute such deferred
amounts to the Profit Sharing Plan. Each year, the Company determines whether to
make a discretionary matching contribution equal to a percentage, determined by
the Company, of the employee's deferred compensation contribution. The Company
has not made any matching contributions to the Profit Sharing Plan. Accordingly,
no compensation expense related to the Profit Sharing Plan has been recognized
in the accompanying financial statements. All contributions to the Profit
Sharing Plan by or on behalf of employees are subject to annual limits
prescribed by the Code. Contributions under both plans are immaterial for all
periods presented.
In July 1994, the Company began offering a medical and dental health plan
to its employees. The Company was self-insured for certain health and dental
benefits up to a maximum amount per month of approximately $10,000 based on
claims history and current employment levels through January 1996. The Company
accrued for estimated losses occurring from both asserted and unasserted claims.
The estimate of the liability for unasserted claims arising from unreported
incidents was based on an analysis of historical claims data. The cost of such
claims was approximately $35,000 and $135,000 for the periods December 31, 1994
and 1995, respectively. In February 1996, the Company changed its medical and
dental plan insurance provider and is no longer self-insured.
10. RELATED-PARTY TRANSACTIONS
The Company has in the past entered into agreements and arrangements with
certain officers, directors and principal shareholders of the Company involving
loans of funds, grants of options and warrants and the acquisition of a
business. Certain of these transactions may be on terms more favorable to
officers, directors and principal shareholders than they could acquire in a
transaction with an unaffiliated party. The Company adopted a policy requiring
that, in the future, all material transactions between the Company and its
officers, directors or other affiliates must (i) be approved by a majority of
the disinterested members of the board of directors of the Company and (ii) be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
In September 1993, the Company loaned a total of $65,000 to the three
principal officers of the Company to purchase 219,984 shares of stock and
175,992 stock purchase warrants exercisable at $0.125 per share from one of the
Company's board members. The loans, which were interest-free, were repaid
during 1996.
In prior years, the Company advanced $25,000 to certain officers and
shareholders of the Company to purchase the common stock and debentures of
another shareholder, and $5,000 was repaid during the year ended March 31, 1994.
The board of directors forgave $10,000 during the nine months ended December 31,
1994. The advances were repaid during 1996.
During the year ended March 31, 1994 and the nine months ended December 31,
1994, management made salary advances of $25,000 and $35,849, respectively, to
certain officers of the Company. During the year ended December 31, 1995,
$50,000 of these amounts were repaid. The balance was repaid during 1996.
-19-
<PAGE>
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In November 1995, the Company loaned a certain officer $90,000 in
connection with the officer's transition from his previous employer to the
Company. This unsecured loan is evidenced by a promissory note bearing interest
at 6.11%, the interest on which is payable beginning in November 1997 and
continuing each year until November 1999. Principal is to be repaid in five
equal annual installments, with accrued interest, commencing in November 2000;
however, pursuant to the officer's employment agreement, the officer may be
required to make earlier payments from certain bonus compensation paid to the
officer under such employment agreement.
In November 1995, the Company loaned three officers a total of $2,338,000,
to fund the exercise of stock warrants and options which were repaid in full in
1996. These loans were evidenced by recourse promissory notes bearing interest
at 6.55%, which were secured by a pledge of the common stock acquired upon the
exercise of the warrants and options. All principal and accrued interest were
to be paid in November 2005; however, if any of the common stock securing the
promissory notes was sold, the net proceeds of such sale were to be applied to
the outstanding principal and interest due under that promissory note.
Additionally, the Company loaned such officers an additional total amount of
$168,220 to assist the officers in paying the federal and state income taxes
associated with the exercise of the warrants and options which were repaid in
full in 1996.
