<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 27, 1998
------------------
PREMIERE TECHNOLOGIES, INC.
(Exact name of registrant
as specified in its charter)
Georgia 0-27778 59-3074176
---------------------- ----------- ------------------
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
3399 Peachtree Road, N.E.
The Lenox Building, Suite 600
Atlanta, Georgia 30326
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 262-8400
N/A
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events
Effective February 27, 1998, Premiere Technologies, Inc. (the "Company"
or "Premiere") completed the acquisition of Xpedite Systems, Inc. ("Xpedite")
pursuant to the terms of the Agreement and Plan of Merger, dated as of November
13, 1997 (the "Merger Agreement"), with Xpedite and Nets Acquisition Corp., a
wholly-owned subsidiary of Premiere ("Acquisition Sub"). Subject to the terms
and conditions of the Merger Agreement, Acquisition Sub merged with and into
Xpedite (the "Merger"), which was the surviving corporation in the Merger
and, as a result thereof, became a wholly-owned subsidiary of Premiere. In
connection with the acquisition the Company issued approximately eleven million
shares of its Common Stock.
The merger has been accounted for as a pooling of interests. Generally
accepted accounting principles prohibit giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. The supplemental
consolidated financial statements for Premiere Technologies, Inc. have been
prepared to give retroactive effect to the merger on February 27, 1998 for all
periods presented and appear herein as Exhibit 99.1.
Premiere hereby files (a) the Supplemental Consolidated Financial
Statements of Premiere Technologies, Inc., which give retroactive effect to the
merger with Xpedite for all periods presented as Exhibit 99.1, incorporated
herein by reference, (b) Management's Discussion and Analysis of Supplemental
Financial Condition and Supplemental Results of Operations of Premiere
Technologies, Inc., which gives retroactive effect to the merger with Xpedite
for all periods presented as Exhibit 99.2, incorporated herein by reference, (c)
Selected Supplemental Consolidated Financial Data of Premiere Technologies,
Inc., which gives retroactive effect to the merger with Xpedite for all periods
presented as Exhibit 99.3, incorporated herein by reference, and (d) the
Consolidated Financial Statements of Xpedite, required by Rule 3-05 of
Regulation S-X promulgated by the Securities and Exchange Commission (the
"Commission") as Exhibit 99.4 incorporated herein by reference.
The supplemental consolidated financial statements do not extend through
the date of consummation. However, they will become the historical consolidated
financial statements of Premiere Technologies, Inc., after financial statements
covering the date of consummation of the business combination are issued.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired
The Consolidated Financial Statements of Xpedite for the years ended
December 31, 1997, 1996 and 1995 are filed as Exhibit 99.4 hereto and
incorporated herein by this reference.
(b) Pro Forma Financial Information
The Supplemental Consolidated Financial Statements of Premiere for the
years ended December 31, 1997, 1996 and 1995, which gives retroactive effect to
the merger with Xpedite for all periods presented, are filed as Exhibit 99.1
hereto and incorporated herein by reference. These Supplemental Consolidated
Financial Statements are filed in lieu of pro forma financial information.
(c) Exhibits
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
99.1 Supplemental Consolidated Financial Statements of Premiere
Technologies, Inc., as described in Item 5 and Item 7(b) of this
Form 8-K/A.
99.2 Management's Discussion and Analysis of Supplemental Financial
Condition and Supplemental Results of Operations of Premiere
Technologies, Inc., as described in Item 5 of this Form 8-K/A.
99.3 Selected Supplemental Consolidated Financial Data of Premiere
Technologies, Inc., as described in Item 5 and Item 7(b) of this
Form 8-K/A.
99.4 Consolidated Financial Statements of Xpedite Systems, Inc., as
described in Item 5 and Item 7(a) of this Form 8-K/A.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf on this 10th
day of April 1998 by the undersigned hereunto duly authorized.
PREMIERE TECHNOLOGIES, INC.
By: /s/ Patrick G. Jones
-----------------------------
Patrick G. Jones
Senior Vice President of Finance
and Legal
<PAGE>
INDEX TO EXHIBITS
Exhibit Page No.
- ------- --------
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
99.1 Supplemental Consolidated Financial Statements of Premiere
Technologies, Inc. and Subsidiaries, as described in Item 5
and Item 7(b) of this Form 8-K/A.
99.2 Management's Discussion and Analysis of Supplemental Financial
Condition and Supplemental Results of Operations of Premiere
Technologies, Inc. and Subsidiaries, as described in Item 5 of this
Form 8-K/A.
99.3 Selected Supplemental Consolidated Financial Data of Premiere
Technologies, Inc. and Subsidiaries, as described in Item 5 of this
Form 8-K/A.
99.4 Consolidated Financial Statements of Xpedite Systems, Inc., as
described in Item 5 and Item 7(a) of this Form 8-K/A.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated March 13, 1998 incorporated by reference in this Current
Report on Form 8-K/A, into the Company's previously filed Registration
Statements (File No. 333-11281, File No. 333-17593, File No. 333-29787, File
No. 333-36557 and File No. 333-39693).
ARTHUR ANDERSEN LLP
April 10, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-17593, Form S-8 No. 333-11281, Form S-8 No. 333-39693, Form S-
8 No. 333-29787 and Form S-3 No. 333-36557), of Premiere Technologies, Inc. and
in the related prospectuses of our report dated April 6, 1998, with respect to
the consolidated financial statements of Xpedite Systems, Inc. for the three
years ended December 31, 1997 included in the current report (Form 8-K/A) of
Premiere Technologies, Inc., filed with the Securities and Exchange Commission.
ERNST & YOUNG, LLP
MetroPark, New Jersey
April 6, 1998
<PAGE>
EXHIBIT 99.1
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Premiere Technologies, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
PREMIERE TECHNOLOGIES, INC. (a Georgia corporation) AND SUBSIDIARIES as of
December 31, 1997 and 1996 and the related supplemental consolidated statements
of operations, shareholders' equity (deficit) and cash flows for the years ended
December 31, 1997, 1996 and 1995. The supplemental consolidated statements give
retroactive effect to the merger with Xpedite Systems, Inc. on February 27,
1998, which has been accounted for as a pooling of interests as described in
Note 3. These supplemental financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
supplemental 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 supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Premiere Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996
and the results of their operations and their cash flows for the years ended
December 31, 1997, 1996 and 1995, after giving retroactive effect to the merger
with Xpedite Systems, Inc. as described in Note 3, all in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 13, 1998
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents.................................... $ 43,731 $ 22,616
Marketable securities................................... 154,569 67,900
Accounts receivable (less allowances of $7,248 and
$3,286, respectively).................................. 55,040 40,353
Prepaid expenses and other.............................. 10,589 13,009
Deferred income taxes, net.............................. 27,957 6,072
--------- --------
Total current assets.................................. 291,886 149,950
--------- --------
PROPERTY AND EQUIPMENT, NET............................... 87,428 66,008
--------- --------
OTHER ASSETS
Deferred income taxes, net.............................. 544 3,534
Strategic alliances and investments, net................ 54,328 31,982
Goodwill, net........................................... 104,244 14,823
Intangibles and other................................... 22,937 17,035
--------- --------
$561,367 $283,332
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................ $ 46,281 $ 30,109
Deferred revenue........................................ 7,139 419
Accrued taxes........................................... 12,639 17,603
Accrued liabilities..................................... 34,635 23,977
Revolving line of credit, net of issue costs............ 128,456 --
Current maturities of long-term debt.................... 2,941 23,931
Current portion of capital lease obligations............ 3,302 4,061
Accrued restructuring and other special charges......... 22,324 --
--------- --------
Total current liabilities............................. 257,717 100,100
--------- --------
LONG-TERM LIABILITIES
Long-term debt.......................................... 854 46,266
Obligations under capital lease......................... 2,708 7,776
Convertible subordinated notes, net of issue costs...... 167,270 --
Other accrued liabilities............................... 11,879 3,809
--------- --------
Total long-term liabilities........................... 182,711 57,851
--------- --------
COMMITMENTS AND CONTINGENCIES............................. -- --
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 150,000,000 shares
authorized, 44,670,619 and 41,933,781 shares issued and
outstanding, respectively.............................. 447 419
Additional paid-in capital.............................. 246,255 211,582
Note receivable, shareholder............................ (973) --
Cumulative translation adjustment....................... (3,551) (117)
Accumulated deficit..................................... (121,239) (86,503)
--------- --------
Total shareholders' equity............................ 120,939 125,381
--------- --------
$ 561,367 $283,332
========= ========
</TABLE>
Accompanying notes are integral to these supplemental financial statements.
1
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES......................................... $395,505 $327,322 $203,227
COST OF SERVICES................................. 127,550 101,394 59,616
-------- -------- --------
GROSS PROFIT..................................... 267,955 225,928 143,611
-------- -------- --------
OPERATING EXPENSES
Selling, general and administrative............ 170,291 163,769 111,672
Depreciation and amortization.................. 29,260 22,621 13,515
Restructuring and other special charges........ 90,099 11,030 53,000
Accrued settlement costs....................... 1,650 1,250 2,500
-------- -------- --------
Total operating expenses..................... 291,300 198,670 180,687
-------- -------- --------
OPERATING INCOME (LOSS).......................... (23,345) 27,258 (37,076)
-------- -------- --------
OTHER INCOME (EXPENSE)
Interest, net.................................. (2,561) (4,845) (4,090)
Gain on contract termination................... -- -- 1,193
Other, net..................................... 637 (31) 336
-------- -------- --------
Total other income (expense)................. (1,924) (4,876) (2,561)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM............................... (25,269) 22,382 (39,637)
PROVISION FOR (BENEFIT FROM) INCOME TAXES........ (2,005) 8,491 2,756
-------- -------- --------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM...... (23,264) 13,891 (42,393)
-------- -------- --------
EARLY EXTINGUISHMENT OF LONG TERM DEBT, NET OF
INCOME TAX BENEFIT
OF $385......................................... (577) -- --
-------- -------- --------
NET INCOME (LOSS)................................ $(23,841) $13,891 $(42,393)
======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE
Income (loss) before extraordinary item........ $ (0.55) $ 0.37 $ (1.52)
Early extinguishment of long term debt......... (0.01) -- --
-------- -------- --------
Net income (loss).............................. $ (0.56) $ 0.37 $ (1.52)
======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE
Income (loss) before extraordinary item........ $ (0.55) $ 0.34 $ (1.52)
Early extinguishment of long term debt......... (0.01) -- --
-------- -------- --------
Net income (loss).............................. $ (0.56) $ 0.34 $ (1.52)
======== ======== ========
</TABLE>
Accompanying notes are integral to these supplemental financial statements.
2
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A TOTAL
(FORMERLY ADDITIONAL STOCK NOTE CUMULATIVE STOCK SHAREHOLDERS'
SERIES 1994) COMMON PAID-IN- SUBSCRIPTIONS RECEIVABLE TRANSLATION WARRANTS ACCUMULATED EQUITY
PREFERRED STOCK STOCK CAPITAL RECEIVABLE SHAREHOLDER ADJUSTMENT OUTSTANDING DEFICIT (DEFICIT)
--------------- ------ ---------- ------------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER
31, 1994........ $ 3,907 $210 $54,352 $ (75) $ -- $ (27) $ 244 $(52,629) $ 5,982
Common stock
issued on
subscription.... -- 56 2,306 (2,362) -- -- -- -- --
Issuance of
Xpedite common
stock for
acquisitions.... -- 15 18,256 -- -- -- -- -- 18,271
Exercise of stock
options......... -- 8 445 -- -- -- -- -- 453
Income tax
benefit from
exercise of
stock options... -- -- 2,622 -- -- -- -- -- 2,622
Other equity
transactions,
primarily S-
corporation
distributions .. -- -- (143) -- -- -- -- (1,789) (1,932)
Translation
adjustment...... -- -- -- -- -- (48) -- -- (48)
Net loss......... -- -- -- -- -- -- -- (42,393) (42,393)
------- ---- -------- ------- ----- ------- ----- --------- --------
BALANCE, DECEMBER
31, 1995........ $ 3,907 $289 $ 77,838 $(2,437) $ -- $ (75) $ 244 $(96,811) $(17,045)
Conversion of
Series A
Preferred Stock
................ $(3,907) 31 3,876 -- -- -- -- -- --
Conversion of
Xpedite
subordinated
notes to common
stock........... -- 4 5,190 -- -- -- -- -- 5,194
Conversion of
stock warrants.. -- 6 238 -- -- -- (244) -- --
Payment of
subscriptions
receivable...... -- -- -- 2,437 -- -- -- -- 2,437
Issuance of
common stock:
Initial public
offering....... -- 46 74,571 -- -- -- -- -- 74,617
Acquisition
(TeleT)........ -- 5 7,495 -- -- -- -- -- 7,500
Strategic
investment
(WorldCom)..... -- 21 25,174 -- -- -- -- -- 25,195
Secondary
offering
(Xpedite)...... -- 7 10,306 -- -- -- -- -- 10,313
Exercise of
stock options.. -- 10 674 -- -- -- -- -- 684
Income tax
benefit from
exercise of
stock options... -- -- 6,886 -- -- -- -- -- 6,886
Other equity
transactions,
primarily S-
corporation
distributions .. -- -- (666) -- -- -- -- (3,583) (4,249)
Translation
adjustment...... -- -- -- -- -- (42) -- -- (42)
Net income....... -- -- -- -- -- -- -- 13,891 13,891
------- ---- -------- ------- ----- ------- ----- --------- --------
BALANCE, DECEMBER
31, 1996........ $ -- $419 $211,582 $ -- $ -- $ (117) $ -- $ (86,503) $125,381
Payment of debt
in common stock
(Voice-Tel
Acquisitions)... -- 5 11,577 -- -- -- -- -- 11,582
Issuance of
common stock:
Voice-Tel
Acquisitions... -- 2 789 -- -- -- -- -- 791
Exercise of
stock options.. -- 21 6,432 -- -- -- -- -- 6,453
Income tax
benefit from
exercise of
stock options... -- -- 15,420 -- -- -- -- -- 15,420
Issuance of
shareholder note
receivable...... -- -- -- -- (973) -- -- -- (973)
Recapitalization
of S-Corporation
retained
earnings........ -- -- 735 -- -- -- -- (735) --
Other equity
transactions,
primarily S-
corporation
distributions... -- -- (280) -- -- -- -- (10,160) (10,440)
Translation
adjustment...... -- -- -- -- -- (3,434) -- -- (3,434)
Net loss......... -- -- -- -- -- -- -- (23,841) (23,841)
------- ---- -------- ------- ----- ------- ----- --------- --------
BALANCE, DECEMBER
31, 1997........ $ -- $447 $246,255 $ -- $(973) $(3,551) $ -- $(121,239) $120,939
======= ==== ======== ======= ===== ======= ===== ========= ========
</TABLE>
Accompanying notes are integral to these supplemental financial statements.
3
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................. $ (23,841) $ 13,891 $(42,393)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization................. 29,260 22,621 13,515
Payments for restructuring, accrued
settlement costs and other special charges... (42,792) -- --
Restructuring, accrued settlement costs and
other special charges........................ 91,749 12,280 55,500
Write-off of capitalized debt issue costs..... 961 -- --
Deferred income taxes......................... (4,566) (3,171) (2,330)
Changes in assets and liabilities:
Accounts receivable, net..................... (10,387) (10,850) (4,536)
Prepaid expenses and other................... 1,074 (1,415) (4,958)
Accounts payable and accrued expenses........ (5,410) 15,676 5,106
--------- --------- --------
Total adjustments........................... 59,889 35,141 62,297
--------- --------- --------
Net cash provided by operating activities... 36,048 49,032 19,904
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchase) redemption of marketable
securities, net.............................. (86,669) (69,719) 2,535
Strategic alliances and investments........... (24,066) (4,777) --
Purchase of property and equipment............ (43,253) (31,141) (16,085)
Cash paid for intangibles..................... -- (6,193) --
Acquisitions.................................. (94,521) (2,870) (46,199)
Other ........................................ 118 622 652
--------- --------- --------
Net cash used in investing activities....... (248,391) (114,078) (59,097)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Initial public offering, net.................. -- 74,617 --
Issuance of common stock...................... -- 10,314 --
Payment of stock subscriptions receivable..... -- 2,437 --
Exercise of stock options..................... 15,566 589 488
Shareholder distributions, primarily S-
corporation distributions.................... (9,360) (3,550) (1,480)
Principal payments under borrowing
arrangements................................. (118,672) (19,603) (8,944)
Proceeds from convertible subordinated notes.. 172,500 -- --
Debt issue costs.............................. (7,214) -- --
Issuance of debt ............................. 183,904 6,901 52,018
Issuance of shareholder note receivable....... (973) -- --
Other ........................................ (1,763) (1,343) (205)
--------- --------- --------
Net cash provided by financing activities... 233,988 70,362 41,877
--------- --------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........ (530) (19) (33)
NET INCREASE IN CASH AND EQUIVALENTS........... 21,115 5,297 2,651
CASH AND EQUIVALENTS, beginning of period...... 22,616 17,319 14,668
--------- --------- --------
CASH AND EQUIVALENTS, end of period............ $ 43,731 $ 22,616 $ 17,319
========= ========= ========
</TABLE>
Accompanying notes are integral to these supplemental financial statements.
4
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND ITS BUSINESS
Premiere Technologies, Inc. and subsidiaries ("Company") is a leading
provider of enhanced communications services that simplify communications for
businesses and individuals. The Company's enhanced communication services
include 800-based services, voice messaging, full service conference calling,
enhanced document distribution (including fax and e-mail) and internet-based
communications which the Company delivers through its private network. The
Company's private network integrates these enhanced communication services by
utilizing digital switching technology, frame relay and internet protocols.
Management believes a network-based solution provides the Company's customers
the flexibility of accessing and utilizing the Company's services through a
computer or telephone and allows them to avoid costly investment in equipment.
The Company markets its services globally through its direct sales force, direct
marketing and direct response campaigns and strategic partner programs. The
Company's operation centers consist of points of presence in over 250 locations
in over 25 countries. The Company began operations in 1991 and came public in
March 1996.
In June 1997, the Company completed the acquisitions 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 (Franchisees). The acquisitions of VTE, VTNLP, VTN and
the Franchisees are sometimes referred to collectively as the "Voice-Tel
Acquisitions". The Voice-Tel entities are engaged in interactive data
and voice messaging utilizing a digital frame relay network with points of
presence allowing to offer enhanced communications services through local
access in the United States, Canada, Australia and New Zealand. The majority
of the Voice-Tel Acquisitions were accounted for as pooling-of-interests. The
financial statements have been restated for all periods presented to include
the operations of the acquired entities accounted for as pooling-of-interests.
See Note 3--Acquisitions.
In September 1997, the Company acquired VoiceCom Holdings, Inc.
("VoiceCom"), a provider of 800-based and voice messaging communication
services. This transaction has been accounted for as a pooling-of-interests
and the Company's financial statements have been restated for all periods
presented to include the operations of VoiceCom. See Note 3--Acquisitions.
Effective February 27, 1998, the Company announced shareholder approval of
the previously announced definitive merger agreement with Xpedite Systems, Inc.
(Xpedite), a leading independent worldwide provider of enhanced document
distribution services. In connection with the merger the Company issued
approximately eleven million shares of its common stock. This transaction has
been accounted for as a pooling-of-interests and the Company's financial
statements have been restated for all periods presented to include the
operations of Xpedite. See Note 3--Acquisitions.
2. SIGNIFICANT ACCOUNTING POLICIES
Supplemental Financial Statements
These supplemental financial statements will be the same as the restated
statements that will be issued after postmerger operating results have been
published.
Accounting Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles 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.
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 Equivalents
Cash and equivalents include cash and highly liquid investments with a
maturity of three months or less.
5
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Marketable Securities
The Company follows 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, 1997 and 1996, investments
consisted of commercial paper, United States Treasury bills, municipal bonds,
coupon municipals, auction rate preferred investments with various maturities
and 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, 1997 or 1996.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided under
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
seven to ten years for office equipment, five to ten years for computer and
telecommunications equipment and 25 years for buildings. 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. The Company has capitalized costs
related to the development of proprietary software utilized to provide enhanced
communications services. 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 these costs by the greater of (a) the ratio that
current gross revenues for a service offering bear to the total of current and
anticipated future gross revenues for that service offering or (b) the straight-
line method over the remaining estimated life of the service offering.
Goodwill
Goodwill represents excess of the cost of businesses acquired over fair
value of net identifiable assets at date of the acquisition and is amortized
using the straight line method over lives ranging from 10 to 40 years.
Valuation of Long-Lived Assets
Management periodically evaluates carrying values of long-lived assets,
including property and equipment, strategic investments, goodwill and other
intangible assets, to determine whether events and circumstances indicate that
these assets have been impaired. An asset is considered impaired when
undiscounted cash flows expected to be realized from such asset are less than
its carrying value. In that event, a loss is determined based on the amount the
carrying value exceeds the fair market value of such asset.
Strategic Alliances and Investments
The Company has entered into alliances with and made investments in various
companies that are engaged in telecommunications and emerging technologies
that are complementary with the Company's core businesses and which further
the Company's strategic plan. These alliances and investments involve
outsourcing initiatives, equity investments and innovative marketing programs.
Each of the equity investments represent less than a twenty percent ownership
interest and are therefore carried at cost. Intangible assets representing
strategic alliances are amortized over the term of the arrangement and such
investments are carried net of accumulated amortization. See Note 5--Strategic
Alliances and Investments.
Stock-Based Compensation Plans
The Company recognizes stock based compensation using the intrinsic value
method as permitted by SFAS No. 123. Accordingly, no compensation expense is
recorded for stock based awards issued at market value at the date such awards
are granted. The Company makes pro forma disclosures of net income and net
income per share as if the market value method was followed. See Note 11--
Stock Based Compensation Plans.
6
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
The Company recognizes revenues when services are provided. Revenues consist
of fixed monthly fees, usage fees generally based on per minute or per page
rates, service initiation fees as well as license fees earned from companies
which have license arrangements for use of the Company's computer telephony
platform, sales of fax message handling systems and royalties for the use of
certain Company software. Revenues from sales of fax message handling systems
are recognized when risk of ownership and title pass to the customer. Deferred
revenue consists of billings made to customers in advance of the time services
are rendered.
Income Taxes
Deferred income taxes are recorded using enacted tax laws and rates for the
years in which income taxes are expected to be paid. Deferred income taxes are
provided when there is a temporary difference between the recognition of items
in income for financial reporting and income tax purposes.
Net Income (Loss) Per Share
In 1997, the Company adopted SFAS No. 128, "Earnings per Share." That
statement requires the disclosure of basic net income (loss) per share and
diluted net income (loss) per share. Basic net income (loss) per share is
computed by dividing net income (loss) available to common shareholders by the
weighted-average number of common shares outstanding during the period and
does not include any other potentially dilutive securities. Diluted net income
(loss) per share gives effect to all potentially dilutive securities. The
Company's convertible subordinated notes and stock options are potentially
dilutive securities. In 1997, both potentially dilutive securities were anti-
dilutive and therefore are not included in diluted net income (loss) per
share. A reconciliation of basic net income (loss) per share to diluted net
income (loss) per share follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- -------------------------- ----------------------------
WEIGHTED WEIGHTED NET WEIGHTED NET
NET AVERAGE NET LOSS NET AVERAGE INCOME AVERAGE LOSS
LOSS SHARES PER SHARE INCOME SHARES PER SHARE NET LOSS SHARES PER SHARE
-------- -------- --------- ------- -------- --------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)....... $(23,841) -- -- $13,891 -- -- $(42,393) -- --
Less: Preferred stock
dividends............... -- -- -- 29 -- -- 308 -- --
-------- ------ ------ ------- ------ ----- -------- ------ ------
Basic net income
(loss)................. $(23,841) 42,920 $(0.56) $13,862 37,199 $0.37 $(42,701) 28,002 $(1.52)
======== ====== ====== ======= ====== ===== ======== ====== ======
Dilutive Securities
Stock options........... -- -- -- -- 4,034 -- -- -- --
-------- ------ ------ ------- ------ ----- -------- ------ ------
Diluted net income
(loss) ................ $(23,841) 42,920 $(0.56) $13,862 41,233 $0.34 $(42,701) 28,002 $(1.52)
======== ====== ====== ======= ====== ===== ======== ====== ======
</TABLE>
Foreign Currency Translation
Assets and liabilities of the Company's non-U.S. subsidiaries are translated
at the exchange rate at the balance sheet date. Revenues and expenses are
translated at average rates of exchange prevailing during the year. Cumulative
translation adjustments that result from the process of translating the non-
U.S. subsidiary financial statements are reported as a component of
shareholders' equity. The cumulative translation adjustments from permanently
invested intercompany balances totalled approximately $2.5 million at December
31, 1997.