In September 1996, the Company loaned a certain officer $75,000 in
connection with the officer's transition from his previous employer to the
Company. This unsecured loan is evidenced by a promissory note bearing interest
at 6.64%, the interest on which is payable beginning in September 1998 and
continuing each year until September 2000. Principal is to be repaid in five
equal annual installments, with accrued interest, commencing in September 2001;
however, pursuant to the officer's employment agreement, the officer may be
required to make earlier payments from certain bonus compensation paid to the
officer under such employment agreement.
In October 1996, the Company loaned a certain officer $10,000. This
unsecured loan is evidenced by a promissory note bearing interest at 6.5%.
Principal and interest are to be repaid in one payment in October 1998.
See Note 6 for disclosure of notes payable to shareholders and related
parties of shareholders.
-20-
<PAGE>
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases central office switching equipment, office space and
other equipment under noncancelable lease agreements. The leases generally
provide that the Company pay the taxes, insurance and maintenance expenses
related to the leased assets. Future minimum operating and capital lease
payments as of December 31, 1996 are as follows: (in thousands)
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASE
--------- --------
<S> <C> <C>
1997...................................................... $ 5,026 $ 5,639
1998...................................................... 4,147 4,738
1999...................................................... 3,518 2,334
2000...................................................... 1,575 738
2001...................................................... 228 227
Thereafter................................................ 0 68
------- -------
$14,494 13,744
=======
Less amount representing taxes............................ (35)
-------
Net minimum lease payments................................ 13,709
Less amount representing interest......................... (2,589)
-------
Present value of net minimum lease payments............... 11,120
Less current portion...................................... (3,735)
-------
Obligation under capital lease, net of current portion.... $ 7,385
=======
</TABLE>
Rental expense under operating leases amounted to approximately $4,481,000,
$4,678,000 and $5,105,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. During 1994, 1995 and 1996, additions to the Company's voice
messaging equipment and switching equipment resulted in an increase to the
capital lease obligation of $5,567,000, $787,000 and $231,000, respectively.
SUPPLY AGREEMENTS
The Company obtains long-distance telecommunications services pursuant to
supply agreements with suppliers of long-distance telecommunications
transmission services. Although these contracts generally provide fixed
transmission prices for terms of three to five years, they are subject to
earlier termination in certain events. No assurance can be given that the
Company will be able to obtain long-distance services in the future at favorable
prices or at all, and the unavailability of long-distance service, or a material
increase in the price at which the Company is able to obtain long-distance
service, would have a material adverse effect on the Company's business,
financial condition and results of operations. Certain of these agreements
provide for minimum purchase requirements. The Company is currently a party to
four long-distance telecommunications services contracts that require the
Company to purchase a minimum amount of services each month. The first such
agreementwhich is with Company A, requires the Company to utilize 100,000
transmission minutes each month per transmission circuit and to incur a minimum
of $75,000 in charges. In the event of a shortfall in minute usage, the Company
would be required to pay Company A an amount equal to $0.015 multiplied by the
difference between 100,000 minutes and the number of minutes actually utilized
by the Company on each transmission circuit. In the event the Company uses less
than $75,000 in services, the Company would be required to pay the difference
between $75,000 and the actual charges incurred. The second such agreement,
which is with Company B, requires the Company to use 75,000 transmission minutes
each month per transmission circuit from Company B. The Company is required to
use 100,000 minutes per month per transmission circuit in order to receive
discounts under this agreement. If the Company fails to utilize 75,000 minutes,
Company B may cancel the contract. The third such agreement requires the
Company to use 100,000 minutes per transmission circuit from Company C. In the
-21-
<PAGE>
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
event of a shortfall, the Company would be required to pay an amount equal to
$0.03 multiplied by the difference between 100,000 minutes and the actual
minutes used. This agreement also requires the Company, from the period of
November 1, 1997 through October 31, 1998, to maintain at least the level of
monthly charges incurred by the Company in the October 1997 billing period and
grants Company C a right of first refusal to provide all telecommunications
service to the Company. The next agreement which is with Company D provides
for a minimum of 300,000 billable minutes per month beginning January 1996.