Foreign Exchange Forward Contracts
Foreign exchange forward contracts are legal agreements between two parties
to purchase and sell a foreign currency, for a price specified at the contract
date, with delivery and settlement in the future. The Company uses such
contracts to hedge risk of changes in foreign currency exchange rates
associated with certain obligation amounts due to the Company which are
denominated in foreign currency. The Company held contracts for German marks
of approximately $2.3 million at December 31, 1996 associated with an
investment in an affiliate. Contracts outstanding at December 31, 1996 were
settled in 1997. There were no open contracts
7
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
at December 31, 1997. The gain resulting from termination of these
contracts prior to their stated maturity are recognized at the termination
date based upon the difference between the contract rate and prevailing rate
on that date and is included in other income in the accompanying statement of
operations.
Concentration of Credit Risk
Revenues from one customer of the Company represented approximately $40.1
million, $46.8 million and $40.6 million of the Company's consolidated
revenues for 1997, 1996 and 1995, respectively.
New Accounting Pronouncements
During 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Both are effective for fiscal years beginning after December 15,
1997. Management is currently studying the impact that SFAS No. 131 will have
on its financial statement disclosures. The adoption of SFAS No. 130 will not
affect results of operations or financial position, but will require cumulative
translation adjustments, which are currently reported in shareholders' equity,
to be included in other comprehensive income and the disclosure of total
comprehensive income.
Reclassifications
Certain prior year amounts have been reclassified to conform to fiscal 1997
presentation. These changes had no impact on previously reported results of
operations.
3. ACQUISITIONS
Xpedite Acquisition
During the first quarter of 1998, the Company acquired Xpedite Systems, Inc.
through the exchange of approximately eleven million shares of its common stock
for all of the issued and outstanding common shares of Xpedite. This transaction
was accounted for as a pooling-of-interests and the Company's financial
statements have been restated for all periods presented to include Xpedite
Systems, Inc.
During 1997, 1996 and 1995 Xpedite made several acquisitions. These
acquisitions, all of which were accounted for as purchases, are as follows:
<TABLE>
<CAPTION>
ACQUISITION PURCHASE
DATE COMPANY NAME PRICE
----------- ------------ -------------
<S> <C> <C>
December 1997 Xpedite Systems Limited ("XSL") $84.8 million
November 1995 Swift Global Communications, Inc. ("Swift") $23.2 million
November 1995 ViTel International Holding Company, Inc. ("Vitel") $41.5 million
November 1995 Comwave Communications AG ("Comwave") $11.3 million
</TABLE>
- ----------
On December 17, 1997, Xpedite acquired substantially all of the outstanding
capital stock of XSL for approximately $87.8 million in cash. XSL is a leading
supplier of enhanced document distribution services in the United Kingdom.
Excess of the purchase price over fair value of identifiable assets acquired of
approximately $79.1 million is recorded as goodwill and is being amortized on a
straight-line basis over forty years.
In January 1998, Xpedite acquired substantially all of the outstanding shares
of capital of Xpedite Systems, GmbH ("XSG"). See Note 19--Subsequent Events.
A portion of the purchase price of the November 1995 acquisitions of Swift,
Vitel and Comwave included the issuance of approximately 1.4 million shares of
common stock and subordinated notes payable with a carrying value of
approximately $4.9 million In connection with these acquisitions, approximately
$53.0 million of the purchase price was allocated to in-process research and
development costs. Since the technological feasibility of the in-process
research and development costs had not yet been established and the technology
had no alternative future use, this cost was expensed as of the acquisition
date. Swift, Vitel and Comwave provide enhanced document distribution services
in Europe and Asia/Pacific.
During 1996, the Company paid an aggregate of approximately $6.2 million for
various assets and customer portfolios through Xpedite.
8
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
VoiceCom Acquisition
During the third quarter of 1997, the Company acquired VoiceCom through the
issuance of approximately 446,000 shares of its common stock. This transaction
was accounted for as a pooling-of-interests and the Company's financial
statements have been restated for all periods presented to include the
operations of VoiceCom.
Voice-Tel Acquisitions
In June 1997, the Company completed the Voice-Tel Acquisitions. The Company
issued approximately 7.4 million shares of its common stock, paid
approximately $16.2 million in cash and assumed approximately $21.3 million in
indebtedness, net of cash acquired.
Most of the transactions were structured as tax-free mergers or share
exchanges and were accounted for under the pooling-of-interests method of
accounting. Accordingly, the financial results of the Company have been
restated for all periods presented to include the results of operations of the
Voice-Tel Acquisitions that were accounted for as pooling-of-interests.
The Company purchased 15 of the Franchisees and the limited partner interest
in VTNLP for an aggregate of approximately $15.5 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 is recorded as an
intangible asset.
A reconciliation of previously reported operating results to those restated
for pooling-of-interests transactions is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Revenue:
Premiere, as previously reported............... $229,352 $ 52,079 $22,326
Voice-Tel Acquisitions......................... -- 90,075 68,690
VoiceCom....................................... -- 55,320 56,527
Xpedite........................................ 166,153 129,848 55,684
-------- -------- --------
Premiere, as restated........................ $395,505 $327,322 $203,227
-------- -------- --------
Net income (loss):
Premiere, as previously reported............... $(25,375) $ (956) $ 1,918
Voice-Tel Acquisitions......................... -- 3,972 3,006
VoiceCom....................................... -- 442 (753)
Xpedite........................................ 1,534 10,433 $(46,564)
-------- -------- --------
Premiere, as restated........................ $(23,841) $ 13,891 $(42,393)
-------- -------- --------
Net income (loss) per share:
Premiere, as previously reported
Basic......................................... $ (0.78) $ (0.05) $ 0.13
======== ======== ========
Diluted....................................... $ (0.78) $ (0.05) $ 0.12
======== ======== ========
Premiere, as restated
Basic......................................... $ (0.56) $ 0.37 $ (1.52)
======== ======== ========
Diluted....................................... $ (0.56) $ 0.34 $ (1.52)
======== ======== ========
</TABLE>
TeleT Acquisition
On September 18, 1996, the Company purchased substantially all of the assets
and business operations of TeleT Communications LLC ("TeleT") for 498,187
shares of the Company's common stock and approximately $2.9 million in cash.
TeleT was an Internet-based technology development company focused on the
integration of computers and telephones.
In connection with this acquisition, the Company allocated approximately
$11.0 million of the purchase price to research and development projects which
had not yet reached technological feasibility and had no
9
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
alternate future use. This allocation was based on values determined by an
independent appraisal. See also Note 16--Restructuring and Other Special
Charges.
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1997, 1996 and 1995 assume the acquisitions accounted
for as purchases of Xpedite Systems Limited by Xpedite Systems, Inc., the Voice-
Tel Entities and TeleT occurred as of January 1, 1996, and the purchase
accounting acquisitions of Swift Global Communications, Inc., ViTel
International Holding Company, Inc. and Comwave Communications AG by Xpedite
Systems, Inc. occurred as of January 1, 1995 exclusive of the charge for
purchased research and development (in thousands, except per share data).
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................... $425,673 $353,004 $254,642
Net income (loss) before extraordinary
(loss)..................................... $(20,375) $ 19,224 $ 6,374
Net income (loss)........................... $(21,312) $ 19,224 $ 6,374
Basic net income (loss) per share........... $ (0.50) $ 0.52 $ 0.22
Diluted net income (loss) per share......... $ (0.50) $ 0.47 $ 0.20
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Computer and telecommunications equipment.............. $130,785 $103,482
Office equipment....................................... 11,033 9,841
Leasehold improvements................................. 8,983 6,628
Construction in progress............................... 13,926 1,450
Land................................................... 76 76
Building............................................... 1,927 104
-------- --------
166,730 121,581
Less accumulated depreciation.......................... 79,302 55,573
-------- --------
Property and equipment, net............................ $ 87,428 $ 66,008
======== ========
</TABLE>
Assets under capital leases included in property and equipment at December
31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Telecommunications equipment............................. $19,244 $19,038
Office equipment......................................... 998 --
------- -------
20,242 19,038
Less accumulated depreciation............................ 12,240 8,292
------- -------
Property and equipment, net.............................. $ 8,002 $10,746
======= =======
</TABLE>
5. STRATEGIC ALLIANCES AND INVESTMENTS
Strategic alliances and investments at December 31 is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
WorldCom................................................. $29,972 $29,972
Other intangible assets.................................. 18,500 --
Less accumulated amortization............................ 1,878 158
------- -------
46,594 29,814
Equity investments....................................... 7,734 2,168
------- -------
$54,328 $31,982
======= =======
</TABLE>
10
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In November 1996, the Company entered into a strategic alliance agreement
with WorldCom, Inc. (WorldCom), the fourth largest long-distance carrier in
the United States. Under the agreement, WorldCom is required, among other
things, to provide the Company with the right of first opportunity to provide
enhanced computer telephony products for a period of at least 25 years. In
connection with 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 approximately $4.7 million in cash.
The Company periodically reviews this asset for impairment. Based on such
reviews, management believes that this intangible asset is appropriately
valued. Management will continue to review this intangible periodically, and
there can be no assurance that future reviews will not require a write down of
this asset.
Intangible assets and equity investments classified as strategic alliances
and investments consist of initiatives funded by the Company to further its
strategic plan. These investments and alliances involve emerging technologies,
such as telemedicine and the internet, as well as marketing alliances and
outsourcing programs designed to reduce costs and develop new markets and
distribution channels for the Company's products. Costs classified as
intangible assets are being amortized over seven years which management
believes matches the revenues produced from and periods benefited by the
related programs. All equity investments held by the Company in other
organizations represent a less than 20 percent ownership and are being
accounted for under the cost method.
6. REVOLVING LINE OF CREDIT
On December 17, 1997 Xpedite entered into a credit agreement ("Credit
Agreement") with The Bank of New York and NationsBank, N.A. which provides a
$150 million revolving credit facility ("Revolver"), a $70 million portion of
which is available for pounds sterling borrowings ("Sterling Sublimit"). Xpedite
and one of its wholly-owned subsidiaries can borrow under the Revolver.
Borrowings on the Revolver were used to repay existing indebtedness of the
Company, pay fees incurred in connection with this credit facility, fund the
purchases of XSL and XSG. See Note 3--Acquisitions and Note 19--Subsequent
Events. Issue costs consisting of banking, legal and other fees of approximately
$1.2 million incurred in connection with the Revolver are being amortized over
the life of the credit agreement.
At the Company's option, the Revolver bears interest at either (a) the "Base
Rate" plus an "Applicable Margin" or (b) the "Eurocurrency Rate" plus an
"Applicable Margin" (as defined in the Credit Agreement). The Applicable Margin
will be adjusted on the Company's financial performance during the term of the
Credit Agreement. The interest rate in effect at December 31, 1997 for "Base
Rate" borrowings was 8.875% per annum and for "Eurocurrency Rate" borrowings was
7.5% per annum. Borrowings under the Credit Agreement become due and payable and
the borrowing commitment terminates on December 16, 1998. Substantially all of
the assets of Xpedite collateralize the Revolver. The Credit Agreement contains
certain covenants which include maintaining minimum financial ratios. Xpedite
was in compliance with all such financial covenants at December 31, 1997.
7. LONG-TERM DEBT
Long-term debt at December 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Notes payable to banks, interest ranging from 2% to 15%......... $ 665 $50,078
Notes payable to shareholders and individuals, interest ranging
from 5% to 16%................................................. 3,130 20,119
------ -------
3,795 70,197
Less current portion............................................ 2,941 23,931
------ -------
$ 854 $46,266
====== =======
</TABLE>
11
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Notes payable to shareholders and individuals consist principally of
indebtedness assumed by the Company in connection with the Voice-Tel and
VoiceCom acquisitions. A majority of these obligations were repaid in 1997 in
connection with the acquisitions. The Company issued approximately 484,000
shares to redeem approximately $11.6 million of such indebtedness in connection
with the acquisitions.
Xpedite entered into a credit agreement ("Old Credit Agreement") which
provided a $40.0 million term loan to finance the acquisition of Swift, ViTel
and Comwave in November 1995. See Note 3 -- Acquisitions. The term loan had
scheduled payments in quarterly installments of $1.3 million increasing
periodically to $2.3 million with a final payment in August 2001. During 1996,
Xpedite made prepayments of principal on the term loan amounting to $3.3
million. The credit agreement also provided for a $5.0 million revolving loan
limited to 80% of eligible accounts receivable, as defined. Amounts outstanding
under this credit agreement were repaid in 1997 with borrowings on the Revolver.
Unamortized debt issue costs of approximately $576,802 (net of income tax
benefit of approximately $384,535) related to the Old Credit Agreement were
written-off and recorded as an extraordinary item in the consolidated statement
of operations for the year ended December 31, 1997.
In addition to the Revolver, the Company has lines of credit with two banks,
that provide committed borrowing facilities aggregating up to $11.0 million.
Interest rates on these lines of credit are prime and prime plus 2%. Commitment
fees under these arrangements are not significant. There were no borrowings
outstanding under these arrangements at December 31, 1997.
Maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1998.................................. $2,941
1999.................................. 515
2000.................................. 160
2001.................................. 120
2002.................................. 59
------
$3,795
======
</TABLE>
8. CONVERTIBLE SUBORDINATED NOTES
In July 1997, the Company issued convertible subordinated notes
("Convertible Notes") of $172.5 million which mature in 2004 and bear interest
at 5 3/4%. The Convertible Notes are convertible at the option of the holder
into common stock at a conversion price of $33 per share, through the date of
maturity, subject to adjustment in certain events. The Convertible Notes are
redeemable by the Company beginning in July 2000 at a price of 103% of the
conversion price declining to 100% at maturity with accrued interest. Issue
costs consisting of investment banking, legal and other fees of approximately
$6.0 million incurred in connection with the Convertible Notes are being
amortized on a straight-line basis over the life of the note.
9. FINANCIAL INSTRUMENTS
The carrying amount of cash and equivalents, marketable securities, accounts
receivable and payable and accrued liabilities approximates fair value due to
the short maturity of these instruments.
The value of foreign currency contracts are based on quoted market prices.
Carrying amounts of foreign currency contracts does not vary materially from
fair value at December 31, 1996. There were no foreign currency contracts
outstanding at December 31, 1997.
The carrying amounts of notes payable and capital lease obligations does not
vary materially from fair value at December 31, 1997 and 1996.
12
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SHAREHOLDERS' EQUITY
On January 18, 1996, the holder of the Series A Preferred Stock elected to
convert all of the shares of the Series A Preferred Stock into 3,095,592
shares of the Company's 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 years ended December 31, 1995 and 1996, respectively. 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 1997 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 ("Code").
Approximately $15.4 million and $6.9 million were recorded as increases in
additional paid-in capital reflecting tax benefits to be realized by the
Company as a result of the exercise of such options during the years ended
December 31, 1997 and 1996, respectively.
The Company made distributions to shareholders of approximately $9.4 million,
$3.6 million and $1.5 million in the years ended December 31, 1997, 1996 and
1995. These distributions were made to shareholders of Voice-Tel and VoiceCom in
periods prior to their acquisition by the Company. Such distributions consisted
principally of amounts paid to shareholders of S-Corporations in connection with
their responsibility to pay income tax on the proportionate share of taxable
income they were required to include in their individual income tax return. Upon
acquisition by the Company, these S-Corporations became subject to income tax.
Accumulated earnings of S-Corporations at the date of acquisition have been
reclassified as additional paid-in capital representing the recapitalization of
these entities.
In 1995, the Company declared a 24-to-1 stock split on its common stock. In
addition, each outstanding share of Series 1994 Preferred Stock was converted
into one share of Series A Preferred Stock.
In August 1996, Xpedite completed an offering of approximately 839,000 shares
of its common stock, at a price of $16.09 per share, less underwriting discounts
and commissions. Of the total shares sold, Xpedite issued approximately 641,000
shares and certain stockholders ("Selling Stockholders") sold approximately
198,000 shares. In September 1996, the underwriters exercised their over-
allotment option, resulting in the issuance by Xpedite of an additional 96,100
shares of common stock, and the sale of an additional 29,708 shares by the
Selling Stockholders. Proceeds to the Company from this offering, net of
underwriting fees, amounted to approximately $11.2 million, of which
approximately $3.4 million was used to repay debt and the balance was used for
other expenses related to the offering, working capital and general corporate
purposes.
11. STOCK BASED COMPENSATION PLANS
The Company has five stock based compensation plans, (1) Premiere's 1994 Stock
Option Plan, (2) Premiere's 1995 Stock Plan, (3) Xpedite's 1993 Plan, (4)
Xpedite's 1996 Plan and (5) Xpedite's Officer's Plan, which provide for the
issuance of options, warrants or stock appreciation rights to directors, key
employees and non-employee consultants of the Company. These plans are
administered by a committee consisting of members of the board of directors of
the Company.
Options for all 960,000 shares of common stock available under Premiere's 1994
Stock Option Plan have been granted. Generally, all such options are non-
qualified, provide for an exercise price equal to fair market value at date of
grant, vest ratably over three years and expire eight years from date of
grant.
13
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Premiere's 1995 Stock Plan provides for the issuance of stock options, stock
appreciation rights (SARs) and restricted stock to employees. A total of
1,500,000 shares of common stock have been reserved in connection with the
plan. Options issued under the plan may be either incentive stock options,
which permit income tax deferral upon exercise of options, or nonqualified
options not entitled to such deferral.
In January 1996, Xpedite established an incentive stock option plan for its
officers and employees ("Xpedite's 1996 Plan"). A total of approximately 874,000
shares of Common Stock were reserved for issuance pursuant to options granted
under the plan.
In November 1993, Xpedite established an incentive stock option plan for its
officers and employees ("Xpedite's 1993 Plan"). A total of approximately 525,000
shares of Common Stock were reserved for issuance pursuant to options granted
under the plan.
Additionally, in April 1996, Xpedite reserved approximately 233,000 shares of
Common Stock for issuance pursuant to options which may be awarded to certain
executive officers of Xpedite under the Officers' Contingent Stock Option Plan
("Xpedite's Officer's Plan"), upon achievement of certain performance targets.
In July 1996, Xpedite granted approximately 108,000 of such options. Optionees
are not required to contribute toward purchasing shares underlying options
granted in connection with this plan. Compensation expense related to these
grants, calculated at the fair market value of the Company's Common Stock at the
date of grant, to be recognized over the vesting period of 48 months, or earlier
if vesting is accelerated due to occurrence of certain events, approximates
$2.0 million. The Company has recognized compensation expense of $94,069 in 1996
and of $410,437 in 1997. These options expire on April 21, 2006.
During 1993, Xpedite issued approximately 8,200 stock warrants to a
consultant to purchase shares of Common Stock at a purchase price of
approximately $0.43 per share. These warrants expire December 31, 1999. Also
during 1993, Xpedite issued approximately 5,800 stock warrants to a stockholder
of the Company to purchase shares of Common Stock at a purchase price of
approximately $6.01 per share. These warrants expire November 16, 2003.
In April 1996, the Company, issued warrants to purchase approximately 146,000
shares of Common Stock at a purchase price of approximately $15.02 per share. In
1996, approximately 9,700 warrants were forfeited. The remaining 135,916
warrants were all outstanding at December 31, 1997.
As permitted by SFAS No. 123, the Company recognizes stock based compensation
using the intrinsic value method. Accordingly, no compensation expense is
recognized for awards issued under the Company's stock based compensation plans
if the exercise price of such awards is the market price of the underlying
common stock at date of grant. Had compensation cost been determined under the
market value method using Black-Scholes valuation principles, net income (loss)
and net income (loss) per share would have been reduced to the following pro
forma amounts:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net income (loss):
As Reported.......................................... $ (23,841) $ 13,891
Pro forma............................................ (32,371) 11,625
Net income (loss) per share:
As Reported -- Basic................................. $ (0.56) $ 0.37
-- Diluted............................... (0.56) 0.34
Pro forma -- Basic................................. (0.75) 0.31
-- Diluted............................... (0.75) 0.28
</TABLE>
Significant assumptions used in the Black-Scholes option pricing model
computations are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Risk-free interest rate.......................... 6.30% 6.26%
Dividend yield................................... 0% 0%
Volatility factor................................ .46 .42
Weighted average expected life................... 2.10 years 2.34 years
</TABLE>
The pro forma amounts reflect options granted since January 1, 1995. Pro
forma compensation cost may not be representative of that expected in future
years.
A summary of the status of the Company's stock based compensation plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
------------- ---------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1994.... 9,257,325 $ 0.81
Granted................................... 5,491,196 1.83
Exercised................................. (5,873,805) 0.43
Forfeited................................. (402,708) 0.65
---------- ------
Options outstanding at December 31, 1995.... 8,472,008 $ 1.72
Granted................................... 1,778,400 16.87
Exercised................................. (1,542,855) 0.63
Forfeited................................. (127,778) 16.73
---------- ------
Options outstanding at December 31, 1996.... 8,579,775 4.83
Granted................................... 3,513,217 23.32
Exercised................................. (2,519,569) 2.39
Forfeited................................. (1,294,139) 8.94
---------- ------
Options outstanding at December 31, 1997.... 8,279,284 $12.99
========== ======
</TABLE>
14
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WEIGHTED EXERCISE PRICE EXERCISE PRICE
RANGE OF OPTIONS AVERAGE OF OPTIONS OPTIONS OF OPTIONS
EXERCISE PRICES OUTSTANDING REMAINING LIFE OUTSTANDING EXERCISABLE EXERCISABLE
- --------------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0-$10 3,427,976 7.40 $ 1.39 2,083,196 $ 1.41
$11-$20 1,960,784 7.13 16.57 901,835 16.34
$21-$30 2,867,250 7.34 24.20 771,416 24.26
$31-$40 23,274 8.73 34.33 8,772 36.86
--------- ---- ------ --------- ------
8,279,284 7.47 $12.99 3,765,219 $ 9.75
========= ==== ====== ========= ======
</TABLE>
12. EMPLOYEE BENEFIT PLANS
The Company sponsors four defined contribution retirement plans covering
substantially all full-time employees. These plans allow employees to defer a
portion of their compensation and associated income taxes pursuant to Section
401(k) of the Internal Revenue Code. The Company may make discretionary
contributions for the benefit of employees under each of these plans. Company
contributions recognized as expense for 1997, 1996 and 1995 approximated
$881,000, $629,000 and $228,000, respectively.
13. 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 follows a policy that
requires all material transactions between the Company and its officers,
directors or other affiliates (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 November 1995, the Company loaned $90,000 with recourse to a certain
officer 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 an employment agreement.
In November 1995, the Company loaned a total of $2.3 million with recourse to
three officers, to fund the exercise of stock warrants and options. These loans
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
$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.
15
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In September 1996, the Company loaned $75,000 with recourse to a certain
officer 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 an employment agreement.
During 1997, an officer of the Company exercised an option to purchase
100,000 shares of the Company's common stock at an exercise price of $0.27 per
share. The Company loaned the officer $973,000 to pay taxes associated with
the exercise of the options. The loan is evidenced by a recourse promissory
note which bears interest at 6% and is secured by the common stock purchased
by the officer.
At December 31, 1997 and 1996, the Company had loans outstanding to XSG of
approximately $3.3 million and $3.5 million respectively. The Company maintained
an ownership interest in XSG carried at cost at December 31, 1997 and 1996,
respectively which is included in Strategic Alliances and Imvestments in the
accompanying financial statements. See Note -- 14 Commitments and Contingencies.
14. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases computer and telecommunications 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, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998................................................... $3,973 $ 9,351
1999................................................... 2,083 6,959
2000................................................... 668 5,530
2001................................................... 210 4,292
2002................................................... 36 3,159
Thereafter............................................. -- 11,009
------ -------
Net minimum lease payments............................. 6,970 $40,300
=======
Less amount representing interest...................... 960
------
Present value of net minimum lease payments............ 6,010
Less current portion................................... 3,302
------
Obligations under capital lease, net of current
portion............................................... 2,708
======
</TABLE>
Rent expense under operating leases was approximately $10.5 million,
$11.5 million and $9.0 million for the years ended December 31, 1997, 1996 and
1995, respectively. Future minimum payments for facilities rent are reduced by
scheduled sublease income of approximately $700,000 in 1998. During 1997, 1996
and 1995, additions of computer and telecommunications equipment resulted in
an increase in capital lease obligations of approximately $829,000, $85,000
and $984,000, respectively.