Subject to certain exceptions, if the Company does not meet the minimum
commitment, the Company will be required to pay $0.02 per billed minute below
the minimum. The minimum requirement is terminable by the Company after it pays
$576,000 to Company D under the agreement. The agreement provides Company D
with the right to be the exclusive service provider of terminating traffic in a
defined region. The Company has not failed to fulfill the minimum usage
requirement under any of these contracts in the past. The Company monitors its
transmission usage in an attempt to avoid any such shortfall. In the future, the
Company may determine that it is desirable to enter into additional agreements
containing minimum purchase requirements. No assurance can be given that demand
for services in the areas covered by the Company's transmission suppliers will
exceed these minimum purchase requirements in the future.
PURCHASE AGREEMENT
An additional agreement which is with Company E provides for a minimum
purchase agreement of $15 million in equipment over the life of the agreement
which commenced in January 1990 and expired in December 1994. The agreement is
silent as to the penalties if the minimum purchase requirements are not
fulfilled.
RISK OF INFRINGEMENT
The Company is aware of other companies that utilize the term "WorldLink"
or "Premiere" in describing their products and services, including
telecommunications products and services. Certain of those companies hold
registered trademarks which incorporate the name "WorldLink" or "Premiere." The
Company has received correspondence from a provider of prepaid calling cards
which claims that the Company's use of the term "Premiere WorldLink" infringes
upon its trademark rights. In addition, the Company has received correspondence
from a major bank, which is among the holders of registered trademarks
incorporating the term "WorldLink," inquiring as to the nature of the Company's
use of the term "WorldLink" as a part of its mark "Premiere WorldLink." Based
on, among other things, the types of businesses in which the other companies are
engaged and the low likelihood of confusion, the Company believes these claims
to be without merit. No actions other than the AudioFAX litigation have been
filed with respect to either the patent or trademark claims. See Litigation
below. However, no assurance can be given that actions or claims alleging
trademark, patent, or copyright infringement will not be brought by these or
other parties against the Company with respect to current or future products or
services or that, if such actions are brought, the Company will ultimately
prevail. Any such claiming parties may have significantly greater resources
than the Company to pursue litigation of such claims. Any such claims, whether
with or without merit, could be time-consuming, result in costly litigation,
cause delays in introducing new or improved services, require the Company to
enter into royalty or licensing agreements, or cause the Company to discontinue
use of the challenged trademark, service mark or technology at potentially
significant expense to the Company associated with the marketing of a new name
or the development or purchase of replacement technology, all of which could
have a material adverse effect on the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Employment
Agreements") with Boland T. Jones, Chairman of the board of directors and
President; D. Gregory Smith, Executive Vice President, Assistant Secretary, and
Director; and Leonard A. DeNittis, Vice President of Engineering and Operations
(the "Executives"). Each Employment Agreement provides for an employment term
expiring December 31, 1999. Under their respective Employment Agreements,
Boland T. Jones and D. Gregory Smith were each paid base salaries of $200,000
for the year ended December 31, 1996 and are each to be paid a base salary of
$210,000 beginning in 1997. Leonard A. DeNittis was paid a base annual salary
of $175,000 and is to be paid a base annual salary of $183,750 beginning in
1997. Patrick G. Jones, who joined the Company in November 1995 as the Senior
Vice President of Finance and Legal and Secretary, has entered into a similar
agreement. Mr. Jones was paid a base salary of $150,000 and is to be paid a
base annual salary of $157,500 beginning in 1997. Gregg S. Freishtat, who
joined the Company as Senior Vice President in September 1996 from TeleT, has
entered into a similar
-22-
<PAGE>
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
agreement. Mr. Freishtat's base salary is $150,000 through 1997.
Under the Employment Agreements, each of the Executives is eligible to
receive bonus compensation based on the financial performance of the Company.
The amount of bonus compensation is calculated based on operating revenues and
the Company's adjusted net income before interest and taxes as determined in
accordance with the Employment Agreements ("Adjusted EBIT"). Boland T. Jones
and D. Gregory Smith received as a bonus (i) 0.25% of the Company's operating
revenues and (ii) 2.5% of the Company's Adjusted EBIT for the year ended
December 31, 1995 which amounted to a bonus of $126,128 for both Mr. Jones and
Mr. Smith. Beginning in 1996, Boland T. Jones and D. Gregory Smith will receive
as a bonus 1.5% of the Company's Adjusted EBIT. Leonard A. DeNittis received a
bonus of 1.5% of the Company's Adjusted EBIT for the year ended December 31,
1995 which amounted to $42,217, and his bonus beginning in 1996 will be 0.5% of
the Adjusted EBIT. The changes in arrangement for Boland T. Jones, D. Gregory
Smith, Leonard A. DeNittis were affected in amendments to their Employment
Agreements entered into in November 1995. In conjunction with these amendments,
Boland T. Jones, D. Gregory Smith, and Leonard A. DeNittis were granted options
to acquire 1,440,000, 1,400,000 and 720,000 shares of common stock,
respectively, at an exercise price of $1.61 per share, the fair value of the
common stock at the date of grant as determined by an independent appraisal.
Beginning in 1996, Patrick G. Jones was entitled to receive a bonus of 0.45% of
the Company's Adjusted EBIT, and beginning in 1997, Gregg S. Freishtat will be
entitled to receive a bonus of 0.45% of the Company's adjusted EBIT. Bonuses
payable to the Executives will be deferred if the net effect of the payment of
the bonuses to the Executives would cause the Company to recognize a net loss
for the year. The amount of any deferred bonus will be paid in the next
succeeding year in which the payment of the deferred bonus and the bonus for
such year would not cause the Company to recognize a net loss. To date, no bonus
amounts have been deferred. In July 1996, Messrs. Boland Jones, Smith, DeNittis
and Patrick Jones each agreed to waive any rights to bonuses otherwise due under
the Employment Agreements for 1996. In connection with such waiver, Messrs.
Boland Jones, Smith, DeNittis and Patrick Jones were granted options to acquire
an aggregate of 50,000, 50,000, 20,000 and 15,000 shares of common stock,
respectively, at an exercise price of $18.50 per share, which was the fair
market value of the common stock on the date of grant as determined by the board
of directors. The options granted will vest on March 31, 1997.
LITIGATION
On January 30, 1996, Eric Bott, E.B. Elliott and Cost Recovery Systems,
Inc. ("CRS") filed a complaint against the Company's wholly owned subsidiary,
Premiere Communications, Inc. ("PCI" or "Premiere Communications") and the
Company's president, Boland T. Jones, in the Superior Court of Fulton County,
Georgia. In the complaint, the plaintiffs allege that: (i) Mr. Bott, a former
company employee, is entitled to options to purchase 10,000 shares of common
stock of PCI at $5.00 per share; (ii) Mr. Bott is entitled to a commission equal
to 10% of all revenues that have been and in the future are collected as a
result of the Company's licensing arrangement with one of its customers; (iii)
Mr. Bott is entitled to $7,000 for consulting work allegedly performed for the
Company; (iv) Mr. Bott is entitled to unspecified damages resulting from his
sale in June 1995 of 750 shares of common stock of PCI to an unrelated third
party for an unspecified amount; (v) Mr. Elliott or CRS, an affiliate of Mr.