System and Marketing Agreement
Xpedite has entered into "put" and "call" arrangements relating to the
outstanding shares of each of Xpedite Systems, GmbH ("XSG") and Xpedite Systems,
S.A. ("XSSA"). The purchase prices payable in connection with the exercise of
such "put" or "call" options is based on, among other things, the achievement of
certain financial results as set forth in the put and call agreements. During
the first quarter 1998, the Company acquired 100% of XSG. See Note 19--
Subsequent Events. The Company currently has an ownership interest of 18.8% in
XSSA. This ownership interest is accounted for at cost and is included in
Strategic Alliances and Investments in the accompanying financial statements.
16
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
XSSA has not met the minimum amount of earnings necessary for the put or
call option to be exercisable, and therefore, due to the uncertainties as to the
ability of XSSA to achieve the required financial results in the future, and the
uncertainty of future events, the Company does not consider the exercise of
these options to be probable. However, assuming that XSSA achieves the minimum
amount of earnings of $1.0 million (at current exchange rates) and utilizing the
Company's stock price and earnings as of the twelve months ended December 31,
1997, the purchase price payable in connection with the exercise of 100% of the
put option would be approximately $13.1 million. The actual amount of any
purchase price will more than likely differ from this amount due to the variable
factors used to determine the purchase price.
If exercised, the purchase price payable in connection with the "put" and
"call" option with respect to XSSA is payable in any combination of cash,
negotiable securities or Common Stock of the Company, at the Company's option.
In addition to the foregoing, the Company may purchase XSSA pursuant to
negotiations with the stockholders thereof.
If and when the put and call options are exercised, the investment in XSSA
will be accounted for either on the equity method of accounting or will be
consolidated, depending on the Company's percentage ownership.
Supply Agreements
The Company obtains long-distance telecommunications services pursuant to
supply agreements with suppliers of long-distance telecommunications
transmission services. These contracts generally provide fixed transmission
prices for terms of three to five years, but are subject to early 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 five long-distance
telecommunications services contracts that require the Company to purchase a
minimum amount of services each month.
Regulation
Various regulatory factors may have an impact on the Company's ability to
compete and on its financial performance. The Company is subject to regulation
by the FCC and by various state public service and public utility commissions.
Federal and state regulations and regulatory trends have had, and may have in
the future, both positive and negative effects on the Company and on the
information and telecommunications service industries as a whole. FCC policy
currently requires interexchange carriers to provide resale of the use of
their transmission facilities. The FCC also requires local exchange carriers
to provide all interexchange carriers with equal access to the origination and
termination of calls. If either or both of these requirements were removed,
the Company could be adversely affected. These carriers may experience
disruptions in service due to factors outside the Company's control, which may
cause the Company to lose the ability to complete its subscribers' long
distance.
Litigation
On January 21, 1997, two former employees and an affiliate of one of the
former employees filed a complaint against the Company seeking remuneration
for alleged work performed on behalf of the Company. In December 1997, the
Company reached a settlement with one of the claimants. The amount of this
settlement was not material to the Company's financial position. The remaining
plaintiffs are seeking an accounting of commissions allegedly due to them,
options to purchase 72,000 shares of the Company's common stock and reasonable
attorney's fees. Management of the Company believes it has meritorious
defenses to the remaining allegations, but due to the inherent uncertainties
of the litigation process, the Company is unable to predict the outcome of
this litigation and the effect, if any, on its financial position or results
of operations.
17
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On June 28, 1996, AudioFAX IP LLC ("AudioFAX") filed a lawsuit against the
Company alleging that the Company infringed certain patents held by AudioFAX
for enhanced facsimile products. In the third quarter of 1996, the Company
recorded a charge to operations of $1.5 million for the estimated legal fees and
other costs to resolve this matter. On February 11, 1997, the Company entered
into a long-term, non-exclusive license agreement with AudioFAX settling this
litigation. Costs accrued in the third quarter of 1996 were adequate to cover
the actual costs of litigation. The cost of the license is not expected to have
a material effect on the Company's future results of operations.
On August 6, 1996, Communications Network Corporation ("CNC"), a licensing
customer of the Company, was placed into bankruptcy (the "Bankruptcy Case")
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code").
On August 23, 1996, CNC filed a motion to intervene in a separate lawsuit
brought by a CNC creditor in the United States District Court for the Southern
District of New York against certain guarantors of CNC's obligations and to
file a third-party action against numerous entities, including such CNC
creditor and Premiere Communications, Inc. ("PCI") for alleged negligent
misrepresentations of fact in connection with an alleged fraudulent scheme
designed to damage CNC (the "Intervention Suit"). The District Court has denied
CNC's request to intervene and has transferred the remainder of the
Intervention Suit to the Bankruptcy Judge presiding over the Bankruptcy Case.
Based upon the findings of the bankruptcy examiner and an investigation by the
bankruptcy trustee (the "Trustee") of potential actions directed at PCI,
including an avoidable preference claim of approximately $950,000, the Trustee
and PCI reached a tentative settlement of all issues, subject to Bankruptcy
Court approval. The terms of the proposed settlement have been incorporated
into a proposed plan of reorganization (the "Plan") filed by the Trustee, which
is also subject to Bankruptcy Court approval. If only the settlement is
approved, PCI will obtain a release from the Trustee and the Trustee will
dismiss the Intervention Suit in consideration of PCI making a cash payment of
$1,200,000 to the Trustee. If the Plan is subsequently approved, PCI will make
an additional cash payment of up to $300,000 to the Trustee in consideration of
PCI obtaining, among other things, an injunction against possible nuisance
suits relating to the CNC business. The Company has previously taken a reserve
for the settlement and Plan payments. If the settlement is not approved and the
Trustee successfully pursues possible litigation against the Company, it could
have a material adverse effect on the Company's business, operating results or
financial condition.
On November 26, 1997, Wael Al-Khatib ("Al-Khatib"), the sole shareholder and
former president of CNC, and his company, Platinum Network, Corp. ("Platinum")
(Al-Khatib and Platinum are collectively referred to herein as "Plaintiffs"),
filed a complaint against PCI, WorldCom Network Services, Inc. f/k/a WilTel,
Inc., Bernard J. Ebbers, David F. Meyers, Robert Vetera, Joseph Cusick, William
Trower, Don Wilmouth, Digital Communications of America, Inc., Boland Jones,
Patrick Jones, and John Does I-XX in the Eastern District of New York, United
States District Court. Plaintiffs contend that PCI, certain officers of PCI and
the other defendants engaged in a fraudulent scheme to restrain trade in the
debit card market nationally and in the New York debit card sub-market and made
misrepresentations of fact in connection with the alleged scheme. The
Plaintiffs are seeking at least $250 million in compensatory damages and $500
million in punitive damages from PCI and the other defendants. Pursuant to the
local rules of the District Court, PCI has filed a letter stating the reasons
it believes the lawsuit should be dismissed. PCI has also filed a motion for
sanctions under Rule 11 of the Federal Rules of Civil Procedure. PCI believes
that it has meritorious defenses to the Plaintiffs' allegations and will
vigorously defend the same. Due to the inherent uncertainties of the judicial
system, the Company is not able to predict the outcome of this lawsuit. If this
lawsuit is not resolved in PCI's favor, it could have a material adverse effect
on the Company's business, operating results or financial condition.
On September 20, 1996, Peter Lucina ("Lucina") filed a complaint against the
Company, Donald B. Gasgarth ("Gasgarth") and Patrick G. Jones ("Jones") in the
United States District Court for the Eastern District of Illinois. As of
December 3, 1997, the Company, Gasgarth and Jones have entered into a
settlement agreement with Lucina for an immaterial amount settling and
disposing of Lucina's claims in connection with this litigation.
In the fourth quarter of 1997, the Company recorded a $150,000 accrued
settlement cost to reflect the impact of various legal matters and the related
expenses.
18
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. 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 items was as follows for the years ended December 31, 1997, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Income taxes at federal statutory rate............. $(8,591) $ 8,094 $(12,800)
State taxes, net of federal benefit................ 278 746 636
Non-deductible merger costs........................ 8,390 -- --
Change in valuation allowance...................... -- 748 (3,402)
S-corporation earnings not subject to corporate
level taxes........................................ (3,117) (1,462) (1,420)
Non-taxable investment income...................... (1,265) (723) --
Write-off of in-process research and development... -- -- 18,020
Establish deferred taxes for non-taxable
predecessor entities............................ 1,207 -- --
Other, primarily non deductible expenses........... 1,093 1,088 1,722
------- ------- --------
Income taxes at the Company's effective rate....... $(2,005) $ 8,491 $ 2,756
======= ======= ========
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 36 $ 8,144 $ 4,180
State............................................ 1,021 1,757 881
International.................................... 1,505 1,761 25
------- ------- --------
2,562 11,662 5,086
------- ------- --------
Deferred:
Federal.......................................... (4,450) (3,414) (1,951)
State............................................ (601) (627) 85
International.................................... 484 870 (464)
------- ------- --------
(4,567) (3,171) (2,330)
------- ------- --------
$(2,005) $ 8,491 $ 2,756
======= ======= ========
</TABLE>
Differences between financial accounting and tax bases of assets and
liabilities which give rise to deferred tax assets and liabilities are as
follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $19,465 $ 8,434
In-process research and development...................... 4,302 4,218
Deferred revenue......................................... 1,832 174
Restructuring and other special charges.................. 11,489 --
Intangibles.............................................. 3,826 3,929
Accounts receivable...................................... 896 944
Accrued liabilities...................................... 4,215 4,807
Other assets............................................. 450 2,466
------- -------
46,475 24,972
Deferred tax liabilities:
Depreciation and amortization............................ (5,839) (3,116)
Other.................................................... (3,380) (3,495)
------- -------
37,256 18,361
Valuation allowance........................................ (8,755) (8,755)
------- -------
Net deferred tax assets.................................... $28,501 $ 9,606
======= =======
</TABLE>
19
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The issuances of stock by the Company have resulted in an ownership change
under the Internal Revenue Code. Therefore, the Company's net operating loss
carryforward could be subject to limitations. Management of the Company has
recorded valuation allowances for such amounts based on their estimate
regarding the realization of these assets.
Most Voice-Tel Franchises acquired in transactions accounted for as pooling-
of-interests had elected to be treated as S-Corporations or partnerships for
income tax and other purposes. Income taxes were not provided on income of
these entities for any year presented because S-Corporations and partnerships
are generally not subject to income tax. Rather, shareholders or partners of
such entities are taxed on their proportionate shares of these entities'
taxable income in their individual income tax returns.
At December 31, 1997, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $50.7 million expiring in
2008 through 2011. Deferred tax benefits of approximately $15.4 million are
associated with nonqualified stock option exercises, the benefit of which was
credited directly to additional paid-in capital.
The Company has unremitted foreign earnings of approximately $5.9 million at
December 31, 1997. It is the Company's intention to permanently reinvest those
earnings in its foreign operations. Accordingly, no federal deferred taxes have
been provided on those earnings. If such earnings were to be remitted, it is
possible there would be withholding taxes (although not readily determinable)
on such remittances.
16. RESTRUCTURING AND OTHER SPECIAL CHARGES:
The Company recorded restructuring and other special charges of approximately
$16.5 million in the fourth quarter of 1997. Such amounts consisted of merger
termination costs in connection with the terminated UBS Agreement as defined
below, transaction costs from the acquisition of Xpedite Systems, Inc. on
February 27, 1998, asset impairments associated with the purchase of Xpedite
Systems Limited and Comwave Communications AG and certain workforce reductions
related to Xpedite Systems Limited. Prior to the acquisition of Xpedite by the
Company, Xpedite had entered into an agreement and plan of merger on August 8,
1997 (the "UBS Agreement"). The UBS agreement was terminated when Xpedite
entered into a definitive merger agreement with the Company.
In connection with the VoiceCom acquisition, the Company recorded
restructuring and other special charges of approximately $28.2 million in the
third quarter of 1997. Such amounts consisted of transaction costs, asset
impairments, costs to terminate or restructure certain contractual obligations
and other costs. Transaction costs associated with the VoiceCom acquisition
were expensed as required by the pooling-of-interests method of accounting.
Other restructuring and special charges recorded in the third quarter result
principally from management's plan to restructure VoiceCom's operations by
reducing its workforce, exiting certain facilities, discontinuing duplicative
product offerings and terminating or restructuring certain contractual
obligations.
The Company recorded approximately $45.4 million of restructuring and other
special charges in the second quarter of 1997 in connection with the Voice-Tel
Acquisitions. Those charges result from management's plan to restructure the
operations of the Voice-Tel Entities under a consolidated business group model
and discontinue its franchise operations. This initiative involves substantial
reduction in the administrative workforce, abandoning duplicate facilities and
assets and other costs necessary to discontinue redundant business activities.
During the third quarter of 1996 in connection with the acquisition of TeleT,
the Company allocated approximately $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.
During the fourth quarter of 1995 the Company, from the acquisition of Xpedite
Systems, Inc., allocated approximately $53.0 million of purchase price to in-
process research and development related to the Swift, Vitel, and Comwave
acquisitions. Since the technological feasibility of the in-process research and
development had not yet been established and the technology had no alternative
future use, this cost was expensed as of the acquisition date. See Note 3--
Acquisitions.
20
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Restructuring and other special charges against operations for the year ended
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
ACCRUED
COSTS
CHARGES TO COSTS DECEMBER 31,
OPERATIONS INCURRED 1997
---------- -------- ------------
<S> <C> <C> <C>
Severance............................... $12,352 $ 5,680 $ 6,672
Asset impairments....................... 15,218 2,570 12,648
Restructure or terminate contractual
obligations............................ 17,911 4,557 13,354
Transaction costs....................... 24,727 17,779 6,948
Merger termination costs................ 9,502 9,502 --
Other costs, primarily to exit
facilities and certain activities...... 10,389 6,601 3,788
------- ------- -------
$90,099 $46,689 $43,410
======= ======= =======
</TABLE>
17. STATEMENT OF CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information (in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ------
<S> <C> <C> <C>
Cash paid during the year for:
Interest.......................................... $9,864 $8,524 $4,601
Income taxes...................................... $8,387 $5,458 $3,164
Cash paid for acquisitions accounted for as purchases are as follows:
<CAPTION>
1997 1996 1995
-------- -------- ------
<S> <C> <C> <C>
Fair value of assets acquired..................... $112,778 $101,618 $ --
Less liabilities assumed.......................... 11,519 21,314 --
Less common stock issued to sellers............... 2,255 26,327 --
Less subordinated debt issued to sellers.......... -- 4,908 --
Less payable to former owners..................... 5,228 -- --
-------- -------- ------
Net cash paid..................................... $ 93,776 $ 49,069 $ --
======== ======== ======
</TABLE>
21
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. SEGMENT DATA AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment. The following table presents
financial information based on the Company's geographic segments for the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
NET OPERATING IDENTIFIABLE
REVENUES INCOME (LOSS) ASSETS
-------- ------------- ------------
<S> <C> <C> <C>
1997
North America........................... $340,585 $ (25,692) $443,393
Asia Pacific............................ 45,163 2,702 14,152
Europe.................................. 13,087 1,022 105,393
Eliminations............................ (3,330) (1,377) (1,571)
-------- --------- --------
Total................................. $395,505 $(23,345) $561,367
======== ========= ========
1996
North America........................... $288,270 $ 25,981 $275,066
Asia Pacific............................ 30,344 (363) 18,927
Europe.................................. 13,001 2,834 9,918
Eliminations............................ (4,293) (1,194) (20,579)
-------- --------- --------
Total................................. $327,322 $ 27,258 $283,332
======== ========= ========
1995
North America........................... $195,052 $(36,120) $113,603
Asia Pacific............................ 6,712 (999) 17,096
Europe.................................. 1,463 43 11,239
-------- --------- --------
Total................................. $203,227 $ (37,076) $141,938
======== ========= ========
</TABLE>
19. SUBSEQUENT EVENTS
In January 1998, the Company acquired, through a wholly owned subsidiary of
the Company, approximately 76.7% of the issued share capital of XSG and
indebtedness of XSG to its former majority shareholder. The purchase price for
the acquisition including transaction costs was approximately $13.3 million.
Together with the 19.9% of the issued share capital of XSG previously owned by
the Company, the Company owned approximately 96.6% of the issued share capital
of XSG upon closing. In addition the Company purchased the remaining 3.4% of the
issued share capital of XSG on February 17, 1998 for approximately $576,000. The
purchase price was funded with bank borrowings. This transaction will be
accounted for under the purchase method of accounting.
On February 27, 1998, the Company completed the acquisition of Xpedite Systems,
Inc. In connection with the acquisition, the Company issued approximately eleven
million shares of its common stock. This transaction will be accounted for as a
pooling-of-interests. Xpedite is a worldwide leader and innovator in the
enhanced fax services business and also provides discounted fax, e-mail, telex,
Internet and mailgram services. Xpedite serves customers who require high-
quality, cost-effective, rapid, and confirmed communications. Xpedite has
developed sophisticated applications in a wide range of industries that enable
customers to deliver common or customized documents to hundreds or thousands of
recipients around the world via fax or electronic mail using Xpedite's
proprietary, private, world-wide document distribution network (the "Xpedite
Network"). Based in Eatontown, New Jersey, Xpedite delivers its document
distribution services over the Xpedite Network, with points of presence in over
70 cities in approximately 29 countries around the world. The Xpedite Network
includes over 14,500 dedicated lines in addition to complete Internet access and
compatibility to allow for the ability to receive and deliver messages in
whatever format is optimal to ensure timely delivery. The Company anticipates
that it will record restructuring and other special charges before income taxes
in the range of $50.0 million in connection with the Xpedite acquisition which
includes restructuring and other special charges related to the Xpedite
acquisition which were taken in the fourth quarter of 1997.
22
<PAGE>
EXHIBIT 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company operates in one industry segment, enhanced communications
services. The Company's services include 800-based services for mobile
individuals, voice messaging, full service conference calling and, in 1998,
enhanced document distribution services (Xpedite) and internet based
communications. The Company's principal competitive advantage is that it
integrates these services through its private network and provides its
customers a single source solution for enhanced communications. By offering a
network-based solution, the Company's customers can access and use its services
through a telephone or computer anywhere in the world and avoid costs associated
with purchasing and maintaining technology and equipment themselves.
Revenues from 800-based services consist of usage fees from individual
subscribers which are generally based on per minute rates. Also, from license
fees from corporations, primarily telecommunication carriers, under outsourcing
arrangements. License fees are also generally based on per minute rates. Voice
messaging revenues generally consist of fixed monthly fees and usage fees based
on the number of messages initiated by a subscriber. Enhanced document
distribution revenues generally consist of per page or per minute fees, sales of
fax message handling systems and royalties for the use of certain Company
software from corporations and individual subscribers. Although the Company does
not currently derive any revenues for its Internet-based services, management
anticipates that revenues from these products will consist of both fixed monthly
and usage based components.
Cost of services consists primarily of transmission costs. License customers
generally arrange for, and directly bear the cost of, transmission.
Consequently, while the per minute fees for licensee platform usage are lower
than those for individual subscriber services, the gross margin from license
arrangements is considerably higher than for subscriber services.
Selling, general and administrative expenses include direct and indirect
commissions, the cost of print advertisements, salaries and benefits, travel
and entertainment expenses, bad debt expense, rent and facility expense,
accounting and audit fees, legal fees, property taxes and other administrative
expenses.
Depreciation and amortization include depreciation of computer and
telecommunications equipment and amortization of intangible assets. The
Company provides for depreciation using the straight-line method of
depreciation over the estimated useful lives of the assets, which range from
five to 25 years, with the exception of leasehold improvements which are
depreciated on a straight-line basis over the shorter of the term of the lease
or the estimated useful life of the assets. Amortization of intangible assets
includes deferred software development costs, goodwill and strategic
investments and alliances and strategic alliance contract intangible, which
are amortized over lives ranging from five to 40 years.
<PAGE>
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 following
discussion and analysis provides information which management believes is
relevant to an assessment and understanding of the Company's consolidated
results of operations and financial condition. This discussion should be read
in conjunction with the consolidated financial statements and notes thereto.
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,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES................................ 100.0% 100.0% 100.0%
COST OF SERVICES........................ 32.3 31.0 29.3
----- ----- -----
GROSS MARGIN............................ 67.7 69.0 70.7
----- ----- -----
OPERATING EXPENSES
Selling, general and administrative... 43.1 50.0 55.0
Depreciation and amortization......... 7.4 6.9 6.7
Restructuring and other special
changes.............................. 22.8 3.4 26.1
Accrued settlement costs.............. 0.4 0.4 1.2
----- ----- -----
Total operating expenses............ 73.7 60.7 89.0
----- ----- -----
OPERATING INCOME (LOSS)................. (6.0) 8.3 (18.3)
----- ----- -----
OTHER INCOME (EXPENSE)
Interest, net......................... (0.7) (1.5) (2.0)
Gain on contract termination.......... -- -- 0.6
Other, net............................ 0.2 (0.0) 0.2
----- ----- -----
Total other income (expense)........ (0.5) (1.5) (1.2)
----- ----- -----
NET INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM.................. (6.5) 6.8 (19.5)
PROVISION FOR (BENEFIT FROM) INCOME
TAXES................................... (0.6) 2.6 1.4
----- ----- -----
NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM.................................... (5.9) 4.2 (20.9)
----- ----- -----
EARLY EXTINGUISHMENT OF LONG-TERM DEBT,
NET OF INCOME TAX (BENEFIT)............ 0.2 -- --
NET INCOME (LOSS)....................... (6.1)% 4.2% (20.9)%
===== ===== =====
</TABLE>
<PAGE>
Overview
The Company has achieved substantial growth particularly since its initial
public offering during the first quarter of 1996. Excluding restatement effects
in prior years from pooling of interests acquisitions, revenues grew from $22.3
million in 1995 to $395.5 million in 1997, a compounded annual growth rate of
321.1%. Similarly, operating profits before restructuring and other special
charges grew from $2.3 million to $68.4 million, a compounded annual growth rate
of 445.5% over the same period. The Company has achieved growth in revenues and
operating profits before restructuring and other special charges by pursuing its
strategy to become the leading provider of enhanced communication services.
During 1996 and 1997 the Company:
. Pursued an aggressive acquisition strategy to expand its service offerings
to encompass all services comprising enhanced communications. In the first
quarter 1998, the Company acquired Xpedite (enhanced document distribution),
a leading worldwide independent provider of enhanced document distribution
services. In 1997, the Company acquired Voice-Tel (voice messaging) and
VoiceCom (voice messaging and 800-based services) thereby acquiring
technology necessary to offer voice messaging on a local access basis and
one of the largest private networks in the world utilizing frame relay and
internet protocols. During 1996, the Company acquired TeleT, an enterprise
engaged in computer telephony software development, which provided it with
the foundation of its Orchestrate service offering which integrates all
enhanced communication services by allowing users the flexibility to utilize
these services through a computer or telephone.
. Continued strong internal growth in the Company's 800-based business.
. Reduced costs by efficiently integrating its 1997 and 1995 acquisitions and
containing growth in other operating costs thereby enabling it to improve
operating leverage from increased revenues.
Analysis
The Company's financial statements for all periods presented have been
restated to include the operations of Xpedite, the Voice-Tel Acquisitions and
VoiceCom which were accounted for as pooling of interests. The following
discussion and analysis is prepared on that basis.
Revenues increased 20.8% to $395.5 million in 1997 and 61.1% to $327.3
million in 1996. Revenue growth was due principally to growth in the following
areas:
. Strategic partner programs, particularly new programs such as American
Express, DeltaTel and First USA, which experienced significant increases in
new subscribers,
. License programs, both from growth in revenue from existing customers and
new license customers, and
. New 800-based services, including prepaid and enhanced feature calling
cards which offer new features such as voice messaging through local
access, call connect and call screening services and text-to-voice e-mail.
. Domestic and international enhanced document distribution services.
Revenues in the Company's 800-based services grew 53.0% in 1997 and 74.4% in
1996.
Gross profit margins were 67.7%, 69.0% and 70.7% in 1997, 1996 and 1995,
respectively. Decreasing gross margins result primarily from changes in revenue
mix toward lower margin international enhanced document distribution services,
lowest cost routing issues in the first half of 1997 associated with enhanced
document distribution services which caused traffic to be delivered at a higher
rate than the lowest cost available and increased fixed leased line costs
associated with expanding enhanced document distribution services. The Company
has taken corrective action to address the lowest cost routing issues from the
first half of 1997 related to its enhanced document distribution services. The
Company monitors gross profit margins routinely and seeks to obtain favorable
transmission costs by negotiating lower rates with its principle
telecommunications service providers through volume discounts, and seeks to
utilize the lowest cost routing through its private network.