Elliott, is entitled to options to purchase 5,000 or 10,000 shares of common
stock of PCI at an unspecified exercise price arising out of work allegedly
performed by CRS for the Company; and (vi) CRS is owed an unspecified amount of
commissions from the Company relating to sales of the Company's
telecommunications services by CRS. Subsequent to the filing of the complaint,
the plaintiffs dismissed without prejudice count (iv) above. The plaintiffs
also seek attorneys' fees and unspecified amounts of punitive damages. The
Company filed an answer and counterclaim denying all allegations of the
complaint and asserting various affirmative defenses. Assuming that the
allegations concerning stock options and stock sales relate to the common stock
of Premiere Technologies, Inc. rather than PCI, as alleged, the Company
believes that the share numbers and exercise prices have not been adjusted for
the 24-to-1 stock split effected in December 1995. In this regard, the
plaintiffs filed a motion to add the Company as a defendant and to amend their
complaint to assert their claims against the
-23-
<PAGE>
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company. Adjusting the share numbers and exercise prices of these options to
reflect the 24-to-1 stock split, the plaintiffs' claims relate to options to
purchase up to a total of 480,000 shares of common stock and the alleged
exercise price of $5.00 per share with regard to a portion of such options
becomes approximately $0.21 per share. The plaintiffs' motion was denied on
December 17, 1996, and the plaintiffs dismissed the case without prejudice on
January 13, 1997. The plaintiffs filed a new complaint against PCI and the
Company on January 21, 1997 setting forth the same allegations as described
above, except that Mr. Bott no longer alleges that he is entitled to unspecified
damages resulting from his sale in June 1995 of 750 shares of common stock of
PCI, and that Mr. Bott and Mr. Elliott allege that the stock options relate to
the common stock of Premiere Technologies, Inc. The Company and PCI have filed
an answer and counterclaim denying all allegations of the complaint and
asserting various affirmative defenses with respect to the counts of the
complaint against the Company, and the parties are currently engaged in
discovery. The Company believes it has meritorious defenses to the plaintiffs'
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, operating results or financial condition.
On June 28, 1996, AudioFAX IP LLC ("AudioFAX") filed a complaint against
the Company and PCI in the United States District Court for the Northern
District of Georgia. In the complaint, AudioFAX alleged that the Company
manufactures, uses, sells and/or distributes certain enhanced facsimile products
which infringe three United States patents and one Canadian patent allegedly
held by AudioFAX. In the third quarter of 1996, the Company took a one-time
charge for the estimated legal fees and other costs that the Company expected to
incur to resolve this matter. On February 11, 1997, the Company entered into a
long-term, nonexclusive license agreement with AudioFAX settling the
litigation. The one-time charge was adequate to cover the actual costs of
litigation, and the cost of the license agreement is not expected to have a
material effect on the Company's earnings. See Note 13 - Subsequent Events.
On August 6, 1996, CNC, a licensing customer of the Company, was placed
into bankruptcy under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code"). On August 23, 1996, CNC filed a motion to intervene in a
separate lawsuit brought by a CNC creditor in the United States District Court
for the Southern District of New York against certain guarantors of CNC's
obligations and to file a third-party action against numerous entities,
including such CNC creditor and PCI for alleged negligent misrepresentations of
fact in connection with an alleged fraudulent scheme designed to damage CNC.
The court has not ruled on CNC's request. Based upon the bankruptcy examiner's
findings 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 trustee and
PCI recently reached a tentative agreement of all issues between the parties,
including dismissal of the above referenced lawsuit, subject to Bankruptcy Court
approval. The terms of the proposed settlement have been incorporated into a
proposed plan of reorganization filed by the trustee with the Court. Based upon
initial hearings before the Bankruptcy Court, the trustee expects to file an
amendment to the plan and disclosure statements before mid-October, 1997. 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, operating results and financial condition.