Selling, general and administrative costs as a percent of revenues were 43.1%,
50.0% and 55.0% in 1997, 1996 and 1995, respectively. These costs declined as a
percent of revenues due to aggressive restructuring of acquired businesses
(Voice-Tel and VoiceCom) in 1997. These activities included substantially
reducing the workforce of acquired businesses, exiting duplicative facilities,
eliminating redundant business activities, expanding internationally where fixed
costs are inherently lower than domestic fixed costs and general spending
reductions. Operating leverage during 1997 and 1996 has improved by increased
revenues as the Company's administrative cost structure is highly fixed in
nature.
<PAGE>
Depreciation and amortization was $29.3 million or 7.4% of revenues in 1997,
$22.6 million or 6.9% of revenues in 1996 and $13.5 million or 6.7% of
revenues in 1995. Increased depreciation and amortization expense results
mainly from depreciation associated with increased purchases of computer
telephony equipment to support new business growth, amortization of goodwill
and other intangibles acquired in connection with the Voice-Tel acquisitions
in 1997, the WorldCom strategic investment entered into in 1996 and the Swift,
Vitel and Comwave acquisitions in the fourth quarter 1995.
Net interest expense decreased to $2.6 million in 1997, from $4.8 million
in 1996 and $4.1 million in 1995. Net interest expense decreased primarily from
investment of excess proceeds from the Company's initial public offering in
March 1996 and convertible subordinated note in June 1997. Interest expense in
1997, 1996 and 1995 resulted mainly from indebtedness of Xpedite, Voice-Tel and
VoiceCom. The majority of these obligations related to Voice-Tel and VoiceCom
were retired in connection with the acquisitions. The majority of indebtedness
at Xpedite is associated with bank borrowings to finance acquisitions in 1995
and the XSL acquisition.
Accrued settlement costs for the year ended December 31, 1997 were $1.7
million compared to $1.3 million for the year ended December 31, 1996. See
Note 14--Commitments and Contingencies of the Notes to the Consolidated
Financial Statements and "Legal Proceedings" under Item 1 of Part II of this
document for further information about this matter.
Restructuring and other special charges incurred in 1997 were $90.1 million
compared to $11.0 million in the year ended December 31, 1996 and $53.0 million
in the year ended December 31, 1995. See Note 3--Acquisitions and Note 16--
Restructuring and Other Special Charges in the Notes to Consolidated Financial
Statements and "Restructuring and Other Special Charges" which follows in this
discussion.
In the years ended December 31, 1997 and 1995 the Company's effective income
tax rate was higher than the statutory rate due to non-deductible merger costs,
and the write-off of in-process research and development in connection with the
Swift, Vitel and Comwave acquisitions. In 1996 the Company's effective income
tax rate was less than the statutory rate due to certain non-taxable investment
income and income of the Voice-Tel entities which had elected to be treated as
S-Corporations under U.S.tax law prior to their acquisition by the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its growth through cash generated by operations,
proceeds from its initial public offering in March 1996, obtaining revolving
bank borrowings and by issuing convertible indebtedness in 1997. Cash provided
by operations was $36.0 million or 9.1% of revenues in 1997, $49.0 million or
15.0% of revenues in 1996 and $19.9 million or 9.8% of revenues in 1995.
Excluding payments made for restructuring, accrued settlement costs and other
special charges, cash provided by operations was $78.8 million or 19.9% of
revenues in 1997. Improving operating cash flow margins, excluding restructuring
and special charges, resulted mainly from the Company's integration and cost
reduction initiatives associated with the Voice-Tel and VoiceCom acquisitions in
1997 which reduced operating costs of these businesses and its increasing
revenue base which, because of the Company's relatively fixed cost structure,
improved operating leverage and profits.
The Company used cash in investing activities of approximately $248.4 million
in 1997, $114.1 in 1996 and $59.1 million in 1995. Investment of $86.7 million
of excess proceeds from the issuance of convertible subordinated notes in 1997,
the purchase of XSL for $78.3 million through bank borrowings in 1997, $67.2
million from the Company's initial public offering in 1996 and the purchase of
Swift, Vitel and Comwave for $46.2 million in 1995 accounted for a majority of
the Company's investing activities in 1997, 1996 and 1995. The Company purchased
property and equipment, primarily computer and telecommunications equipment, of
approximately $43.3 million in 1997, $31.1 million in 1996 and $16.1 million in
1995. These expenditures were made primarily to expand operational
infrastructure to support new business growth. Management anticipates that these
expenditures will continue to increase in the future as the Company upgrades and
expands its operational infrastructure of both its existing computer telephony
network and integrates the network of its recent acquisition, Xpedite. The
Company made investments of approximately $24.1 million in 1997 in various
companies engaged in emerging technologies, such as telemedicine and the
internet, as well as marketing alliances and outsourcing programs designed to
reduce costs and develop new markets and distribution channels for the Company's
products. Management will continue to make such investments in the future in
complementary businesses and other initiatives that further its strategic
<PAGE>
business plan. The Company paid approximately $94.5 million of cash in
connection with the purchase of XSL and the Voice-Tel Acquisitions in 1997 and
$2.9 million in the acquisition of TeleT in 1996. See Note 3 -- Acquisitions in
Notes to Consolidated Financial Statements.
The Company utilized proceeds from issuance of convertible subordinated notes
of $172.5 million and revolving line of credit of $150.0 million in 1997 and its
initial public offering proceeds of $74.6 million in 1996 to support growth in
its existing businesses and also to make acquisitions and other strategic
investments. In addition to cash paid to purchase XSL and certain Voice-Tel
Franchisees in 1997, the Company also repaid approximately $29.5 million of
indebtedness in 1997 assumed in connection with the Voice-Tel acquisitions. Cash
distributions to shareholders of VoiceCom and certain Voice-Tel companies,
primarily S Corporations, used $9.4 million, $3.6 million and $1.5 million in
1997, 1996 and 1995, respectively. Such distributions were made in periods prior
to the Voice-Tel and VoiceCom acquisitions and were made primarily to remunerate
S Corporation shareholders for taxes paid on the proportionate share of taxable
income of such companies they were required to report in their individual income
tax returns.
At December 31, 1997,the cumulative translation adjustment was approximately
($3.6) million. Cumulative translation adjustments result from the process of
translating the consolidated financial statements from the functional currencies
of each non-U.S. subsidiary into U.S. dollars. The functional currencies of the
Company's subsidiaries include thirteen different foreign currencies. This
translation resulted in an approximate $3.6 million unfavorable cumulative
translation adjustment for the year ended December 31, 1997. More specifically,
in the period from December 31, 1996 to December 31, 1997, all of the foreign
currencies that represent functional currencies of the Company's subsidiaries
were devalued, relative to the U.S. Dollar, including the devaluation of the
Australian Dollar, Malaysian Ringgit, Japanese Yen, Taiwanese Dollar, and South
Korean Won by approximately 20%, 48%, 11%, 18% and 71%, respectively.
In January 1998, the Company acquired, directly or indirectly through a wholly
owned subsidiary of the Company, approximately 76.7% of the issued share capital
of XSG and indebtedness of XSG to its former majority shareholder. The
purchase price for the acquisition including transaction costs was approximately
$13.3 million, which included the forgiveness of the $3.2 million loan to XSG.
Together with the 19.9% of the issued share capital of XSG previously owned by
the Company, the Company owned approximately 96.6% of the issued share capital
of XSG upon closing. In addition the Company purchased the remaining 3.4% of
the issued share capital of XSG on February 17, 1998, for approximately
$576,000. The purchase price was funded with bank borrowings.
The Company has entered into "put" and "call" arrangements relating to the
outstanding shares of each of XSL, Xpedite Systems, GmbH ("XSG") and Xpedite
Systems, S.A. ("XSSA"). The purchase prices payable in connection with the
exercise of such "put" or "call" options is based on, among other things, the
achievement of certain financial results as set forth in the put and call
agreements. The Company currently has an ownership interest of 18.8% in XSSA.
XSSA has not met the minimum amount of earnings necessary for the put or call
option to be exercisable, and therefore, due to the uncertainties as to the
ability of XSSA to achieve the required financial results in the future, and the
uncertainty of future events, the Company does not consider the exercise of
these options to be probable during the next twelve months. However, assuming
that XSSA achieves the minimum amount of earnings of $1.0 million (at current
exchange rates) and utilizing the Company's stock price and earnings as of the
twelve months ended December 31, 1997, the purchase price payable in connection
with the exercise of 100% of the put option would be approximately $13.1
million. The actual amount of the purchase price will more than likely differ
from this amount due to (1) the variable factors used to determine the purchase
price; and/or (2) the possibility of changes in the Company's capital structure,
and/or its continued status as a publicly traded company.
If exercised, the purchase price payable in connection with the "put" and
"call" option with respect to XSSA is payable in any combination of cash,
negotiable securities or Common Stock of the Company, at the Company's option.
In addition to the foregoing, the Company may purchase XSSA pursuant to
negotiations with the stockholders thereof.
If and when the put and call options are exercised, the investment in XSSA
will be accounted for either on the equity method of accounting or will be
consolidated, depending on the Company's percentage of ownership.
At December 31, 1997, the Company's principal commitments involve certain
indebtedness, lease obligations and minimum purchase requirements under supply
agreements with telecommunications providers. The Company is in compliance under
all such agreements at this date. See also Note 6--Revolving Line of Credit,
Note 7--Long-Term Debt and Note 14--Contingencies and Commitments in Notes to
Consolidated Financial Statements.
Management believes that cash and marketable securities on-hand of
approximately $198.3 million and cash generated by operating activities will
be adequate to fund growth in the Company's existing businesses for the
forseeable future. However, the Company will be required to repay or refinance
certain indebtedness assumed in connection with its acquisition on February
27, 1998 of Xpedite. Such indebtedness approximates $140 million and
management is currently evaluating alternatives in this regard.
RESTRUCTURING AND OTHER SPECIAL CHARGES
In connection with the Xpedite Acquisition, the Company recorded
restructuring and other special charges of approximately $16.5 million in the
fourth quarter 1997. Such amounts consisted of merger termination costs
associated with the "UBS Agreement," transactions costs associated with the
acquisition of Xpedite and asset write-offs of acquisitions accounted for
under the purchase method of accounting.
In connection with the VoiceCom Acquisition, the Company recorded
restructuring and other special charges of approximately $28.2 million in the
third quarter of 1997. Such amounts consisted of transaction costs, asset
impairments, costs to terminate or restructure certain contractual obligations
and other costs.
Transaction costs associated with the VoiceCom acquisition were expensed as
required by the pooling-of-interests method of accounting. Other restructuring
and special charges recorded in the third quarter result principally from
management's plan to restructure VoiceCom's operations by reducing its
workforce, exiting certain facilities, discontinuing duplicative product
offerings and terminating or restructuring certain contractual obligations.
The Company recorded approximately $45.4 million of restructuring and other
special charges in the second quarter of 1997 in connection with the Voice-Tel
Acquisitions. Those charges result from management's plan to restructure the
operations of the Voice-Tel Entities under a consolidated business group model
and discontinue its franchise operations. This initiative involves substantial
reduction in the administrative workforce, abandoning duplicative facilities
and assets and other costs necessary to discontinue redundant business
activities.
During the third quarter of 1996 in connection with the acquisition of
TeleT, the Company allocated approximately $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.
During the fourth quarter of 1995 the Company, from the acquisition of Xpedite
Systems, Inc., allocated approximately $53.0 million of purchase price to in-
process research and development related to the Swift, Vitel and Comwave
acquisitions. Since the technological feasibility of the in-process research and
development had not yet been established and the technology had no alternative
future use, this cost was expensed as of the acquisition date.
OTHER MATTERS
It is possible that a significant portion of the Company's installed computer
systems, software products, billing systems, telephony networks, database or
other business systems (hereinafter referred to collectively as "Systems", or
those of the Company's customers, vendors or resellers, working either alone or
in conjunction with other software or systems, will not accept input of, store,
manipulate and output dates for the years 1999, 2000 or thereafter without error
or interruption (commonly known as the "Year 2000" problem). The Company is
currently in the process of evaluating its Systems to determine whether or not
modifications will be required to prevent problems related to the Year 2000.
There can be no assurance that the Company will identify all such Year 2000
problems in its Systems or those of its customers or vendors, including network
transmission providers, in advance of their occurrence or that the Company will
be able to successfully remedy any problems that are discovered. In addition,
the Company is dependent upon third parties for transmission of its calls and
other communications. There can be no assurance that these third party providers
will identify and remedy any Year 2000 problems in their transmission
facilities. The expenses of the Company's efforts to identify and address such
problems, the expenses or liabilities to which the Company may be subject as a
result of such problems, or the failure of third party providers of transmission
facilities, could have a material adverse effect on the Company's business,
financial condition and results of operations. The financial stability of
existing customers may be adversely impacted by Year 2000 problems which could
have a material adverse impact on the Company's revenues. In addition, failure
of the Company to identify and remedy Year 2000 problems could put the Company
at a competitive disadvantage relative to companies that have corrected Year
2000 problems.
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
During 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Both are effective for fiscal years beginning after December 15,
1997. Management is currently studying the impact that SFAS No. 131 will have on
its financial statement disclosures. The adoption of SFAS No. 130 will not
affect results of operations or financial position, but will require cumulative
translation adjustments, which currently are reported in shareholders' equity,
to be included in other comprehensive income and the disclosure of total
comprehensive income.
FACTORS AFFECTING FUTURE PERFORMANCE
When used in this Form 8-K, in documents incorporated herein and elsewhere by
management or the Company from time to time, the words "believes,"
"anticipates," "expects" and similar expressions are intended to identify
forward-looking statements concerning the Company's business operations,
economic performance and financial condition, including in particular, the
Company's business strategy and means to implement the strategy, the Company's
objectives, the amount of future capital expenditures, the likelihood of the
Company's success in developing and introducing new products and expanding its
business, and the timing of the introduction of new and modified products or
services. For these statements, the Company claims the protection of the safe
harbor for forward looking statements contained in the Private Securities
Litigation Reform Act of 1995. These statements are based on a number of
assumptions and estimates which are inherently subject to significant risks and
uncertainties, many of which are beyond the control of the Company and reflect
future business decisions which are subject to change. A variety of factors
could cause actual results to differ materially from those anticipated in the
Company's forward-looking statements, including the factors set forth below and
in the Company's reports and other filings with the Commission.
Ability to Manage Growth; Acquisition Risks. Premiere continually evaluates
acquisition opportunities and, as a result, frequently engages in acquisition
discussions, conducts due diligence activities in connection with
<PAGE>
possible acquisitions, and, where appropriate, engages in acquisition
negotiations. Premiere has experienced substantial growth in revenue and
personnel in recent years, particularly in 1997. A substantial portion of such
growth has been accomplished through acquisitions, including the Voice-Tel
Acquisitions, the acquisition of VoiceCom Holdings, Inc. ("VoiceCom") and the
merger (the "Xpedite Merger") with Xpedite Systems, Inc. Premiere's
growth has placed significant demands on all aspects of Premiere's business,
including its administrative, technical and financial personnel and systems.
Additional expansion by Premiere, including the Xpedite Merger, may further
strain Premiere's management, financial and other resources. There can be no
assurance that Premiere's systems, procedures, controls and existing space are
or will be adequate to support expansion of Premiere's operations. Premiere's
future operating results will substantially depend on the ability of its
officers and key employees to manage changing business conditions and to
implement and improve its administrative, technical and financial control and
reporting systems. If Premiere is unable to respond to and manage changing
business conditions, then the quality of Premiere's services, its ability to
retain key personnel and its results of operations could be materially
adversely affected. At certain stages of growth in network usage, Premiere
will be required to add capacity to its computer telephony platform and its
digital central office switches and will need to continually add capacity to
its private frame relay network, thus requiring Premiere continuously to
attempt to predict growth in its network usage and add capacity accordingly.
Difficulties in managing continued growth, including difficulties in
predicting the growth in network usage, could have a material adverse effect
on Premiere's business, financial condition and results of operations.
Acquisitions, including the Xpedite Merger, also involve numerous additional
risks, including difficulties in the assimilation of the operations, services,
products and personnel of the acquired company, the diversion of Premiere's
management's attention from other business concerns, entry into markets in
which Premiere has little or no direct prior experience and the potential loss
of key employees of the acquired company. Premiere is unable to predict
whether or when any prospective acquisition candidate will become available or
the likelihood that any acquisition will be completed.
Future acquisitions by Premiere may result in potentially dilutive issuances
of equity securities, the incurrence of additional debt, the assumption of
known and unknown liabilities, the write-off of software development costs and
the amortization of expenses related to goodwill and other intangible assets,
all of which could have a material adverse effect on Premiere's business,
financial condition and results of operations. For example, the Voice-Tel
Entities and VoiceCom established reserves for certain potential tax
liabilities that Premiere's management believes to be adequate based on
certain assumptions which Premiere's management believes are reasonable. If,
however, such assumptions prove to be incorrect and the potential liabilities
ultimately exceed established reserves, Premiere's business, financial
condition and results of operations could be materially adversely affected.
Premiere has recorded approximately $14.8 million of goodwill and other
intangible assets in connection with the Voice-Tel Acquisitions. Premiere is
amortizing the goodwill on a straight-line basis over 40 years, and Premiere
believes the useful life of the Voice-Tel Entities to be at least 40 years. If
the amortization period is accelerated due to a reevaluation of the useful
life of the Voice-Tel Entities or otherwise, amortization expense may
initially increase on a quarterly basis or require a write-down of the
goodwill. An increase in the rate of amortization of goodwill or future write-
downs and restructuring charges could have a material adverse effect on
Premiere's business, financial condition and results of operations.
Premiere has taken, and in the future may take, charges in connection with
acquisitions. During the second quarter of 1997, Premiere took a pre-tax
charge of approximately $45.4 million in connection with the Voice-Tel
Acquisitions and during the third quarter of 1997, Premiere took a pre-tax
charge of approximately $28.2 million in connection with the acquisition of
VoiceCom. The Company anticipates that it will record restructuring and other
special charges before income taxes in the range of $50 million in connection
with the Xpedite acquisition. Such amount includes charges recorded by Xpedite
in the fourth quarter of 1997 expected by management to be in the range of $20
million before income taxes. Moreover, Premiere may take additional charges in
connection with future acquisitions. There can be no assurance that the costs
and expenses incurred will not exceed the estimates upon which such charges are
based.
In June 1997, Premiere completed the Voice-Tel Acquisitions. Prior to the
Voice-Tel Acquisitions, the Voice-Tel Entities operated approximately 210 POPs
in five countries. VTE operated as a franchisor, and each of the approximately
100 Franchisees was independently owned and operated. Premiere is in the
process of
<PAGE>
consolidating these separate businesses by attempting to eliminate duplicative
and unnecessary costs and to operate them under common management. Potential
challenges to the successful consolidation of the Voice-Tel Entities include,
but are not limited to: (i) centralization and consolidation of financial,
operational and administrative functions; (ii) consolidation of the service
centers, network and work force; (iii) elimination of unnecessary costs; and
(iv) realization of economies of scale. Premiere is in the process of
integrating Voice-Tel's service offerings, operations and systems with those
of Premiere, and therefore, the Voice-Tel integration plans may materially
change in the future. Challenges to the successful integration of the Voice-
Tel Entities include, but are not limited to: (i) localization of Premiere
products; (ii) integration of the Premiere platform with the Voice-Tel
network; (iii) cross-selling of products and services to the customer base of
Voice-Tel and Premiere; (iv) integration of new personnel; and (v) compliance
with regulatory requirements.
Because of the size and fragmented nature of the facilities and businesses
of the Voice-Tel Entities and the technical complexity of integrating
Premiere's products with those of Voice-Tel, the integration process is
particularly complex and will place significant demands on Premiere's
management, engineering, financial and other resources. There can be no
assurance that the Voice-Tel Entities will be successfully consolidated or
integrated with Premiere's operations on schedule or at all, that the Voice-
Tel Acquisitions will result in sufficient net sales or earnings to justify
Premiere's investment therein or the expenses related thereto, or that
operational synergies will develop. The successful consolidation of the Voice-
Tel Entities and their integration into Premiere's operations are critical to
Premiere's future performance. Failure to successfully consolidate and
integrate the Voice-Tel Entities or to achieve operating synergies would have
a material adverse effect on Premiere's business, financial condition and
results of operations.
Competition. The market for the Company's services is intensely competitive,
rapidly evolving and subject to rapid technological change. The Company
expects competition to increase in the future. Many of the Company's current
and potential competitors have longer operating histories, greater name
recognition, larger customer bases and substantially greater financial,
personnel, marketing, engineering, technical and other resources than the
Company. The Company believes that existing competitors are likely to expand
their service offerings and that new competitors are likely to enter the
personal communications market and to attempt to integrate such services,
resulting in greater competition for the Company. Such competition could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company attempts to differentiate itself from its competitors by
offering an integrated suite of enhanced personal communications services.
Other providers currently offer each of the individual services and certain
combinations of the services offered by the Company. The Company's worldwide
mobile communications services and features compete with services provided by
companies such as AT&T Corp. ("AT&T"), MCI Communications Corp. ("MCI") and
Sprint Corp. ("Sprint") as well as smaller interexchange long distance
providers. The Company's voice mail services, including those acquired in the
Voice-Tel Acquisitions and the VoiceCom acquisition, compete with voice mail
services provided by AT&T, certain regional Bell Operating Companies ("RBOCs")
and other service bureaus as well as by equipment manufacturers, such as Octel
Communications Corporation ("Octel"), Northern Telecom, Inc. ("Northern
Telecom"), Siemens Business Communications Systems, Inc. ("Siemens"),
Centigram Communications Corporation ("Centigram"), Boston Technology, Inc.
("Boston Technology") and Digital Sound Corporation ("Digital Sound"). The
Company's enhanced travel, concierge, news and e-mail services compete with
services provided by America Online, Inc. ("America Online"), Prodigy Services
Co. ("Prodigy") and numerous Internet service providers. The Company's paging
services compete with paging services offered by companies such as AT&T and
MCI.
The Company's Orchestrate service, which the Company anticipates beginning
marketing during the second quarter of 1998, is expected to compete with
products offered by companies such as Octel, Microsoft Corp. ("Microsoft"),
Novell, Inc. ("Novell"), Lucent Technologies, Inc. ("Lucent") and numerous
other entities. For example, Octel and Microsoft recently announced a service,
called "Unified Messenger," which places all voice mail, e-mail and fax
messages in a single mailbox accessible by computer or telephone. In addition,
the number of companies offering call center technology, including AT&T, MCI
and Lucent, has grown dramatically over the past few years, primarily in
response to major outsource initiatives and significantly lower technology
costs.
<PAGE>
The Company expects that other parties will develop and implement information
and telecommunications service platforms similar to its platform, thereby
increasing competition for the Company's services.
Through the recently completed Xpedite Merger, Premiere offers enhanced
document distribution services ("Enhanced Services"). Xpedite's fax
communication services currently compete with services provided by each of
AT&T, MCI and Sprint, and many of the national postal, telephone and telegraph
companies ("PTTs") around the world. Neither Premiere nor Xpedite can predict
whether AT&T, MCI, Sprint, any Internet service provider or PTT or any other
competitor will expand its fax communications services business, and there can
be no assurance that these or other competitors will not commence or expand
their businesses. Moreover, Xpedite's receiving, queuing, routing and other
systems logic and architecture are not proprietary to Xpedite, and as a
result, there can be no assurance that such information will not be acquired
or duplicated by Xpedite's existing and potential competitors. Xpedite does
not typically have long-term contractual agreements with its customers, and
there can be no assurance that its customers will continue to transact
business with Premiere in the future. In addition, even if there is continued
growth in the use of electronic document distribution services, there can be
no assurance that potential customers will not elect to use their own
equipment to fulfill their needs for electronic document distribution
services. There also can be no assurance that customers will not elect to use
alternatives to Xpedite's electronic document distribution services, including
the Internet, to carry such customers' communications or that companies
offering such alternatives will not develop product features or pricing which
are more attractive to customers than those currently offered by Xpedite.
Furthermore, on February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996, as amended (the "1996 Act"), which allows
local exchange carriers ("LECs"), including the RBOCs, to provide long
distance telephone service between Local Access and Transport Areas ("LATAs"),
which will likely significantly increase competition for long distance
services. The new legislation also grants the Federal Communications
Commission (the "FCC") the authority to deregulate other aspects of the
telecommunications industry, which in the future may, if authorized by the
FCC, facilitate the offering of an integrated suite of information and
telecommunications services by regulated entities, including the RBOCs, in
competition with the Company. Such increased competition could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Telecommunications companies compete for consumers based on price, with
major long distance carriers conducting extensive advertising campaigns to
capture market share. There can be no assurance that a decrease in the rates
charged for communications services by the major long distance carriers or
other competitors, whether caused by general competitive pressures or the
entry of the RBOCs and other LECs into the long distance market, would not
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company expects that the information and telecommunications services
markets will continue to attract new competitors and new technologies,
possibly including alternative technologies that are more sophisticated and
cost effective than the technology of the Company. The Company does not have
the contractual right to prevent its Premiere WorldLink subscribers from
changing to a competing network, and the Company's subscribers may generally
terminate their service with the Company at will.