On September 20, 1996, Peter Lucina ("Lucina") filed a complaint against
the Company, Donald B. Gasgarth ("Gasgarth") and Patrick G. Jones ("Jones") in
the United States District Court for the Eastern District of Illinois. In the
complaint, Lucina alleges, among other things, that: (i) in November 1995, he
sold 1,563 shares of the Company's common stock to Gasgarth, a former director
of the Company, for $31,260; (ii) Jones offered to "facilitate" the sale; (iii)
in December 1995, the Company filed a registration statement relating to the
initial public offering of its common stock; (iv) prior to his sale of stock to
Gasgarth, neither Gasgarth nor Jones told Lucina that the Company planned an
initial public offering; and (v) the 1,563 shares sold to Gasgarth, adjusted for
the 24-to-1 stock split subsequently effected, were worth $675,216 based on the
Company's initial public offering at $18 per share in March 1996. In his
complaint, Lucina asserts violations of the Securities Exchange Act of 1934 and
the rules promulgated thereunder, the Illinois Consumer Fraud and Deceptive
Business Practices Act and common law fraud. Lucina seeks the return of 37,512
shares of common stock of the Company or, in the alternative, compensatory
damages in the amount of $975,312 with interest thereon, punitive damages in the
amount of $1 million and costs of the suit, including reasonable attorneys' fees
and other associated costs. The Company has filed an answer to the complaint
denying allegations of the complaint and asserting various defenses. Discovery
is
-24-
<PAGE>
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
continuing, and no trial date has been set. The Company believes
that it has meritorious defenses to the Lucina complaint; however, due to the
inherent uncertainties of the 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, operating results or financial condition.
On September 1, 1995, VTE settled a lawsuit for monthly payments over the
next 33 months aggregating $2.5 million plus interest at 8%. VTE originally
commenced this action to seek a declaratory judgment that no joint venture
agreement or other relationships existed with the defendant relative to the
development of any international voice messaging markets. Without admitting
liability, VTE agreed to this settlement subsequent to a jury verdict against it
for breach of contract in the amount of $5.3 million. Should VTE default on its
obligation under the settlement agreement, it may be liable for the full amount
of the jury verdict. The settlement also provides for the acceleration of
payments if certain assets are sold during the settlement payment period. VTE's
lenders agreed to waive any violation or event of default that may occur as a
result of this settlement.
12. INCOME TAXES
The difference between the statutory federal income tax rate and the
Company's effective income tax rate applied to income before income taxes and
extraordinary loss was as follows for the years ended December 31, 1994,
1995 and 1996: (in thousands)
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Income taxes at federal statutory rate (2,517) 1,689 1,552
State tax provision, net of federal benefit (370) 248 222
Utilization of net operating loss (94) 0 0
Change in valuation allowance 0 (693) 1,341
S-corporation earnings not subject to corporate
level taxes 1,961 (1,420) (1,462)
Non-taxable investment income 0 0 (723)
Other 247 0 178
Non-deductible expenses 217 220 252
------ ------ ------
Income taxes at the Company's effective rate (556) 44 1,360
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal (366) 414 3,226
State 128 76 587
International 0 25 42
Deferred:
Federal 380 (54) (3,283)
State 64 47 (553)
International (762) (464) 1,341
</TABLE>
During the year ended December 31, 1996, the Company booked a valuation
allowance related to its Voice-Tel subsidiary's investment in a foreign
jurisdiction.
During the year ended December 31, 1995, the Company reduced its valuation
reserve to zero based upon management's conclusion that it is more likely than
not that future taxable income will be sufficient to realize all net operating
loss carryforwards. At December 31, 1996, the remaining $5,959,202 of net
operating loss carryforwards relate primarily to nonqualified stock
compensation expense for tax purposes in excess of stock compensation for book
purposes, the benefit of which was credited directly to additional paid-in
capital in accordance with APB No. 25 and SFAS No. 109.
-25-
<PAGE>
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The sources of differences between the financial accounting and tax bases
of assets and liabilities which give rise to the deferred tax assets and
liabilities are as follows at December 31, 1995 and 1996: (in thousands)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Deferred tax asset:
Net operating loss $ 2,209 $ 5,959
In-process research and development 0 4,218
Unearned revenue 135 174
Accounts receivable (319) (368)
Accounts receivable reserve 42 238
Accrued expenses 1,223 1,250
Voice-Tel Pty. Ltd. deferred tax asset 0 1,723
Other assets 1,899 496
Other liabilities (101) 0
------- -------
5,088 13,690
Deferred tax liability:
Depreciation and amortization (1,464) (2,304)
Other (8) (167)
------- -------
3,616 11,219
Valuation allowance 0 (1,723)
------- -------
Net deferred tax asset $ 3,616 $ 9,496
======= =======
</TABLE>
Many of the Franchisees included herein that were acquired in conjunction
with the pooling-of-interests transactions discussed in Notes 1 and 3 were
either S-corporations or partnerships. Accordingly, in accordance with SFAS No.