Dependence on Key Management and Personnel. The Company's success is largely
dependent upon its executive officers and other key personnel, the loss of one
or more of whom could have a material adverse effect on the Company. The
Company believes that its continued success will depend to a significant
extent upon the efforts and abilities of Boland T. Jones, Chairman and
President, and certain other key executives. Mr. Jones has entered into an
employment agreement with the Company which expires in December 1999, and the
Company maintains key man life insurance on Mr. Jones in the amount of $3.0
million. During the fourth quarter of 1997, D. Gregory Smith, a co-founder of
the Company, resigned as a director, Executive Vice President and Assistant
Secretary of the Company and as a director and officer of PCI and certain
other subsidiaries, and Leonard A. DeNittis resigned as the Vice President of
Engineering and Operations of PCI.
<PAGE>
The Company also believes that to be successful it must hire and retain
highly qualified engineering and product development personnel. Competition in
the recruitment of highly qualified personnel in the information and
telecommunications services industry is intense. The inability of the Company
to locate, hire and retain such personnel may have a material adverse effect
on the Company. No assurance can be given that the Company will be able to
retain its key employees or that it will be able to attract qualified
personnel in the future.
Reliance on Amway and Certain other Relationships. Historically, the Voice-
Tel Entities have relied on sales through Amway Corporation ("Amway") for a
substantial portion of their revenue. Such sales accounted for approximately
20.0%, 14.3% and 10.1% of the Company's revenue for 1995, 1996 and 1997,
respectively. Amway's relationship with VTE commenced in 1990 when VTE began
managing the voice messaging operations previously conducted by Amway's
subsidiary, Amvox, Inc. ("Amvox"). VTE subsequently acquired and franchised
the former Amvox service centers from Amway in exchange for an equity interest
in VTE. Amway later invested in the development of the private frame relay
digital messaging network through VTN. As a result of these transactions,
Amway also became the single largest equity holder in VTE and VTN. VTE and
Amway have entered into a service and reseller agreement (the "Amway
Agreement") providing, among other things, for the sale by VTE of voice
messaging and network transmission services on an exclusive basis to Amway in
the United States, Canada, New Zealand and Australia for resale by Amway to
its independent distributors under the "Amvox" tradename. The Amway Agreement
does not bind the Amway distributors, who are free to acquire messaging
services from alternative vendors. The Amway Agreement may be canceled by
either party upon 180 days prior written notice or upon shorter notice in the
event of a breach. The Amway Agreement does not prohibit VTE from continuing
to provide voice messaging and network transmission services to Amway's
distributors following termination of the Amway Agreement. However, in the
event that Amway recommended a voice messaging and network transmission
services provider other than the Company, there can be no assurance that
Amway's distributors would not follow such recommendation. Amway sold a
significant portion of the Common Stock that it acquired in the Voice-Tel
Acquisitions in an offering pursuant to a demand registration by certain
former owners of the Voice-Tel Entities. Such sale decreased Amway's interest
in the Company and may increase the possibility that Amway will recommend a
voice messaging and network transmission services provider other than the
Company. There can be no assurance that the Company's relationship with Amway
and the Amway distributors will continue at historical levels or at all, nor
can there be any assurance of long-term price protection for services provided
to Amway. Loss or 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 Company's business, financial condition and
results of operations.
In September 1997, Premiere entered into an agreement with Digitec 2000,
Inc. ("Digitec") pursuant to which Digitec will act as a distributor to market
and sell prepaid telephone cards. Under the terms of such agreement, Digitec
agreed, starting January 1, 1998, to sell cards with a minimum retail value
each month. In the event that Digitec has not sold all of the cards by August
31, 1998, Digitec will be obligated to pay Premiere an amount equal to the
retail value of the unsold cards less commissions that would have been payable
on such cards. Digitec is not currently selling the monthly minimum amount and
no assurance can be given that Digitec will be able to sell the amount of
cards that it is obligated to sell under the terms of such agreement. In the
event that Digitec is unable to do so, the Company believes that it is
unlikely that Digitec would have the financial resources available to it to
make the payment required on August 31, 1998 under such agreement.
Technological Change; Risk of Obsolescence; Dependence on New Services. The
market for the Company's services is characterized by rapid technological
change, frequent new product introductions and evolving industry standards.
The Company's future success will depend in significant part on its ability to
anticipate industry standards, continue to apply advances in technologies,
enhance its current services, develop and introduce new services in a timely
fashion, enhance its software and its computer telephony platform and compete
successfully with products and services based on evolving or new technologies.
The Company expects new products and services, and enhancements to existing
products and services, to be developed and introduced which will compete with
the services offered by the Company. Among the new and evolving technologies
with which the Company expects to compete are notebook computers equipped with
sound cards, fax modems and
<PAGE>
cellular modems, portable Internet appliances which would allow connection to
the Internet over wireless networks and personal digital assistants with
enhanced communications features. In addition, aspects of the Company's
Orchestrate product line, which has been marketed to customers during the
first quarter of 1998, is expected to compete within markets where larger
companies are working to provide a unified messaging solution. The Company is
also aware that products currently exist which provide text-to-voice e-mail
conversion and "call connect/call screening" services.
Through the recently completed Xpedite Merger, Premiere offers Enhanced
Services. See "--Risks Associated with Expansion of Enhanced Document
Distribution Services." Technological advances may result in the availability
of new services, products or methods of electronic document delivery that
could compete with the electronic document distribution services currently
provided by Premiere and Xpedite or decrease the cost of existing products or
services which could enable Premiere's and/or Xpedite's established or
potential customers to meet their own needs for electronic document
distribution services more cost efficiently than through the use of Premiere
or Xpedite or in the future through the use of the combined company's
services. In addition, Premiere may experience difficulty integrating
incompatible systems of acquired businesses into its network. There can be no
assurance that Premiere will not be materially adversely affected in the event
of such technological change or difficulty, or that changes in technology will
not enable additional companies to offer services which could replace, or be
more cost-effective than, some or all of the services offered now by Premiere
or Xpedite or in the future by the combined company.
The Voice-Tel Acquisitions constitute a significant investment by the
Company in a private frame relay network architecture. Alternative
architectures currently exist, and technological advances may result in the
development of additional network architectures. There can be no assurance
that the telecommunications industry will not standardize on a protocol other
than frame relay or that the Company's frame relay architecture will not
become obsolete. Such events would require the Company to invest significant
capital in upgrading or replacing its private frame relay network and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company must continually introduce new products in response to evolving
industry standards and customer demands for enhancements to the Company's
existing products. One such new product is Orchestrate, which is operational
and has been available in limited release. The Company anticipates commencing
marketing of the Orchestrate product during the second quarter of 1998. The
Company believes that its competitors have not yet developed a publicly
available network-based product which incorporates all of the functionalities
of Orchestrate, although the Company's competitors have developed products
which the Company believes offer some, but not all, of the bundled services
offered through Orchestrate . There can be no assurance that: (i) the Company
will be successful in developing and marketing service enhancements or new
services that respond to these or other technological changes or evolving
industry standards; (ii) the Company will not experience difficulties that
could delay or prevent the successful development, introduction and marketing
of its services, including Orchestrate; or (iii) its new services and the
enhancements thereto, including Orchestrate, will adequately meet the
requirements of the marketplace and achieve market acceptance. Delays in the
introduction of new services, the inability of the Company to develop such new
services or the failure of such services to achieve market acceptance could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Uncertainty of Market Acceptance of Computer Telephony. The Company's future
success depends upon the market acceptance of its existing and future computer
telephony product lines and services. Computer telephony integrates the
functionality of telephones and computers and thus represents a departure from
standards for information and telecommunications services. Market acceptance
of computer telephony products and services generally requires that
individuals and enterprises accept a new way of exchanging information. The
Company believes that broad market acceptance of its computer telephony
product lines and services will depend on several factors, including ease of
use, price, reliability, access and quality of service, system security,
product functionality and the effectiveness of strategic marketing and
distribution relationships. There can be no assurance that the Company's
computer telephony products and services will achieve broad market acceptance
<PAGE>
or that such market acceptance will occur at the rate which the Company
currently anticipates. A decline in the demand for, or the failure to achieve
broad market acceptance of, the Company's computer telephony product lines and
services would have a material adverse effect on the Company's business,
financial condition and results of operations.
Limited Protection of Proprietary Rights and Technology. The Company relies
primarily on a combination of intellectual property laws and contractual
provisions to protect its proprietary rights and technology. These laws and
contractual provisions provide only limited protection of the Company's
proprietary rights and technology. The Company's proprietary rights and
technology include confidential information and trade secrets which the
Company attempts to protect through confidentiality and nondisclosure
provisions in its licensing, services, reseller and distribution agreements.
The Company typically attempts to protect its confidential information and
trade secrets through these contractual provisions for the term of the
applicable agreement and, to the extent permitted by applicable law, for some
negotiated period of time following termination of the agreement, typically
one to two years at a minimum. Although the Company is not aware of any
current or previous infringement of its proprietary rights and technology,
there can be no assurance that the Company's means of protecting its
proprietary rights and technology will be adequate or that the Company's
competitors will not independently develop similar technology. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights to as great an extent as the laws of the U.S.
Risks of Infringement Claims. Many patents, copyrights and trademarks have
been issued in the general areas of information and telecommunications
services and computer telephony. The Company believes that in the ordinary
course of its business third parties will claim that the Company's current or
future products or services infringe the patent, copyright or trademark rights
of such third parties. No assurance can be given that actions or claims
alleging patent, copyright or trademark infringement will not be brought
against the Company with respect to current or future products or services, or
that, if such actions or claims 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 products and services, require the
Company to enter into royalty or licensing agreements, or cause the Company to
discontinue use of the challenged technology, tradename or service mark 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's business,
financial condition and results of operations.
The Company is aware of other companies that use the terms "WorldLink" or
"Premiere" in describing their products and services, including
telecommunications products and services. Certain of those companies hold
registered trademarks which incorporate the names "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 "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 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.
In October 1996, VTE received a letter from a third party claiming that
certain aspects of VTE's products and services may be infringing upon one or
more of the third party's patents. The Company has reviewed the patent claims
of the third party and does not believe that the Company's products or
services infringe on the claims of the third party. No patent infringement
claims against the Company have been filed by the third party at this time.
Should the third party file patent infringement claims against the Company,
the Company believes that it would have meritorious defenses to any such
claims. However, due to the inherent uncertainties of litigation, the Company
is unable to predict the outcome of any potential litigation with the third
party, and any adverse outcome could have a material adverse effect on the
Company's business, results of operations or financial condition. Even if the
Company were to ultimately prevail, the Company's business could be adversely
affected by the diversion of management attention and litigation costs.
Because of this risk, the Company
<PAGE>
withheld in escrow approximately 123,000 shares of Common Stock from the
purchase price of VTE and VTN. This escrow arrangement terminates in April
2000. There can be no assurance that such escrow will be sufficient to fully
cover the Company's exposure in the event of litigation or an adverse outcome
to the potential infringement claims.
In May 1997, Premiere received a letter from a manufacturer and marketer of
certain telecommunications equipment asserting that Premiere is offering
certain "calling card and related enhanced services," "single number service"
and "call connecting services" covered by three patents held by that company
and inviting Premiere to obtain a license. Premiere has preliminarily reviewed
the subject patents and, based on that review, presently believes that its
products and services currently being marketed do not infringe these patents.
Premiere intends, however, to conduct a further review of these patents in
order to determine whether it would be helpful to its future products and
services to license the patents. If Premiere ultimately determines that it is
infringing these patents, or any one of them, it could seek to license the
technology or discontinue using it and employ an alternate technology. There
can be no assurance that Premiere would be able to license the technology on
commercially reasonable terms or that it could easily and inexpensively migrate
to a new call reorigination technology. Premiere's call reorigination service is
only one service that it offers, and management does not believe that this
service is critical to the marketing of Premiere's overall suite of services.
Consequently, Premiere does not believe that its inability to license the
technology or migrate to a new technology would have a material adverse effect
on its business, financial condition and results of operations. No claim has
been asserted beyond this letter, but no assurance can be given that the third
party will not commerce an infringement action against Premiere. If a patent
infringement claim is brought against Premiere, there can be no assurance that
Premiere would prevail and any adverse outcome could have a material adverse
effect on Premiere's business, financial condition and results of operations.
In May 1997, the Company received a letter from counsel for a provider of
goods and services in the telecommunications field objecting to the Company's
use of the phrase "personal assistant" based on that company's federally
registered "personal assistant" service mark. On June 18, 1997, counsel for
the Company responded to the objections, noting that the Company did not
intend to use, nor would it use in the future, the words "personal assistant"
as a trademark or service mark, but instead would merely use these words to
describe the nature of its product. The Company has not heard anything further
from the potential claimant and believes that the matter has been resolved.
In July 1997, the Company received a letter from counsel for a French
publishing company objecting to the Company's use of the "Premiere" trademark.
Based on, among other things, the type of business in which the French company
is engaged and the unlikelihood that the Company will engage in competitive
activities using the Premiere mark in France, the Company believes that no
action will be brought. Due to the inherent uncertainties of litigation,
however, the Company is unable to predict the outcome of any potential
litigation with the French company, and any adverse outcome could have a
material effect on the Company's business, financial condition and results of
operations. Even if the Company were to prevail in such a challenge, the
Company's business could be adversely affected by the diversion of management
attention and litigation costs.
In February 1997, the Company entered into a long-term nonexclusive license
agreement with AudioFAX settling a patent infringement suit filed by AudioFAX
in June 1996. 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. In September 1997, VoiceCom also entered into a
long-term nonexclusive license agreement with AudioFAX.
In July 1996, Xpedite received a letter from counsel for AudioFAX, which
informed Xpedite that AudioFAX is the owner of certain U.S. and Canadian
patents relevant to the fax processing business, and inquired as to Xpedite's
interest in obtaining a license to use these patents. In the first quarter of
1998, the Company expects to take a one-time charge of approximately $2.85
million for the estimated settlement costs and expenses related to resolution of
these claims.
<PAGE>
Uncertainty of Strategic Relationships. A principal element of the Company's
strategy is the creation and maintenance of strategic relationships that will
enable the Company to offer its services to a larger customer base than the
Company could otherwise reach through its direct marketing efforts. The Company
has experienced growth in its existing strategic relationships during 1996 and
1997 and has entered into or initiated new strategic relationships with several
companies, including WorldCom and American Express. Although the Company intends
to continue to expand its direct marketing channels, the Company believes that
strategic partner relationships may offer a potentially more effective and
efficient marketing channel. Consequently, the Company's success depends in part
on the ultimate success of these relationships and on the ability of these
strategic partners to market the Company's services effectively. Failure of one
or more of the Company's strategic partners to successfully develop and sustain
a market for the Company's services, or the termination of one or more of the
Company's relationships with a strategic partner, could have a material adverse
effect on the Company's overall performance. The telecommunications industry is
experiencing rapid consolidation. Recently WorldCom, which is a strategic
partner of the Company, entered into an agreement to acquire MCI, which competes
with the Company with respect to certain services. Consolidation in the
communications industry, including consolidations involving the Company's
customers and strategic partners, could have a material adverse effect on the
Company's business, financial condition and results of operations.
In November 1996, the Company entered into a strategic alliance agreement
with WorldCom, whereby WorldCom is required, among other things, to provide
the Company with the right of first opportunity to provide certain 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. The Company recorded the
value of this agreement as an intangible asset. While the Company believes
that the intangible asset will be recovered over the life of the agreement,
this recoverability is dependent upon the success of the strategic
relationship. The Company will continually evaluate the realizability of the
intangible asset recorded, and there can be no assurance that future
evaluations will not require a write-down of this asset.
Although the Company views its strategic relationships as a key factor in
its overall business strategy and in the development and commercialization of
its services, there can be no assurance that its strategic partners view their
relationships with the Company as significant for their own businesses or that
they will not reassess their commitment to the Company in the future. The
Company's arrangements with its strategic partners do not always establish
minimum performance requirements for the Company's strategic partners, but
instead rely on the voluntary efforts of these partners in pursuing joint
goals. Certain of these arrangements prevent the Company from entering into
strategic relationships with other companies in the same industry as the
Company's strategic partners, either for specified periods of time or while
the arrangements remain in force. In addition, even when the Company is
without contractual restriction, it may be restrained by business
considerations from pursuing alternative arrangements. The ability of the
Company's strategic partners to incorporate the Company's services into
successful commercial ventures will require the Company, among other things,
to continue to successfully enhance its existing services and develop new
services. The Company's inability to meet the requirements of its strategic
partners or to comply with the terms of its strategic partner arrangements
could result in its strategic partners failing to market the Company's
services, seeking alternative providers of communications and information
services or canceling their contracts with the Company, any of which could
have a material adverse impact on the Company's business, financial condition
and results of operations.
Dependence on Licensing and Strategic 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 4.2% of Premiere's revenues in 1996 and 6.8% of Premiere's
revenues during 1997. One licensee, Communications Network Corporation
("CNC"), accounted for approximately 19.6% of Premiere's 1996 license fees and
approximately 0.8% of the Company's total 1996 revenues. On August 6, 1996,
CNC was placed into bankruptcy under Chapter 11 of the United States
Bankruptcy Code. CNC owed the
<PAGE>
Company approximately $627,000 as of December 31, 1996. However, CNC's
transmission provider, WorldCom Network Services, Inc., d/b/a 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
1.8% of the Company's total 1996 revenues, and approximately 66.8% of the
Company's license fees and 4.5% of the Company's total 1997 revenues. 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.
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. Licensees that ceased doing business with Premiere 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 and the first three quarters of 1997, 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, financial condition and results of operations.
Year 2000 Problem. It is possible that a significant portion of the
Company's currently installed computer systems, software products, billing
systems, telephony platforms, networks, database or other business systems
(hereinafter referred to collectively as "Systems"), or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem). The Company is
currently in the process of evaluating its Systems to determine whether or not
modifications will be required to prevent problems related to the Year 2000.
There can be no assurance that the Company will identify all such Year 2000
problems in its Systems or those of its customers or vendors, including
network transmission providers, in advance of their occurrence or that the
Company will be able to successfully remedy any problems that are discovered.
In addition, the Company is dependent upon third parties for transmission of
its calls and other communications. There can be no assurance that these third
party providers will identify and remedy any Year 2000 problems in their
transmission facilities. The expenses of the Company's efforts to identify and
address such problems, the expenses or liabilities to which the Company may be
subject as a result of such problems, or the failure of third party providers
of transmission facilities, could have a material adverse effect on the
Company's business, financial condition and results of operations. The
financial stability of existing customers may be adversely impacted by Year
2000 problems which could have a material adverse impact on the Company's
revenues. In addition, failure of the Company to identify and remedy Year 2000
problems could put the Company at a competitive disadvantage relative to
companies that have corrected Year 2000 problems.
Risks of Leverage. In connection with the issuance of its convertible notes
to the public on June 30 and July 30, 1997 (the "Convertible Notes"), Premiere
incurred $172.5 million in indebtedness. As a result of this increased
leverage, Premiere's principal and interest obligations have increased
substantially. The degree to which Premiere is leveraged could adversely
affect Premiere's ability to obtain additional financing for working capital,
acquisitions or other purposes and could make it more vulnerable to economic
downturns and competitive pressures. Premiere's increased leverage could also
adversely affect its liquidity, as a substantial portion of available cash
from operations may have to be applied to meet debt service requirements, and
in the event of a cash shortfall, Premiere could be forced to reduce other
expenditures and forego potential acquisitions to be able to meet such
requirements. The indenture related to the Convertible Notes does not contain
any financial covenants or any other agreements restricting the payments of
dividends, the repurchase of securities of Premiere, the issuance of
additional equity or the incurrence of additional indebtedness. In December
1997, Xpedite entered into a credit agreement with certain banks which
provides a $150 million revolving credit
<PAGE>
facility, a $70 million portion of which is available for pound sterling
borrowings. All borrowing under this Credit Agreement becomes due and payable
on December 16, 1998. Substantially all of the assets of Xpedite collateralize
the revolving credit facility. The credit agreement also contains certain
financial covenant provisions. Management is currently evaluating the Company's
options regarding refinancing this indebtedness which could result in increased
leverage and greater restrictions on the Company's activities due to financial
covenants and other similar restrictions.
Shares Eligible for Future Sale; Registration Rights. As of March 26, 1998,
the Company had approximately 45,260,000 shares of Common Stock outstanding
(including 329,840 Exchangeable Non-Voting Shares of Voice-Tel Canada Limited,
a subsidiary of the Company (the "Exchangeable Shares"), which are convertible
at any time into a like number of shares of Common Stock and approximately
10,984,000 shares issued or issuable in connection with the Xpedite Merger. Of
these shares, approximately 31,348,000 shares of Common Stock are freely
transferable without restriction or limitation under the Securities Act. The
remaining shares (approximately 13,912,000 shares) are "restricted securities"
("the Restricted Shares") within the meaning of Rule 144 ("Rule 144") adopted
under the Securities Act. Approximately 7,032,000 Restricted Shares are
immediately eligible for sale in the public market pursuant to Rule 144.
Beginning on April 30, 1998 and September 30, 1998, approximately 6,434,000
additional shares and approximately 446,000 additional shares, respectively,
will be eligible for sale pursuant to Rule 144, subject to the volume, manner
of sale and notice requirements of Rule 144. The Company is aware that Mr. D.
Gregory Smith, the beneficial owner of approximately 1.8 million shares,
executed a letter agreement with a third party broker that restricts his
ability to sell or offer for sale any shares of Common Stock of Premiere until
December 5, 1998 without the consent of the third party. There can be no
assurance such third party will not give its consent to the sale of shares of
Common Stock by Mr. Smith or will enforce its rights under such agreement.
As of December 31, 1997 options and warrants to purchase an aggregate of
approximately 7,413,000 shares of Common Stock were outstanding, of which
options and warrants to purchase approximately 3,302,000 shares of Common
Stock are vested and immediately exercisable. Substantially all of the shares
issuable upon the exercise of outstanding options and warrants will be
eligible for immediate resale, if and when issued, under Rule 701 adopted
under the Securities Act or pursuant to Registration Statements on Form S-8.
In addition, an aggregate of approximately 543,000 shares of Common Stock are
issuable upon the exercise of options and warrants previously granted by
Xpedite and converted into the right to acquire Premiere Common Stock in the
Merger. The Company intends to file a Registration on Form S-8 to register the
share issuable upon the exercise of the options and warrants assumed in the
Merger.
The Convertible Notes are convertible into a maximum of approximately
3,227,000 shares of Common Stock at any time prior to final maturity at a
conversion price of $33.00 per share, subject to adjustment. The Convertible
Notes and the Common Stock issuable upon conversion of the Convertible Notes
are currently registered for resale under the Securities Act and may be resold
pursuant to such registration statement.
Excluding certain holders of shares of Common Stock issued in connection
with the Xpedite Merger discussed below, the holders of approximately
10,641,494 shares of Common Stock and their permitted transferees are entitled
to certain rights with respect to the registration of such shares under the
Securities Act.
Prior to the Company's initial public offering in March 1996, the Company
granted certain registration rights to holders of convertible preferred stock
and warrants. Although these contractual rights remain in force, the shares
subject to such registration rights may be freely disposed of pursuant to Rule
144 under the Securities Act.
Subsequent to the Company's initial public offering, the Company has granted
registration rights in connection with the Company's execution of a strategic
alliance agreement with WorldCom, and the Company's acquisitions of TeleT
Communications, LLC ("TeleT"), the Voice-Tel Entities and VoiceCom. In each of
these instances, the Company is required to notify the holders of the
Company's intent to register any of its Common Stock under the Securities Act
and allow such holders an opportunity to include their shares of Common Stock
in the Company's registration; provided, however, that (i) with respect to
WorldCom such notice
<PAGE>
must be given only if the Company intends to register and sell newly issued
shares; (ii) with respect to CMG@Ventures, L.P. ("CMG"), such notice must be
given only if 20% of the shares held by CMG remain outstanding; and (iii) with
respect to the former owners of the Voice-Tel Entities, such notice must be
given only until April 30, 1998. These registration rights are subject to
certain limitations and restrictions, including the right of the underwriters
of an underwritten offering to limit the number of shares offered in such
registration if such underwriter determines that the number of shares
requested to be registered cannot be underwritten.