109 and APB No. 16, no tax provision relating to these entities has been
included in the accompanying financial statements as these Franchisees would not
have recorded a provision had they been stand-alone entities.
The Company and its subsidiaries file a consolidated income tax return.
The Company has not paid income taxes for any of the years presented in the
accompanying financial statements. At December 31, 1996, the Company had net
operating loss carryforwards of approximately $15,280,004 expiring $439,587 in
2008, $955,846 in 2009 and $4,268,270 in 2010 and $9,616,301 in 2011.
13. SUBSEQUENT EVENTS
On February 11, 1997, the Company entered into a long-term, non exclusive
license agreement with AudioFAX settling the litigation. The one-time charge
was adequate to cover the actual costs of litigation, and the cost of the
license agreement is not expected to have a material effect on the Company's
earnings. See Note 11 - Commitments and Contingencies.
On June 12, 1997, the Company announced the completion of the acquisitions
of VTE, VTNLP, VTN, and the Franchisees. 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 transactions were structured as tax-free mergers or share
exchanges and were accounted for under the pooling-of-interests method of
accounting. The Company purchased 15 of the Franchises and the limited partner
interest in VTNLP for an aggregate of $13.9 million in cash and approximately
94,000 shares of its common stock. Accordingly, the purchase method of
accounting will be used for the 15 Franchisees and the limited partner interest
in VTNLP which did not qualify for pooling-of-interests treatment. The excess of
the purchase price over the fair value of the net assets acquired for such
entities will be recorded as an intangible asset as of the acquisition dates.
Given that the Voice-Tel Acquisitions accounted for under the purchase method of
accounting were acquired subsequent to December 31, 1996, no results of
operations or pro forma results of operations are presented as required under
paragraph 96 of APB Opinion No. 16.
On June 30, 1997, the Company sold $150 million of 5-3/4% convertible
subordinated notes due 2004 (the "Notes"). On July 30, 1997, the Company sold an
additional $22.5 million of 5-3/4% convertible subordinated notes due 2004 (the
"Option Notes", and together with the Notes, the "Convertible Notes") pursuant
to the exercise of an overallotment option. The total offering price of the
Notes was $150 million, with a discount to the underwriters of the Notes of
3.0%, and the total offering price of the Option Notes was $22.5 million with a
discount to the underwriters of the Option Notes of 3.0%. The Notes and the
Option Notes, unless previously redeemed or repurchased, are convertible at the
option of the holder at any time through the close of business on the final
maturity date into shares of common stock at a conversion price of $33.00 per
share, subject to adjustment in certain events.
In connection with the Voice-Tel Acquisitions, the Company recorded
restructuring and other special charges of $45.4 million during the quarter
ended June 30, 1997 as follows: (in thousands)
<TABLE>
<S> <C>
Transaction costs $16,599
Severance and related costs 9,514
Assets impairments 8,601
Other exit costs 10,709
-------
$45,423
=======
</TABLE>
Transaction costs are comprised of professional fees and other costs
directly associated with the Voice-Tel Acquisitions. Such costs were expensed as
required by the pooling-of-interests method of accounting. Charges for
severance, asset impairments and other exit costs result from management's plan
to restructure the operations of the Voice-Tel Acquisitions (as defined below)
under a consolidated business group model and discontinue 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 performed in each of the former
franchise businesses. Cash expenditures of $12,807,654 have been incurred
through June 30, 1997. Such expenditures consisted of $1,200,637 of severance
and related costs associated with the termination of 115 employees and
$11,607,017 of transaction and other exit costs.
-26-