WorldCom has a one-time right to require the Company to file a registration
statement under the Securities Act, provided that such request is made: (i)
between November 13, 1998 and November 13, 1999; or (ii) within 60 days from
the date of a change in control of Premiere, the termination of Boland T.
Jones as an executive officer or the termination of the strategic alliance
agreement with WorldCom if the events described in clause (ii) occur prior to
November 13, 1999. In addition, the registration must be with respect to such
minimum number of shares of Common Stock having an aggregate proposed offering
price equal to $10.0 million.
With respect to the former owners of the Voice-Tel Entities, the Company
agreed to file a shelf registration statement (the "Voice-Tel Shelf") as soon
as practicable following December 15, 1997 to include any shares of Common
Stock then held by the former owners of the Voice-Tel Entities. The Company
exercised certain contractual rights to postpone this requirement for up to 90
days. The Company has received requests to register approximately 4.5 million
shares of Common Stock and is using its commercially reasonable efforts to
file the Voice-Tel Shelf as soon as practicable. In addition, the Company agreed
to file a shelf registration statement for the former holders of VoiceCom within
30 days after the filing of the Company's Annual Report on Form 10-K, and use
reasonable commercial efforts to have the registration statement declared
effective as soon as practicable thereafter. The Company anticipates including
these shares in the Voice-Tel Shelf.
The shares of Premiere Common Stock issued in connection with the Xpedite
Merger were registered under the Securities Act and, unless issued to
affiliates of Xpedite as of the date of the Xpedite stockholders meeting to
consider the Xpedite Merger, are freely transferable without restriction or
limitation under the Securities Act.
For a period of three months commencing 30 days after financial results
covering at least 30 days of combined operations of Premiere and Xpedite have
been published, each person who is precluded by the Securities Act from
selling or disposing of all of their shares of Premiere Common Stock received
in the Xpedite Merger within one calendar quarter (a "Large Stockholder") will
have a one-time right to require Premiere to file a registration statement
under the Securities Act relating to all or part of their registrable
securities (an "Xpedite Demand Registration"). Premiere is obligated to use
its commercially reasonable efforts to effect an Xpedite Demand Registration
as soon as reasonably practical after the request is made, except that
Premiere has the right, under certain circumstances, to delay the effective
date of a registration statement or any sales thereunder for a period not to
exceed 120 days from the date of the request for registration. In addition,
Premiere is not obligated to effect an Xpedite Demand Registration (i) for
less than one million shares or (ii) within three months of a Large
Stockholder selling any registrable securities pursuant to an Xpedite
Piggyback Registration (defined below). Unless Premiere shall otherwise
consent, any offering pursuant to an Xpedite Demand Registration shall be
underwritten and Premiere shall select the underwriters and any additional
investment bankers to be used.
If Premiere proposes to file a registration statement under the Securities
Act with respect to an offering for Premiere's own account (other than for
offerings pursuant to certain acquisitions or employee benefit plans, non-
underwritten offerings or offerings of certain convertible securities), or for
the account of any holders of Premiere Common Stock other than the Large
Stockholders (other than for non-underwritten offerings), any Large
Stockholder may request registration under the Securities Act of all or part
of its Registrable Securities on the same terms and conditions as Premiere or
such other holders of Premiere Common Stock (an "Xpedite Piggyback
Registration"). In the case of an Xpedite Piggyback Registration, Premiere has
the right to terminate or withdraw any registration undertaken by it prior to
the effectiveness of such registration whether or not any Large Stockholder
has elected to include registrable securities in such registration.
<PAGE>
No prediction can be made as to the effect, if any, that the availability of
additional shares for sale will have on the market prices of the Common Stock
prevailing from time to time. Nevertheless, sales of substantial amounts of
the Common Stock in the public market could adversely affect prevailing market
prices of the Common Stock and the ability of the Company to raise equity
capital in the future.
Potential Adverse Impact of Pending Litigation. In the ordinary course of
its business, the Company is subject to claims and litigation from third
parties alleging that the Company's products and services infringe the
patents, trademarks and copyrights of such third parties. See "--Risk of
Infringement Claims." The Company has several litigation matters pending not
involving infringement claims, as described below, which the Company is
defending vigorously. Due to the inherent uncertainties of the litigation
process and the judicial system, the Company is unable to predict the outcome
of such litigation matters. If the outcome of one or more of such matters is
adverse to the Company, it could have a material adverse effect on the
Company's business, financial condition and results of operations.
On January 21, 1997, Eric Bott, E.B. Elliott and Cost Recovery Systems, Inc.
("CRS") filed a complaint against the Company, PCI and the Company's
president, Boland T. Jones, in the Superior Court of Fulton County, Georgia
("Civil Action"). As of December 2, 1997, the Company, PCI and Mr. Jones
entered into a settlement agreement with Mr. Bott which settled and disposed
of Mr. Bott's claims in connection with this litigation. On December 12, 1997,
Mr. Elliott and CRS filed a Second Amended Complaint against Premiere and
Boland T. Jones in the Civil Action. The first count seeks an accounting of
commissions that Mr. Elliott and CRS allege may be due to them under a sales
commission agreement between CRS and Premiere. The second count seeks options
for 72,000 shares of Premiere Common Stock that Mr. Elliott and CRS claim are
due to them, or damages in the alternative. The third count seeks to recover
the Plaintiffs' reasonable attorneys' fees. In the Second Amended Complaint,
the remaining plaintiffs have dropped their prior request for punitive
damages. The Company believes it has meritorious defenses to Mr. Elliott's and
CRS' remaining allegations, but due to the inherent uncertainties of the
litigation process, the Company is unable to predict the outcome of this
litigation. If the outcome of this litigation is adverse to the Company, it
could have a material adverse effect on the Company's business, financial
condition and results of operations. The settlement with Mr. Bott will not
have a material adverse effect on the Company's business, financial condition
or results of operations.
On August 6, 1996, CNC, a licensing customer of the Company, was placed into
bankruptcy (the "Bankruptcy Case") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code"). On August 23, 1996, CNC filed a
motion to intervene in a separate lawsuit brought by a CNC creditor in the
United States District Court for the Southern District of New York against
certain guarantors of CNC's obligations and to file a third-party action
against numerous entities, including such CNC creditor and PCI for alleged
negligent misrepresentations of fact in connection with an alleged fraudulent
scheme designed to damage CNC (the "Intervention Suit"). The District Court
has denied CNC's requests to intervene and to file a third party action and has
transferred the remainder of the Intervention Suit to the Bankruptcy Case. Based
upon the bankruptcy examiner's findings and the subsequently appointed
bankruptcy trustee's investigation of potential actions directed at PCI,
including an avoidable preference claim under the Bankruptcy Code of an amount
up to approximately $950,000, the bankruptcy trustee (the "Trustee") and PCI
have reached a tentative settlement on all issues between the parties, subject
to Bankruptcy Court approval. The terms of the proposed settlement have been
incorporated into a proposed plan of reorganization (the "Plan") filed by the
Trustee with the Bankruptcy Court, which is also subject to Bankruptcy Court
approval. Based upon hearings before the Bankruptcy Court, the Trustee filed on
November 18, 1997, a motion requesting approval of the settlement to accompany
the Plan. If only the settlement is approved, PCI will obtain a release from the
Trustee and the Trustee will dismiss the Intervention Suit in consideration of
PCI making a cash payment of $1,200,000 to the Trustee. If the Plan is
subsequently approved by the Court, PCI will make an additional cash payment of
up to $300,000 to the Trustee in consideration of PCI obtaining certain allowed
subordinated claims and the Court granting an injunction in Premiere's favor
against possible nuisance suits relating to the CNC business. The Company has
previously established a reserve for the settlement and Plan payments. If the
outcome of this matter is adverse to PCI, the settlement is not approved
<PAGE>
and the Trustee successfully pursues possible litigation against the Company,
it could have a material adverse effect on the Company's business, operating
results or financial condition.
On November 26, 1997, Wael Al-Khatib ("Al-Khatib"), the sole shareholder and
former president of CNC, and his company, Platinum Network, Corp. ("Platinum")
(Al-Khatib and Platinum are collectively referred to herein as "Plaintiffs"),
filed a complaint against PCI, WorldCom Network Services, Inc. f/k/a WilTel,
Inc., Bernard J. Ebbers, David F. Meyers, Robert Vetera, Joseph Cusick,
William Trower, Don Wilmouth, Digital Communications of America, Inc., Boland
Jones, Patrick Jones, and John Does I-XX (the "Defendants") in the United States
District Court for the Eastern District of New York (the "Al-Khatib lawsuit").
Plaintiffs contend that, during 1996, PCI, certain officers of PCI and the other
Defendants engaged in a fraudulent scheme to restrain trade in the debit card
market nationally and in the New York debit card sub-market and made
misrepresentations of fact in connection with the scheme. The Plaintiffs are
seeking at least $250 million in compensatory damages and $500 million in
punitive damages from PCI and the other Defendants. Pursuant to the local rules
of the District Court, PCI has filed a letter stating the reaons it believes the
lawsuit should be dismissed. PCI has also filed a motion for sanctions under
Federal Rule of Civil Procedure 11. PCI believes that it has meritorious
defenses to the Plaintiffs' allegations and will vigorously defend the same. Due
to the inherent uncertainties of the judicial system, the Company is not able to
predict the outcome of the Al-Khatib lawsuit. If the Al-Khatib lawsuit is not
resolved in the Company's favor, it could have a material adverse effect on the
Company's business, financial condition and results of operations.
On July 8, 1997, various limited partners purporting to act on behalf of
Telentry Research Limited Partnership, Telentry Development Limited
Partnership, Telentry XL Limited Partnership, Telentry Research Limited
Partnership II and Telentry Development Limited Partnership II (collectively,
the "Telentry Partnerships") filed a complaint in the Superior Court of New
Jersey for Morris County against Xpedite and two other defendants. The
complaint alleges, inter alia, that Xpedite is in breach of its obligations to
make royalty payments under a series of license agreements between Xpedite and
the Telentry Partnerships. In this action, the plaintiff's seek, inter alia,
damages of $2,030,040 and an accounting of royalties. On September 29, 1997.
Xpedite filed a motion to dismiss the complaint. The court subsequently
elected to treat this motion as a motion for summary judgment. The motion has
been fully briefed by both parties, and oral argument is currently scheduled
for April 3, 1998. To date, no discovery has been taken in this action.
On February 23, 1998, Rudolf R. Nobis and Constance Nobis filed a complaint
in the Superior Court of Union County, New Jersey against 15 named defendants
including Xpedite Systems, Inc. ("Xpedite") and certain of its alleged current
and former officers, directors, agents and representatives. The lawsuit is
styled Rudolf R. Nobis and Constance Nobis v. Edward Angrisani, et al., Civil
Action File No. UNN-L-113698, Superior Court of New Jersey Law Division: Union
County. The plaintiffs allege that the 15 named defendants and certain
unidentified "John Doe defendants" engaged in wrongful activities in
connection with the management of the plaintiffs' investments with Equitable
Life Assurance Society of the United States and/or Equico Securities, Inc.
(collectively "Equitable"). More specifically, the complaint asserts
wrongdoing in connection with the plaintiffs' investment in securities of
Xpedite and in unrelated investments involving insurance-related products. The
defendants include Equitable and certain of its current or former
representatives. The allegations in the complaint against Xpedite are limited
to plaintiffs' investment in Xpedite. The plaintiffs have alleged that two of
the named defendants, allegedly acting as officers, directors, agents or
representatives of Xpedite, induced the plaintiffs to make certain investments
in Xpedite but that the plaintiffs failed to receive the benefits that they
were promised. The plaintiffs allege that Xpedite knew or should have known of
alleged wrongdoing on the part of other defendants. The plaintiffs' claims
against Xpedite include breach of contract, breach of fiduciary duty, unjust
enrichment, conversion, fraud, conspiracy, interference with economic
advantage and liability for ultra vires acts. The plaintiffs seek an
accounting of the corporate stock in Xpedite, compensatory damages of
$4,845,953.13, plus $200,000 in "lost investments," interest and/or dividends
that have accrued and have not been paid, punitive damages in an unspecified
amount, and for certain equitable relief, including a request for Xpedite to
issue 139,430 shares of common stock in the plaintiffs' names, attorneys' fees
and costs and such other and further relief as the Court deems just and
equitable. Xpedite intends to file an answer denying the material allegations
of the complaint and asserting various affirmative defenses and a motion to
dismiss the counts of the complaint against it. Premiere believes that Xpedite
has meritorious
<PAGE>
defenses to the plaintiffs' allegations, but due to the inherent uncertainties
of the litigation process, Premiere is unable to predict the outcome of this
litigation. If the outcome of this litigation is adverse to Xpedite, it could
have a material adverse effect on the Company's business, operating results and
financial condition.
Dependence on Switching Facilities and Computer Telephony Platforms; Damage,
Failure and Downtime. The Company currently maintains switching facilities and
computer telephony platforms in Atlanta, Georgia, Dallas, Texas and London,
England. 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, upgraded backup hardware and 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, and although the Company has not experienced any significant
downtime of its network in the last three years due to technical failures,
natural disasters or similar events, 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 one of the switching facilities as a
whole, thereby resulting in an interruption of the Company's services. Such an
interruption could have a material adverse effect on the Company's business,
financial condition and results of operations. Although the Company maintains
business interruption insurance providing for aggregate coverage of
approximately $10.8 million per policy year, there can be no assurance that
the Company will be able to maintain its business interruption insurance, that
such insurance will continue to be available at reasonable prices or that such
insurance will be sufficient to compensate the Company for losses it
experiences due to the Company's inability to provide services to its
subscribers.
Factors Affecting Operating Results; Potential Fluctuations in Quarterly
Results. The Company's operating results have varied significantly in the past
and may vary significantly in the future. Special factors that may cause the
Company's future operating results to vary include: (i) the unique nature of
strategic relationships into which the Company may enter in the future; (ii)
changes in operating expenses resulting from such strategic relationships and
other factors; (iii) the continued acceptance of the Company's licensing
program; (iv) the financial performance of the Company's licensees; (v) the
timing of new service announcements; (vi) market acceptance of new and
enhanced versions of the Company's services; (vii) potential acquisitions;
(viii) changes in legislation and regulation that may affect the competitive
environment for the Company's communications services; and (ix) general
economic and seasonal factors.
In the future, revenues from the Company's strategic relationships may
become an increasingly significant portion of the Company's total revenues.
Due to the unique nature of each strategic relationship, these relationships
may change the Company's mix of expenses relative to revenues.
Quarterly revenues are difficult to forecast because the market for the
Company's services is rapidly evolving. The Company's expense levels are
based, in part, on its expectations as to future revenues. If revenue levels
are below expectations, the Company may be unable or unwilling to reduce
expenses proportionately and operating results would likely be adversely
affected. As a result, the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to all of the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and
investors. In such event, the market price of the Company's Common Stock will
likely be materially adversely affected.
Risk of Software Failures or Errors. The software developed and utilized by
the Company in providing its services, including the Orchestrate software, may
contain undetected errors. Although the Company generally engages in extensive
testing of its software prior to introducing the software onto its network,
there can be no assurance that errors will not be found in the software after
the software goes into use. Any such error may result in partial or total
failure of the Company's network, additional and unexpected expenses to fund
further product development or to add programming personnel to complete a
development project, and loss of revenue because of the inability of
subscribers to use Premiere's network or the cancellation by subscribers of
their service with
<PAGE>
Premiere, any of which could have a material adverse effect on the Company.
The Company maintains technology errors and omissions insurance coverage of
$10.0 million per policy aggregate. However, there can be no assurance that
the Company will be able to maintain its technology errors and omissions
insurance, that such insurance will continue to be available at reasonable
prices or will be sufficient to compensate the Company for losses it
experiences due to the Company's inability to provide services to its
subscribers.
Dependence upon Telecommunication Providers; No Guaranteed Supply. The Company
does not own a transmission network and, accordingly, depends on WorldCom, LCI
International Telecom Corp. ("LCI"), MCI, Sprint and other facilities-based and
non-facilities based carriers for transmission of its subscribers' long distance
calls. These long distance telecommunications services generally are procured
pursuant to supply agreements for terms of three to five years, subject to
earlier termination in certain events. Certain of these agreements provide for
minimum purchase requirements. Further, the Company is dependent upon LECs for
call origination and termination. If there is an outage affecting one of the
Company's terminating carriers, the Company's platform automatically switches
calls to another terminating carrier if capacity is available. The Company has
not experienced significant losses in the past due to interruptions of service
at terminating carriers, but no assurance can be made in this regard in the
future. The Company's ability to maintain and expand its business depends, in
part, on its ability to continue to obtain telecommunication services on
favorable terms from long distance carriers and the cooperation of both
interexchange and LECs in originating and terminating service for its
subscribers in a timely manner. The partial or total loss of the ability to
receive or terminate calls would result in a loss of revenues by the Company and
could lead to a loss of subscribers, which could have a material adverse effect
on the Company.
The Company leases capacity on the WorldCom backbone to provide connectivity
and data transmission within the Company's private data network. The
telecommunications agreement expires in September 2000. The Company's hub
equipment is collocated at various WorldCom sites pursuant to co-location
agreements that are terminable by either party upon 30 days written notice. The
Company's ability to maintain network connectivity is dependent upon its access
to transmission facilities provided by WorldCom or an alternative provider. The
Company has no assurance that it will be able to continue such relationship with
WorldCom beyond the terms of its current agreements with WorldCom or that it
will be able to find an alternative provider on terms as favorable as those
offered by WorldCom or on any other terms. If the Company were required to
relocate its hub equipment or change its network transmission provider, it could
experience shutdowns in its service and increase costs which could have a
material adverse effect on its customer relationships and customer retention
and, therefore, its business, financial condition and results of operations.
Reliance on Supplier of Voice Messaging Equipment. The Company does not
manufacture voice messaging equipment used at its voice messaging service
centers, and such equipment is currently available from a limited number of
sources. Although the Company has not historically experienced any significant
difficulty in obtaining equipment required for its operations and believes
that viable alternative suppliers exist, no assurance can be given that
shortages will not arise in the future or that alternative suppliers will be
available. The inability of the Company to obtain this equipment could result
in delays or reduced delivery of messages which would materially and adversely
affect the Company's business, financial condition and results of operations.
Regulation. Various regulatory factors affect the Company's financial
performance and its ability to compete. The Company's operating subsidiaries
that provide regulated long distance telecommunications services ("Operating
Subsidiaries") are subject to regulation by the FCC and by various state
public service and public utility commissions ("PUCs"), and are otherwise
affected by regulatory decisions, trends and policies made by these agencies.
FCC rules currently require interexchange carriers to permit resale of their
transmission services. FCC rules also require LECs to provide all
interexchange carriers with equal access to local exchange facilities for
purposes of origination and termination of long distance calls. If either or
both of these requirements were eliminated, the Company could be adversely
affected. Moreover, the underlying carriers that provide services to the
Operating Subsidiaries or that originate or terminate the Operating
Subsidiaries' traffic may increase rates or experience disruptions in service
due to factors outside the Company's control, which could cause the Operating
Subsidiaries to experience increases in rates for telecommunications services
or disruptions in transmitting their subscribers' long distance calls.
<PAGE>
PCI, one of the Operating Subsidiaries, has made the requisite filings with
the FCC to provide interstate and international long distance services.
VoiceCom Systems, Inc. ("VCOM"), another Operating Subsidiary, is in the
process of making the requisite filings with the FCC to provide interstate and
international long distance services. There can be no assurance that the FCC
will approve VCOM's filings. Failure by VCOM to comply with FCC requirements
in connection with its provision of interstate and international long distance
services could have a material adverse effect on the Company's or on VCOM's
business, financial condition and results of operation.
In order to provide intrastate long distance service, the Operating
Subsidiaries generally are required to obtain certification from state PUCs,
to register with such state PUCs or to be found exempt from registration by
such state PUCs. Each of PCI and VCOM has either filed the applications
necessary to provide intrastate long distance telecommunications services
throughout the United States or is in the process of filing such applications.
To date, PCI is authorized to provide long distance telecommunications
services in 46 states and in the District of Columbia and is seeking
authorization to provide long distance telecommunications services in four
states. With the exception of three states, Colorado, Michigan and Arizona, in
which PCI's applications to provide operator service (i.e., "0+") are pending,
PCI is authorized to provide operator service in each state where PCI provides
long distance telecommunications service. VCOM, on the other hand, is
authorized to provide long distance telecommunications services in 13 states
and in the District of Columbia and is in the process of filing applications
for certificates to provide long distance telecommunications services in 37
states. The Operating Subsidiaries' facilities do not prevent subscribers from
using the facilities to make long distance calls in any state, including
states in which the Operating Subsidiaries currently are not authorized to
provide intrastate telecommunications services and operator services. There
can be no assurance that the Operating Subsidiaries' provision of long
distance telecommunications and operator services in states where the
Operating Subsidiaries are not authorized to provide such services will not
have a material adverse effect on the Company's or on the Operating
Subsidiaries' business, financial condition and results of operations.
The 1996 Act is intended to increase competition in the long distance and
local telecommunications markets. The 1996 Act opens competition in the local
services market and, at the same time, contains provisions intended to protect
consumers and businesses from unfair competition by incumbent LECs, including
the RBOCs. The 1996 Act allows RBOCs to provide long distance service outside
of their local service territories but bars them from immediately offering in-
region interLATA long distance services until certain conditions are
satisfied. An RBOC must apply to the FCC to provide in-region interLATA long
distance services and must satisfy a set of pro-competitive criteria intended
to ensure that RBOCs open their own local markets to competition before the
FCC will approve such application. Further, while the FCC has final authority
to grant or deny such RBOC application, the FCC must consult with the
Department of Justice to determine if, among other things, the entry of the
RBOC would be in the public interest, and with the relevant state to determine
if the pro-competitive criteria have been satisfied. While the FCC has yet to
grant any RBOC inter-LATA application, the Company is unable to determine how
the FCC will rule on any such applications in the future.
In response to a constitutional challenge filed by SBC Communications Inc.,
the United States District Court for the Northern District of Texas found the
1996 Act's restrictions on RBOC interLATA services to be an unconstitutional
bill of attainder, but stayed the effect of its decision pending further
appeal. As a result of the 1996 Act and if the interLATA restrictions are
ultimately struck down, the Company may experience increased competition from
others, including the RBOCs. In addition, the Operating Subsidiaries may be
subject to additional regulatory requirements and fees, including universal
service assessments and payphone compensation surcharges resulting from the
implementation of the 1996 Act.
In conducting its business, the Company is subject to various laws and
regulations relating to commercial transactions generally, such as the Uniform
Commercial Code and is also subject to the electronic funds transfer rules
embodied in Regulation E promulgated by the Board of Governors of the Federal
Reserve System (the "Federal Reserve"). Congress has held hearings regarding,
and various agencies are considering, whether to regulate providers of
services and transactions in the electronic commerce market. For example, the
Federal
<PAGE>
Reserve recently completed a study, directed by Congress, regarding the
propriety of applying Regulation E to stored value cards. The Department of
Treasury recently promulgated proposed rules applying record keeping,
reporting and other requirements to a wide variety of entities involved in
electronic commerce. It is possible that Congress, the states or various
government agencies could impose new or additional requirements on the
electronic commerce market or entities operating therein. If enacted, such
laws, rules and regulations could be imposed on the Company's business and
industry and could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's proposed
international activities also will be subject to regulation by various
international authorities and the inherent risk of unexpected changes in such
regulation.
Risks Associated with International Expansion. A key component of the
Premiere strategy is its planned expansion into international markets. In
1996, the Company opened a POP site in London, England which is currently
being upgraded to a full switching facility and computer telephony platform.
In addition, the Company intends to pursue long term strategic relationships
with European partners. Premiere also intends to establish high speed
client/server networks of personal computers (called "Telnodes") and PCs
utilizing the Company's proprietary software (called "Network Managers") in
Canada, New Zealand and potentially other countries in 1998. The Company
currently has voice messaging service centers in Canada, Australia, New
Zealand and Puerto Rico, If international revenues are not adequate to offset
the expense of establishing and maintaining these international operations,
Premiere's business, financial condition and results of operations could be
materially adversely affected. To date, Premiere has only limited experience
in marketing and distributing its services internationally. There can be no
assurance that Premiere will be able to successfully establish the proposed
international Telnodes and Network Managers or to market, sell and deliver its
services in international markets. In addition to the uncertainty as to
Premiere's ability to expand its international presence, there are certain
difficulties and risks inherent in doing business on an international level,
such as burdensome regulatory requirements and unexpected changes in these
requirements, export restrictions, export controls relating to technology,
tariffs and other trade barriers, difficulties in staffing and managing
international operations, longer payment cycles, problems in collecting
accounts receivable, political instability, fluctuations in currency exchange
rates, seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world and potentially adverse tax
consequences. The Company denominates foreign transactions in foreign currency
and does not engage in hedging transactions. The Company has not experienced
any material losses from fluctuations in currency exchange rates, but there
can be no assurance that the Company will not incur material losses due to
currency exchange rate fluctuations in the future.
Premiere recently completed the Xpedite Merger. A significant portion of
Xpedite's business is conducted outside the United States and a significant
portion of its revenues and expenses are derived in foreign currencies.
Accordingly, Xpedite's results of operations may be materially affected by
fluctuations in foreign currencies. Many aspects of Xpedite's international
operations and business expansion plans are subject to foreign government
regulations, currency fluctuations, political uncertainties and differences in
business practices. There can be no assurance that foreign governments will
not adopt regulations or take other actions that would have a direct or
indirect adverse impact on the business or market opportunities of Xpedite
within such governments' countries, including increased tariffs. Furthermore,
there can be no assurance that the political, cultural and economic climate
outside the United States will be favorable to Xpedite's operations and growth
strategy.
Risks Associated with Expansion of Enhanced Document Distribution
Services. Premiere intends to accelerate growth of Enhanced Document
Distribution Services throughout the world by expansion of Xpedite's
proprietary private world-wide document distribution network (the "Xpedite
Network"), the integration of the Xpedite Network with Premiere's private
frame relay network and computer telephony platform and the acquisition of
entities engaged in the business of Enhanced Document Distribution Services.
There can be no assurance that Premiere will be able to expand its ability to
provide services at a rate or in a manner satisfactory to meet the demands of
existing or future customers, including, but not limited to, increasing the
capacity of the Xpedite Network to process increasing amounts of document
traffic, integrating and increasing the capability of the Xpedite Network to
perform tasks required by Premiere's customers or identifying and establishing
alliances
<PAGE>
with new partners in order to enable Premiere to expand its network in new
geographic regions. Such inability may adversely affect customer relationships
and perceptions of Premiere in the markets in which it provides services,
which could have a material adverse effect on Premiere's business, financial
condition or results of operations. In addition, such growth will involve
substantial investments of capital, management and other resources. There can
be no assurance that Premiere will generate sufficient cash for future growth
of the Enhanced Document Distribution Services business through earnings or
external financings, or that such external financings will be available on
terms acceptable to Premiere or that Premiere will be able to employ any such
resources in a manner that will result in accelerated growth.
Risk of Loss from Returned Transactions; Fraud; Bad Debt; Theft of
Services. Premiere uses two principal financial payment clearance systems: the
Federal Reserve's Automated Clearing House for electronic fund transfers; and
the national credit card systems for electronic credit card settlement. In its
use of these established payment clearance systems, Premiere generally bears
credit risks similar to those normally assumed by other users of these systems
arising from returned transactions caused by insufficient funds, stop payment
orders, closed accounts, frozen accounts, unauthorized use, disputes, theft or
fraud. From time to time, persons have gained unauthorized access to
Premiere's network and obtained services without rendering payment to Premiere
by unlawfully using the access numbers and Personal Identification Numbers
("PINs") of authorized users. In addition, in connection with Premiere's
wholesale prepaid telephone card relationships, Premiere has experienced
unauthorized activation of prepaid telephone cards. No assurance can be given
that losses due to unauthorized use of access numbers and PINs, unauthorized
activation of prepaid calling cards or activation of prepaid calling cards in
excess of the prepaid amount, or theft of prepaid calling cards will not be
material. Premiere attempts to manage these risks through its internal
controls and proprietary billing system. Premiere's computer telephony
platform is designed to prohibit a single access number and PIN from
establishing multiple simultaneous connections to the platform, and Premiere
establishes preset spending limits for each subscriber. Premiere also
maintains reserves for such risks. Past experience in estimating and
establishing reserves and Premiere's historical losses are not necessarily
accurate indicators of Premiere's future losses or the adequacy of the
reserves established by Premiere in the future. Although Premiere believes
that its risk management and bad debt reserve practices are adequate, there
can be no assurance that Premiere's risk management practices, including its
internal controls, or reserves will be sufficient to protect Premiere from
unauthorized or returned transactions or thefts of services which could have a
material adverse effect on Premiere's business, financial condition and
results of operations.
Anti-Takeover Effects of Certain Provisions of Articles of Incorporation,
Bylaws and Georgia Law. The Board of Directors of the Company is empowered to
issue preferred stock without shareholder action. The existence of this
"blank-check" preferred could render more difficult or discourage an attempt
to obtain control of the Company by means of a tender offer, merger, proxy
contest or otherwise. The Company's Articles of Incorporation, as amended (the
"Articles"), divide the Board of Directors into three classes, as nearly equal
in size as possible, with staggered three-year terms. One class will be
elected each year. The classification of the Board of Directors could have the
effect of making it more difficult for a third party to acquire control of the
Company. The Company is also subject to certain provisions of the Georgia
Business Corporation Code which relate to business combinations with
interested shareholders. In addition to considering the effects of any action
on the Company and its shareholders, the Company's Articles permit the Board
of Directors and the committees and individual members thereof to consider the
interests of various constituencies, including employees, customers,
suppliers, and creditors of the Company, communities in which the Company
maintains offices or operations, and other factors which such directors deem
pertinent, in carrying out and discharging the duties and responsibilities of
such positions and in determining what is believed to be in the best interests
of the Company.
<PAGE>
EXHIBIT 99.3
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following selected supplemental consolidated statement of operations
data for the years ended December 31, 1997, 1996 and 1995, and the
supplemental consolidated balance sheet data as of December 31, 1997 and 1996,
have been derived from the audited consolidated financial statements of the
company included in the Annual report on form 10-K and the audited financial
statements of Xpedite. This supplemental financial data gives retroactive
effect to the mergers with Voice-Tel, VoiceCom and Xpedite, all of which were
accounted for as poolings-of-interests, and are qualified by reference to such
supplemental consolidated financial statements including the related notes
thereto. The unaudited supplemental consolidated statement of operations data
for the years ended December 31, 1994 and 1993 and the unaudited supplemental
consolidated balance sheet data at December 31, 1994 and 1993 are derived from
unaudited consolidated financial statements of the Company and Xpedite which
give retroactive effect to the mergers with Voice-Tel, VoiceCom and Xpedite,
all of which were accounted for as poolings-of-interests, and include all
adjustments, consisting only of normal recurring accruals, which the company
considers necessary for a fair presentation thereof. The selected supplemental
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Supplemental Financial Condition and Supplemental
Results of Operations" and the Company's supplemental consolidated financial
statements and the notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL STATEMENT OF
OPERATIONS DATA:
Revenues............... $395,505 $327,322 $203,227 $160,565 $129,127
Gross margin........... 267,955 225,928 143,611 109,666 74,184
Operating income
(loss)(1)............. (23,345) 27,258 (37,076) (6,988) 2,026
Net income (loss)(1)... (23,841) 13,891 (42,393) (10,791) (3,421)
Net income (loss)
attributable to common
shareholders for
--basic net income
(loss) per share...... $(23,841) $ 13,862 $(42,701) $(11,111) $ (3,421)
--diluted net income
(loss) per share...... (23,841) 13,862 (42,701) (11,111) (3,421)
Net income (loss) per
common and common
equivalent shares for
--basic(1)(2).......... $ (0.56) $ 0.37 $ (1.52) $ (0.53) $ (0.22)
--diluted(1)(2)........ $ (0.56) $ 0.34 $ (1.52) $ (0.53) $ (0.22)
Shares used in computing
net income (loss) per
common and common
equivalent shares for
--basic................ 42,920 37,199 28,002 21,157 15,305
--diluted.............. 42,920 41,233 28,002 21,157 15,305
SUPPLEMENTAL BALANCE
SHEET DATA (AT
PERIOD END):
Cash, cash equivalents
and investments....... $198,300 $ 90,516 $ 20,835 $ 23,988 $ 6,135
Working capital........ 34,169 49,850 (18,361) 3,938 (20,823)
Total assets........... 561,367 283,332 146,274 90,113 68,915
Total debt............. 305,531 82,034 99,932 49,247 47,180
Total shareholders'
equity (deficit)...... 120,939 125,381 (17,045) 7,874 (8,310)
</TABLE>
- --------
(1) Excluding charges for purchased research and development, accrued
settlement costs and restructuring and other special charges incurred by
Premiere in the amounts of approximately $53.0, $2.5 and $0 million,
respectively, in 1995, and approximately $11.0, $1.3 and $0 million,
respectively, in 1996, and approximately $0, $1.7 and $90.1 million
respectively, in 1997, operating income, net income, basic net income per
share and diluted net income per share would have been approximately $18.4
million, $9.8 million, $0.34 and $0.30, respectively, for 1995, and
approximately $39.6 million, $21.3 million, $0.57 and $0.52, respectively,
for 1996 and approximately $68.4 million, $40.9 million, $0.95 and $0.88
respectively, for 1997.
(2) Basic net income (loss) per share is computed using the weighted average
number of shares of common stock. Diluted net income (loss) per share is
computed using the weighted average number of shares of common stock and
dilutive common stock equivalents from convertible preferred stock and
convertible subordinated notes (using the if-converted method) and from
stock options (using the treasury stock method).
<PAGE>
EXHIBIT 99.4
XPEDITE SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
XPEDITE SYSTEMS, INC.
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997
XPEDITE SYSTEMS, INC.
- INDEX -
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
- - Financial Statements
Report of Independent Auditors 3
Consolidated Balance Sheets - December 31, 1997 and December 31, 1996 4
Consolidated Statements of Operations
- Years ended December 31, 1997, 1996 and 1995 5
Consolidated Statements of Stockholders' Equity (Deficit)
- Years ended December 31, 1997, 1996 and 1995 6
Consolidated Statements of Cash Flows
- Years ended December 31, 1997, 1996 and 1995 7
Notes to Consolidated Financial Statements 8
</TABLE>
2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of Xpedite Systems, Inc.
We have audited the accompanying consolidated balance sheets of Xpedite Systems,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial position of Xpedite Systems,
Inc. at December 31, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
MetroPark, New Jersey
April 6, 1998
3
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996
----------------- -------------
ASSETS:
- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $ 21,961,011 $ 6,679,970
Accounts receivable, net of reserve for allowances and doubtful
accounts of $3,945,000 and $1,851,000 for 1997 and 1996, respectively................. 34,321,401 25,749,334
Deferred income taxes................................................................... 2,241,515 1,903,694
Other current assets..................................................................... 3,648,318 4,290,034
--------------- ------------
Total current assets.............................................................. 62,172,245 38,623,032
Property, plant and equipment , net........................................................ 25,399,742 20,500,426
Customer lists, net of accumulated amortization of $3,116,000 and $2,004,000 for 1997 and
1996, respectively........................................................................ 10,110,913 8,232,144
Purchased software, net of accumulated amortization of $3,042,000 and
$2,027,000 for 1997 and 1996, respectively................................................ 2,279,702 3,156,044
Costs in excess of fair value of net assets acquired, net of accumulated
amortization of $2,310,000 and $1,180,000 for 1997 and 1996, respectively................. 86,140,347 10,609,687
Investments in affiliates, at cost......................................................... 2,432,686 2,168,248
Loans to affiliate......................................................................... 3,329,825 3,452,580
Deferred income taxes...................................................................... - 1,879,917
Other assets............................................................................... 2,475,794 2,569,510
--------------- ------------
Total............................................................................. $ 194,341,254 $ 91,191,588
=============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
- ------------------------------------
Current liabilities:
Accounts payable......................................................................... $ 11,009,907 $ 10,067,510
Accrued expenses......................................................................... 14,975,263 8,721,801
Due to former owners of XSL.............................................................. 5,227,901 -
Income taxes payable..................................................................... 2,893,598 7,131,347
Current portion of long-term debt........................................................ 129,692,290 7,763,459
Current portion of capital lease obligations............................................. 243,848 241,995
Other current liabilities................................................................ 1,436,118 223,818
--------------- ------------
Total current liabilities......................................................... 165,478,925 34,149,930
Long-term debt............................................................................. - 27,146,147
Long-term portion of capital lease obligations............................................. 270,575 326,686
Deferred income taxes...................................................................... 3,419,042 3,692,134
Other liabilities.......................................................................... 758,027 739,492
Commitments and contingencies.............................................................. - -
Stockholders' equity:
Preferred Stock, $.01 par value, authorized 1,000,000 shares;
none issued and outstanding in 1997 and 1996.......................................... - -
Common Stock, $.01 par value, authorized 15,000,000;
Issued and outstanding 9,145,477 and 8,903,240 shares,
for 1997 and 1996, respectively....................................................... 91,455 89,032
Additional paid-in capital............................................................... 66,401,949 64,782,539
Retained earnings (Accumulated deficit).................................................. (38,265,122) (39,431,890)
Cumulative translation adjustment........................................................ (3,597,597) (86,482)
Less: Treasury stock; 72,000 shares at 1997
and 1996; at cost..................................................................... (216,000) (216,000)
--------------- ------------
Total stockholders' equity........................................................ 24,414,685 25,137,199
--------------- ------------
Total Liabilities and Stockholders' Equity........................................ $ 194,341,254 $ 91,191,588
=============== ============
</TABLE>
See accompanying notes.
4
<PAGE>
XPEDITE SYSTEMS, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995
------------------- -------------------- ---------------------
<S> <C> <C> <C>
Net revenues:
Service revenues............................... $160,717,639 $122,425,726 $ 51,840,379
System sales and other......................... 5,434,885 7,421,925 3,843,583
------------ ------------ ------------
Total net revenues........................ 166,152,524 129,847,651 55,683,962
Cost of sales:
Operations, line charges and
support engineering........................ 77,556,203 57,155,734 20,144,082
Cost of sales of systems....................... 1,768,173 2,821,095 1,458,238
------------ ------------ ------------
Total cost of sales....................... 79,324,376 59,976,829 21,602,320
------------ ------------ ------------
Operating expenses:
Selling and marketing.......................... 38,056,465 28,578,884 15,059,118
General and administrative..................... 10,872,960 8,332,255 3,964,401
Research and development....................... 5,204,074 4,887,563 3,414,577
Depreciation and amortization.................. 10,389,305 7,619,330 2,722,930
Merger termination costs....................... 9,502,250 - -
Restructuring & other non-recurring charges.... 7,150,038 - -
Write off of in-process research and
development costs.......................... - - 53,000,000
------------ ------------ ------------
Total operating expenses.................. 81,175,092 49,418,032 78,161,026
------------ ------------ ------------
Operating income (loss)............................ 5,653,056 20,452,790 (44,079,384)
Interest income.................................... 441,093 507,362 769,341
Interest expense .................................. (2,987,471) (3,662,118) (535,889)
Other income....................................... 411,060 254,599 22,878
------------ ------------ ------------
Income (loss) before income taxes and
extraordinary item................................ 3,517,738 17,552,633 (43,823,054)
Income tax expense................................. 1,407,095 7,119,171 2,740,890
------------ ------------ ------------
Net income (loss) before extraordinary item........ 2,110,643 10,433,462 (46,563,944)
Early extinguishment of long term debt, net of
income tax benefit of $384,535 576,802 - -
------------ ------------ ------------
Net (loss) income.................................. $ 1,533,841 $ 10,433,462 $(46,563,944)
============ ============ ============
Basic earnings (loss) per common share:
Income (loss) before extraordinary item......... $ 0.23 $ 1.28 $ (6.67)
Early extinguishment of long term debt.......... $ (0.06) $ - $ -
------------ ------------ ------------
Basic earnings (loss) per common share............. $ 0.17 $ 1.28 $ (6.67)
============ ============ ============
Earning (loss) per common share assuming
dilution:
Income (loss) before extraordinary item......... $ 0.22 $ 1.20 $ (6.67)
Early extinguishment of long term debt.......... $ (0.06) $ - $ -
------------ ------------ ------------
Earnings (loss) per common share assuming
dilution.......................................... $ 0.16 $ 1.20 $ (6.67)
============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE>
XPEDITE SYSTEMS, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TREASURY STOCK
-------------------- PAID-IN ACCUMULATED TRANSLATION ----------------------
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT SHARES AMOUNT TOTAL
---------- -------- ------------- ------------ -------------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 6,480,562 $64,805 $30,541,797 $ (3,296,591) $ - (75,000) $ (225,000) $ 27,085,011
Exercise of stock options and
warrants.................. 44,072 441 94,549 - - - - 94,990
Issuance of common stock..... 1,249,000 12,490 18,254,135 - - - - 18,266,625
Cumulative translation -
adjustment................ - - - (33,445) - - (33,445)
Treasury stock reissued...... - - 30,750 - - 3,000 9,000 39,750
Treasury stock acquired...... - - - - - (235) (4,935) (4,935)
Retirement of treasury stock. (235) (2) (116) (4,817) - 235 4,935 -
Net loss..................... - - - (46,563,944) - - - (46,563,944)
--------- ------- ----------- ------------ ----------- ------- ----------- ------------
BALANCE, DECEMBER 31, 1995 7,773,399 77,734 48,921,115 (49,865,352) (33,445) (72,000) (216,000) (1,115,948)
Exercise of stock options.... 146,341 1,463 271,895 - - - - 273,358
Issuance of common stock..... 632,500 6,325 10,305,823 - - - - 10,312,148
Issuance of performance
stock options............... - - 2,036,474 - - - - 2,036,474
Deferred compensation cost... - - (1,942,405) - - - - (1,942,405)
Conversion of Notes into
Common Stock................ 351,000 3,510 5,189,637 - - - - 5,193,147
Cumulative translation
adjustment.................. - - - - (53,037) - - (53,037)
Net income................... - - - 10,433,462 - - - 10,433,462
--------- ------- ----------- ------------ ----------- ------- ----------- ------------
BALANCE, DECEMBER 31, 1996 8,903,240 89,032 64,782,539 (39,431,890) (86,482) (72,000) (216,000) 25,137,199
Exercise of stock options,
net of tax benefit of
$157,800.................... 265,423 2,654 1,898,041 (56,612) - - - 1,844,083
Issuance of performance
stock options............... 23,962 240 - - - - - 240
Deferred compensation cost... - - 410,437 - - - - 410,437
Treasury stock acquired...... - - - - - (47,148) (1,000,000) (1,000,000)
Retirement of treasury stock. (47,148) (471) (689,068) (310,461) - 47,148 1,000,000 -
Cumulative translation
adjustment.................. - - - - (3,511,115) - - (3,511,115)
Net income................... - - - 1,533,841 - - 1,533,841
--------- ------- ----------- ------------ ----------- ------- ----------- ------------
BALANCE, DECEMBER 31, 1997 9,145,477 $91,455 $66,401,949 $(38,265,122) $(3,597,597) (72,000) $ (216,000) $ 24,414,685
========= ======= =========== ============ =========== ======= =========== ============
</TABLE>
See accompanying notes.
6
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1997 1996 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income....................................................... $ 1,533,841 $ 10,433,462 $(46,563,944)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization........................................ 11,302,638 8,437,697 3,060,801
Write-off of in-process research and development..................... - - 53,000,000
Accretion on subordinated debt.................................. - 175,925 -
Write-off non-cash non-recurring charges............................. 1,814,464 - -
Write-off of debt issue costs........................................ 961,337 - -
Deferred income taxes................................................ 335,668 (656,400) (2,012,700)
Change in operating assets and liabilities:
Accounts receivable................................................ (3,920,272) (9,182,216) (839,721)
Other current assets............................................... 1,915,431 934,139 355,833
Other assets....................................................... 489,070 (131,453) -
Accounts payable................................................... (478,252) (645,052) (3,128,006)
Accrued expenses................................................... 4,248,338 (1,206,077) 631,373
Income taxes payable............................................... (9,335,897) 3,855,874 1,665,745
Other liabilities.................................................. 22,717 127,386 176,021
------------ ------------ ------------
Net cash provided by operating activities............................... 8,889,083 12,143,285 6,345,402
INVESTING ACTIVITIES
Acquisition of property, plant and equipment............................ (9,387,133) (8,964,368) (3,650,251)
Purchase of computer software........................................... (479,117) (272,417) (252,327)
Acquisition of businesses............................................... (78,322,736) (46,199,458)
Acquisition of intangibles.............................................. - (6,193,052)
Purchase of held-to-maturity securities................................. - - (11,692,002)
Sale of held-to-maturity securities..................................... - - 17,510,014
Investments in affiliates............................................... (269,851) (1,693,893) (4,599)
Loans to affiliate...................................................... 122,755 (842,594) (1,622,513)
------------ ------------ ------------
Net cash used in investing activities................................... (88,336,082) (17,966,324) (45,911,136)
FINANCING ACTIVITIES
Proceeds from notes payable............................................. 183,904,410 2,915,516 40,000,000
Payment of debt issuance costs.......................................... (1,185,836) - (1,402,500)
Repayments of other loans and notes payable............................. (88,939,413) (9,766,158) (292,892)
Repayments of capital lease obligations................................. (264,074) (289,924) (79,917)
Net proceeds from issuance of Common Stock.............................. 1,742,895 10,585,506 129,805
------------ ------------ ------------
Net cash provided by financing activities............................... 95,257,982 3,444,940 38,354,496
Effect of exchange rate changes on cash................................. (529,942) (18,181) (33,445)
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents........................ 15,281,041 (2,396,280) (1,244,683)
Cash and cash equivalents at beginning of year.......................... 6,679,970 9,076,250 10,320,933
------------ ------------ ------------
Cash and cash equivalents at end of year................................ $ 21,961,011 $ 6,679,970 $ 9,076,250
============ ============ ============
</TABLE>
See accompanying notes.
7
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE
During 1997, the Company settled its claim related to the escrow funds from
the acquisitions of Swift, Vitel, and Comwave. The settlement called for the
return to the Company of $1 million of the escrow funds, in the form of 47,148
shares of the Company's Common Stock, valued at the market price of the
Company's stock on the date of the settlement. These shares were received into
treasury stock, and subsequently retired.
The Company entered into capital lease agreements for equipment in the
amount of $168,388 in 1997 and $161,200 in 1995.
The Company made interest payments of $2,764,000, $4,008,087 and $31,011
during 1997, 1996 and 1995, respectively. The Company made income tax payments
of $7,547,000, $5,149,000 and $3,103,000 during 1997, 1996 and 1995,
respectively.
During 1995, the Company issued 3,000 treasury shares of Common Stock, as
part of a legal settlement with a former investor.
The purchase price for the businesses acquired in 1997 and 1995 is
allocated to the assets acquired and liabilities assumed based on their
estimated fair market values as follows:
<TABLE>
<CAPTION>
1997 1995
--------------------- ---------------------
<S> <C> <C>
Fair Value of Assets Acquired:
Current assets excluding cash............................. $ 6,159,430 $ 11,466,998
Property, plant and equipment............................. 4,701,206 7,956,162
In-process research and development....................... - 53,000,000
Customer lists............................................ 3,000,000 5,600,000
Purchased software........................................ - 2,700,000
Cost in excess of fair value of 79,085,084
net assets acquired.................................. 8,304,201
Other assets.............................................. - 1,561,401
Less Liabilities Assumed:
Current liabilities....................................... (8,465,083) (16,173,973)
Deferred taxes and Other liabilities...................... (930,000) (5,040,388)
Due to former owners......................................... (5,227,901) -
Common stock issued to sellers............................... - (18,266,625)
Subordinated debt issued to sellers.......................... - (4,908,318)
----------- ------------
Net Cash Paid................................................ $78,322,736 $ 46,199,458
=========== ============
</TABLE>
See accompanying notes.
8
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Xpedite Systems, Inc. (the "Company") was incorporated in Delaware in July
1988. The Company develops and markets fax communication services worldwide.
The Company generates revenues from the following: (i) usage fees charged for
the Company's fax broadcast service ("Fax Broadcast"), gateway messaging service
("Gateway Messaging") and international point-to-point fax service ("Point-to-
Point") to customers in diverse industries; (ii) sales of fax message handling
systems, including equipment; and (iii) royalties with respect to the use of the
Company's software. Revenues from the sales of systems are recognized when risk
of ownership and title passes to the customer. The Company performs ongoing
credit evaluations of customers and does not generally require collateral.
Reserves are maintained for potential credit losses and allowances, and such
losses and allowances have been within management's expectations.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements have been prepared on a consolidated
basis to include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany amounts have been eliminated in consolidation.
FOREIGN OPERATIONS AND CURRENCY TRANSLATION
The Company and each of its subsidiaries use their local currency as their
functional currency. Net gains from foreign currency transactions totaled
$91,000, $11,000 and $23,000 in 1997, 1996 and 1995, respectively and are
included in other income in the consolidated statement of operations.
Cumulative translation adjustments, which result from the process of translating
the consolidated financial statements from the functional currencies of each
subsidiary into the reporting currency, are included as a component of
stockholders' equity. The cumulative translation adjustments from permanently
invested intercompany balances totalled approximately $2.5 million in 1997.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The fair value of
these investments approximates cost.
9
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is provided
using the straight-line method over the following estimated useful lives of the
assets:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings 25
Equipment 5
Furniture and fixtures 7
</TABLE>
Leasehold improvements are amortized using the straight-line method over
the lesser of the term of the lease or the estimated useful life of the related
improvement.
PURCHASED SOFTWARE AND CUSTOMER LISTS
Purchased software is being amortized on a straight line basis over the
estimated useful life of three to five years. Such amortization is greater than
the amount computed using the ratio that current gross revenues related to the
purchased software bear to the total of current and anticipated future gross
revenues related to the purchased software. Amortization of purchased software
amounted to $1,170,564, $1,141,097 and $337,871 during 1997, 1996 and 1995,
respectively.
Customer lists are being amortized on a straight-line basis over the
estimated useful life of eight years. In the opinion of management, the
customer list assets will be recovered over a period of eight years based upon
the anticipated future revenue stream generated from the customer base existing
on the acquisition dates.
COSTS IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED
Costs in excess of the fair value of the tangible net assets and
identifiable intangible assets of businesses acquired are amortized on a
straight-line basis primarily over an estimated useful life of forty years. The
Company assesses the recoverability of costs in excess of the fair value of the
net assets acquired by determining whether the carrying value of these assets
can be recovered through undiscounted forecasted future cash flows over their
remaining lives.
10
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. In 1997, events and
circumstances indicated that approximately $1.1 million of plant and equipment
and associated costs in excess of fair value of net assets acquired had been
impaired and accordingly were written down to their fair value. Although the
carrying amounts of impaired assets may be recovered, there can be no assurance
that sufficient undiscounted cash flows will be achieved. The Company will
continue to evaluate the remaining long-lived assets based on future facts and
circumstances.
FOREIGN EXCHANGE FORWARD CONTRACTS
Foreign exchange forward contracts are legal agreements between two parties
to purchase and sell a foreign currency, for a price specified at the contract
date, with delivery and settlement in the future. The Company uses such
contracts to hedge risk of changes in foreign currency exchange rates associated
with certain amounts due to the Company which are denominated in foreign
currency.
The Company held contracts German for marks of approximately $2.3 million
at December 31, 1996 associated with the loans to affiliate. Contracts
outstanding at December 31, 1996 were settled in 1997. There were no open
contracts at December 31, 1997.
The gain resulting from the termination of these hedge contracts prior to
their stated maturity are recognized at the termination date based upon the
difference between the contract rate and prevailing rate on that date and is
included in other income in the accompaning consolidated statement of
operations.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the differences
between financial reporting and tax basis of assets and liabilities.
STOCK BASED COMPENSATION
As permitted by FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (FASB 123), the Company has elected to follow Accounting
Principal Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related interpretations in accounting for its employee stock option
plans. Under APB 25, compensation expense is calculated at the time of option
grant based upon the difference between the exercise price of the option and the
fair market value of the Company's common stock at the date of grant, recognized
over the vesting period.
11
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
The Company incurs research and development costs primarily related to
developing enhancements and new service features for which technological
feasibility is not established. Accordingly, these costs are expensed as
incurred.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128
"Earnings Per Share" ("FAS 128"). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any diluted
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where applicable, restated to conform to the FAS 128 requirements.
REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes new
standards for the reporting and display of comprehensive income and its
components in the financial statements. The adoption of FAS 130 will not effect
results of operations or financial position, but will require cumulative
translation adjustments, which currently would be reported in stockholders'
equity, to be included in other comprehensive income and the disclosure of total
comprehensive income. FAS 130 is effective for fiscal years beginning after
December 15, 1997. The Company plans to adopt FAS 130 on January 1, 1998. If
the Company adopted FAS 130 for the year ended December 31, 1997, the total of
other comprehensive income (loss) items and comprehensive income (loss) (which
includes net income) would be approximately ($3.5) million and $(2.0) million,
respectively, and would be displayed separately.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information" ("FAS
131"). FAS 131 established standards for reporting information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. FAS 131 is
effective for fiscal years beginning after December 15, 1997. The adoption of
FAS 131 will have no impact on the Company's consolidated results of operation,
financial position or cash flows.
RECLASSIFICATIONS
Certain December 13, 1996 balances have been reclassified to conform with
the December 31, 1997 presentation.
12
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. OFFERS TO PURCHASE THE COMPANY
The Company entered into an Agreement and Plan of Merger dated as of
November 13, 1997 (the "Merger Agreement") with Premiere Technologies, Inc.
("Premiere") and Nets Acquisition Corp. ("Acquisition Sub"), a wholly-owned
subsidiary of Premiere, under which Acquisition Sub would merge with and into
the Company in a stock-for-stock merger transaction (the "Premiere Merger")
which Premiere intends to qualify as a "pooling of interests" for accounting
purposes and to qualify as a tax-free reorganization. Under the terms of
Premiere's offer, each share of the Company's common stock would be converted
into $34 of Premiere's common stock, subject to certain adjustments, with the
precise exchange ratio to be based on the average trading price of Premiere's
common stock prior to closing. The Merger is expected to close on February 27,
1998.
The Merger Agreement contains certain conditions, including approval by the
Company's stockholders of the Premiere Merger and Premiere's stockholders of the
issuance of additional shares in the Premiere Merger and the receipt of required
antitrust approvals.
Concurrently with the execution of the Merger Agreement, certain
stockholders of the Company, including the members of the Board of Directors,
certain members of Senior Management (the "Management Buyers"), certain funds
managed by Patricof & Co. Ventures, Inc. ("Patricof"), and David, Stuart and
Robert Epstein (collectively, the "Epstein Family"), each entered into
individual Stockholder Agreements (the "Stockholder Agreements"), dated as of
November 13, 1997, with the Company and Premiere. Each Stockholder Agreement
provides, among other things, that the stockholder party thereto will vote his
or its shares, among other things, in favor of the merger of Acquisition Sub
with and into the Company (the "Merger"), the approval of the Merger Agreement
and the approval of certain amendments to the Company's certificate of
incorporation. Pursuant to the Stockholder Agreements; each stockholder gave
Premiere his or its irrevocable proxy to vote his or its shares, among other
things, in favor of the matters referred to above and agrees to certain
restrictions on transfer with respect to his or its shares.
Prior to the execution of the Merger Agreement, the Company and Xpedite
Acquisition Corp., a Delaware corporation ("Acquisition Corp."), whose
stockholders include UBS Capital II LLC, Fenway Partners Capital Fund, L.P., and
certain of their affiliates (collectively, the "Investors"), had entered into an
Agreement and Plan of Merger dated as of August 8, 1997 (the "UBS Merger
Agreement") under which Acquisition Corp. would merge with and into the Company
for a cash purchase price of $23.25 per share of common stock, $0.01 par value
per share (the "Common Stock") of the Company. The UBS Merger Agreement was
terminated and in conjunction with such termination, the Company recognized a
one-time pre-tax charge of approximately $9.5 million related to fees and
expenses which were paid to Acquisition Corp. in accordance with the UBS Merger
Agreement.
13
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
3. ACQUISITIONS
On December 17, 1997, the Company acquired, directly or indirectly through
a wholly-owned subsidiary of the Company, substantially all of the outstanding
capital stock of Xpedite Systems Limited ("XSL"). The purchase price for the
acquisition, including transaction costs, was approximately $87.8 million. The
purchase price was funded with bank borrowings and an amount payable in 1998 to
former owners of XSL of $5.2 million. The acquisition was accounted for as a
purchase and, accordingly, the acquired assets and liabilities assumed through
this purchase have been recorded at their estimated fair market values at the
date of acquisition. Identifiable intangible assets acquired included customer
lists of $3,000,000. Costs in excess of fair value of net assets acquired of
approximately $79.1 million are amortized on a straight-line basis over an
estimated useful life of forty years. Subject to the completion of a closing
date adjustment to purchase price calculated in accordance with the purchase
agreement of XSL, the Company may be obligated to pay up to an additional
(Pounds)1,823,708 (U.S. Dollar Equivalent of approximately $3 million based upon
recent exchange rates). This amount has been recorded as a liability as part of
the preliminary purchase price allocation. The results of operations of XSL
from the date of acquisition to December 31, 1997 are consolidated in the
overall results of the Company for the year ended December 31, 1997.
In September 1996, the Company purchased the assets of one of its Nodal
Partners in Korea, Posdata Company, Ltd. ("Posdata"), for a purchase price of
approximately $2.5 million. Further, in December 1996, a subsidiary of the
Company purchased from Pacific Star Services Pty Limited, a subsidiary of New
Zealand's national telephone company, Pacific Star Communications, Ltd.
("PacStar"), the assets of PacStar's "Fax 2000" enhanced facsimile services
business carried on in Australia. The purchase price for the Fax 2000 business
was approximately $1.3 million. The Company also purchased a customer list from
XSL for $1.3 million in March 1996.
On November 20, 1995, the Company purchased all of the outstanding
capital stock of Swift Global Communications, Inc. ("Swift"), ViTel
International Holding Company, Inc. ("ViTel") and Comwave Communications AG
("Comwave"). The purchase prices for the acquisitions, including transaction
costs, were approximately $23,195,000, $41,540,000 and $11,340,000,
respectively, which includes a total of $2,000,000 held in escrow for settlement
of certain representations and warrantees. This escrowed amount was released to
the sellers in 1997. A portion of the purchase prices were paid through the
issuance of 1,249,000 shares of the Company's Common Stock valued at
$18,267,000, and subordinated notes payable to the sellers of ViTel with a
carrying value of approximately $4,908,000. The acquisitions were accounted for
as purchases. Accordingly, the acquired assets and liabilities assumed through
these purchases have been recorded at their estimated fair market values at the
date of acquisition. Identifiable intangible assets acquired included
$53,000,000 of in-process research and development costs, customer lists of
$5,600,000, and purchased software of $2,700,000. Since the technological
feasibility of the in-process research and development costs had not yet been
established and the technology had no alternative future use at the acquisition
date, the in-process research and development costs were immediately written-off
and included in the results of operations as a non-recurring charge for the year
ended December 31, 1995.
A stockholder of the Company received $348,000 of fees for services
provided in connection with the Swift, ViTel and Comwave transactions.
14
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
3. ACQUISITIONS (CONTINUED)
The results of operations of the purchased business are included in the
accompanying consolidated statements of operations from the dates of
acquisition. Unaudited proforma results as if the acquisition of XSL had
occurred on January 1, 1996 and the acquisitons of Swift, ViTel and Comwave
occurred on January 1, 1995, which excludes the $53,000,000 write-off of in-
process research and development costs, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net revenues........................ $194,014,000 $150,784,000 $107,099,000
Income before extraordinary items... $ 4,995,058 $ 10,047,000 $ 2,203,000
Net income.......................... $ 4,418,256 $ 10,047,000 $ 2,203,000
Diluted earnings per common share... $ 0.46 $ 1.15 $ 0.31
</TABLE>
The proforma results are not necessarily indicative of the results of
operations that would have occurred had the acquisitions taken place at the
beginning of the periods presented nor are they intended to be indicative of
results that may occur in the future.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
Land......................................................... $ 75,753 $ 75,753
Building..................................................... 1,927,230 103,977
Equipment.................................................... 37,154,570 26,135,687
Furniture and fixtures....................................... 3,434,182 3,537,759
Leasehold improvements....................................... 1,783,849 1,559,932
----------- -----------
44,375,584 31,413,108
Less accumulated depreciation................................ 18,975,842 10,912,682
----------- -----------
$25,399,742 $20,500,426
=========== ===========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1997
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
----------------------------------------
1997 1996
-------------------- ------------------
<S> <C> <C>
Certain cost of service, inclusive of
communication line charges................................... $ 4,566,927 $3,042,458
Salaries and related benefits.................................. 5,816,115 3,082,296
Professional Fees.............................................. 3,990,162 669,904
Interest....................................................... 178,248 82,318
Other.......................................................... 423,811 1,844,825
----------- ----------
$14,975,263 $8,721,801
=========== ==========
</TABLE>
6. LONG-TERM DEBT-
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1997 1996
-------------------------- --------------------
<S> <C> <C> <C>
Revolving loan............................... $ 129,600,000 $ -
Term loan.................................... - 31,750,000
Notes payable to banks....................... 92,290 2,951,057
Notes payable to former owners of ViTel...... - 208,549
------------- -----------
129,692,290 34,909,606
Less current maturities...................... (129,692,290) (7,763,459)
------------- -----------
$ - $27,146,147
============= ===========
</TABLE>
On December 17, 1997 the Company entered into a credit agreement (the
"Credit Agreement") with The Bank of New York and NationsBank, N.A. which
provides a $150 million revolving credit facility (the "Revolver"), a $70
million portion of which is available for pounds sterling borrowings (the
"Sterling Sublimit"). The Company and one of its wholly-owned subsidiaries can
borrow under the Revolver. Borrowings on the Revolver were used to repay
existing indebtedness of the Company, pay fees incurred in connection with this
credit facility, fund the purchase price of XSL (see Note 3) and fund the
purchase price of XSG (see Note 16).
At the Company's option, the Revolver bears interest at either (a) the
"Base Rate" plus an "Applicable Margin" or (b) the "Eurocurrency Rate" plus an
"Applicable Margin" (as defined in the Credit Agreement). The Applicable Margin
will be adjusted based on the Company's financial performance during the term of
the Credit Agreement. The interest rate in effect at December 31, 1997 for
"Base Rate" borrowings was 8.875% per annum and for "Eurocurrency Rate"
borrowings was 7.5% per annum. Borrowings under the Credit Agreement become due
and payable and the borrowing commitment terminates on December 16, 1998.
Substantially all of the assets of the Company collateralize the Revolver. The
credit agreement contains certain financial covenants which include
"Consolidated EBITDA" compared to "Interest Expense" and "Consolidated
Indebtedness" as compared to "Consolidated EBITDA" (as defined in the Credit
Agreement). The Company was in compliance with the aforementioned financial
covenants at December 31, 1997.
16
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
6. LONG-TERM DEBT- (CONTINUED)
The Company entered into a credit agreement ("Old Credit Agreement") which
provided a $40,000,000 term loan to finance the acquisition of Swift, ViTel, and
Comwave in November 1995 (see Note 3). The term loan had scheduled payments in
quarterly installments of $1,250,000 increasing periodically to $2,250,000 with
a final payment in August 2001. Amounts outstanding under this credit agreement
were paid off in full in 1997 with funds from borrowings on the Revolver.
The notes payable to banks consists of borrowing under two lines of credit
in the combined amount of (Yen)60,000,000 (U.S. Dollar Equivalent of
approximately $460,000 at December 31, 1997) payable to Japanese banks bearing
interest at rates ranging from 2.4% to 3.8%. Principal and interest is payable
monthly or quarterly through September 1998.
The carrying amount of the Company's borrowings approximates the fair
value.
Costs incurred in connection with obtaining the Revolver totaled
approximately $1,186,000 and are included in other assets in the accompanying
consolidated balance sheet. These costs are amortized on a straight line basis
over the life of the credit agreement. Accumulated amortization totaled $42,000
at December 31, 1997. Unamortized debt issue costs of $576,802 (net of income
tax benefit of $384,535) related to the Old Credit Agreement were written-off in
full and recorded as an extraordinary item in the consolidated statement of
operations for the year ended December 31, 1997. Debt issuance cost
amortization related to the Old Credit Agreement for 1997 was $240,000.
7. INCOME TAXES
The components of income tax expense (benefit) attributable to income
(loss) before extraordinary item for the years ended December 31, 1997, 1996 and
1995 are:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- --------------- -----------------
<S> <C> <C> <C> <C>
Federal:
Current $ 35,202 $4,898,356 $ 3,971,390
Deferred (45,053) (111,550) (2,050,400)
State and local:
Current 20,998 1,159,000 782,200
Deferred (18,312) (73,907) 37,700
Foreign:
Current 1,015,227 1,718,215 -
Deferred 399,033 (470,943) -
---------- ---------- -----------
$1,407,095 $7,119,171 $ 2,740,890
========== ========== ===========
</TABLE>
17
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. INCOME TAXES (CONTINUED)
The reconciliation of income taxes computed at the U.S. statutory federal
tax rate to income tax expense attributable to income (loss) before
extraordinary item for the years ended December 31, 1997, 1996 and 1995 are:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ---------------------- ------------------------
AMOUNT Percent Amount Percent Amount Percent
---------- -------- ------------ -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit) at U.S.
statutory rate................. $1,196,031 34% $6,143,421 35% $(14,900,000) (34%)
Write-off of in process
research and development....... -- -- -- -- 18,020,000 41
State income taxes, net of
federal income tax benefit..... 1,773 (25) 753,023 4 541,000 1
Reduction in valuation
allowance...................... -- -- (192,700) (1) (2,279,000) (5)
Other items........................ 209,291 31 415,427 2 1,358,890 3
---------- --- ---------- -- ------------ ---
Income tax expense................. $1,407,095 40% $7,119,171 40% $ 2,740,890 6%
========== === ========== == ============ ===
</TABLE>
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ -------------------
<S> <C> <C>
Reserve for allowances and doubtful
accounts................................... $ 896,000 $ 944,000
Accruals and reserves....................... 1,133,000 1,286,000
Future tax benefits of net operating
loss carryforwards........................ 1,750,000 1,554,000
----------- ----------
Gross deferred tax asset.................... 3,779,000 3,784,000
----------- ----------
Deferred tax liabilities:
Fixed assets.............................. 1,597,000 1,019,000
Intangibles............................... 3,360,000 2,614,000
Other liabilities......................... - 59,000
----------- ----------
Gross deferred tax liability................ 4,957,000 3,692,000
----------- ----------
Net deferred tax asset (liability).......... $(1,178,000) $ 92,000
=========== ==========
</TABLE>
18
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. INCOME TAXES (CONTINUED)
Pretax income (loss) before extraordinary item from the Company's domestic
operations totaled approximately $(.4) million, $13.8 million and ($44.0)
million at December 31, 1997, 1996 and 1995, respectively. Pretax income from
the Company's foreign operations totaled approximately $3.9 million, $3.7
million and $200,000 at December 31, 1997, 1996 and 1995, respectively.
The Company has recorded a deferred tax asset of $1,750,000 at December 31,
1997, reflecting the benefit of domestic and foreign loss carryforwards of
$4,695,000 and $154,000, respectively. These losses will expire in varying
amounts between 2001 and 2007 if not fully utilized. Realization is dependent on
generating sufficient taxable income prior to expiration of the loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax assets will be realized.
As a result of certain transactions involving the Company's stock, an
ownership change, as defined in Section 382 of the Internal Revenue Code,
occurred in 1992. Consequently, future utilization of the Company's federal net
operating loss carryforwards are subject to an annual limitation of
approximately $644,000.
The Company has unremitted foreign earnings of approximately $5.9 million
at December 31, 1997. It is the Company's intention to permanently reinvest
those earnings in its foreign operations. Accordingly, no federal deferred
taxes have been provided on those earnings. If such earnings were to be
remitted, it is possible there would be withholding taxes (although not readily
determinable) on such remittances.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space and office equipment under long-term lease
agreements. The obligations related to the leasing of equipment, are classified
as capital leases. Equipment under capital leases totaled $524,000 and $610,000,
net of accumulated depreciation, at December 31, 1997 and 1996, respectively.
19
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The leases of real property are classified as operating leases and expire
through 2004. These leases are subject to increases in property taxes and
maintenance costs.
The following is a schedule of future minimum lease payments for capital
and operating leases as of December 31, 1997:
<TABLE>
<CAPTION>
CAPITAL
LEASES OPERATING LEASES
------- ----------------
<S> <C> <C>
1998............................................ $271,601 $2,766,966
1999............................................ 168,590 2,026,324
2000............................................ 55,102 1,531,980
2001............................................ 35,157 1,162,923
2002............................................ 23,438 721,987
Thereafter...................................... - 80,292
-------- ----------
Total minimum lease payments.................... 553,888 $8,290,472
==========
Less amount representing interest...............
(39,465)
--------
Present value of minimum lease
Payments.......................................
514,423
Less current portion............................ 243,848
--------
$270,575
========
</TABLE>
Rent expense totaled $2,941,194, $3,257,102 and $1,201,632 for 1997, 1996
and 1995, respectively.
The Company is involved in litigation, as a defendant, incidental to the
conduct of its business. It is the opinion of management, after consultation
with counsel, that the outcome of such litigation will not have a material
adverse effect on the accompanying financial statements.
9. BENEFIT PLANS
In January 1996, the Company established an incentive stock option plan for
its officers and employees (the "1996 Plan"). A total of 750,000 shares of
Common Stock were reserved for issuance pursuant to options granted under the
1996 Plan.
In November 1993, the Company established an incentive stock option plan
for its officers and employees (the "1993 Plan"). A total of 450,000 shares of
Common Stock were reserved for issuance pursuant to options granted under the
1993 Plan.
The 1992 Incentive Stock Option Plan (the "1992 Plan") was approved by the
Board of Directors in 1992 and authorized the issuance of up to 715,696 options.
20
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Additionally, in April 1996, the Company reserved 200,000 shares of Common
Stock for issuance pursuant to options which may be awarded to certain executive
officers of the Company under the Officers' Contingent Stock Option Plan (the
"Plan"), upon achievement of certain performance targets. In July 1996, the
Company granted 92,500 of such options, at a purchase price of $0.00 per share.
Compensation expense related to these grants, calculated at the fair market
value of the Company's Common Stock at the date of grant, to be recognized over
the vesting period of 48 months, total $2,036,474. The Company has recognized
compensation expense of $94,069 in 1996 and of $410,437 in 1997. These options
expire on April 21, 2006.
In April 1997, the Company adopted resolutions to amend the Plan to
eliminate the unawarded "second tranche" of 100,000 options, and in lieu
thereof, in the event of a merger or consolidation of the Company, the sale of
all or substantially all of the assets of the Company, the acquisition by any
party of 51% or more of the Company Common Stock or a liquidation or dissolution
of the Company following which the Company's business is conducted by another
entity, cash bonuses were to be payable to senior, mid-level and low-level
management and staff of the Company (the "Bonus Plan"). The Bonus Plan was
subsequently terminated, in November 1997.
During 1993, the Company issued 7,000 stock warrants to a consultant to
purchase shares of Common Stock at a purchase price of $0.50 per share. These
warrants expire December 31, 1999. Also during 1993, the Company issued 5,000
stock warrants to a stockholder of the Company to purchase shares of Common
Stock at a purchase price of $7.00 per share. These warrants expire November
16, 2003.
In April 1996, the Company issued warrants to members of the Board of
Directors to purchase 125,000 shares of Common Stock at a purchase price of
$17.50 per share. In 1996, 8,334 warrants were forfeited due to the resignation
of a Board member. The remaining 116,666 warrants were all outstanding at
December 31, 1997.
FASB 123 requires pro forma information regarding net income and earnings
per share as if the Company has accounted for its employee stock options and
purchased by employees in connection with the Stock Option Plan ("equity
awards") under the fair value method of FAS 123. The fair value of these equity
awards was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions: for 1996, risk-free
interest rates of between 6.07% and 6.17%; expected volatility of 0.55; expected
option life of five years from vesting and an expected dividend yield of 0.0%;
for 1997, risk-free interest rates of between 5.70% and 5.87%; expected
volatility of 0.48; expected option life of five years from vesting and an
expected dividend yield of 0.0%.
21
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
9. BENEFIT PLANS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
equity awards is amortized to expense over the options vesting period. The
Company's pro forma information is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------- --------------
<S> <C> <C>
Pro forma net (loss) income....................... $27,647 $9,548,461
Pro forma basic (loss) earnings per share of
common stock...................................... $ 0.00 $ 1.11
</TABLE>
Stock option plans' activity is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995
------------------------ -------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ---------- --------- --------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year........................... 1,007,245 $10.46 803,963 $ 8.10 675,420 $ 6.23
Canceled............................ (32,366) $15.56 (33,476) $16.04 (6,319) $13.46
Granted............................. 25,000 $18.63 383,100 $12.62 170,600 $14.18
Exercised........................... (256,073) $ 5.63 (146,340) $ 1.87 (35,738) $ 0.78
--------- --------- -------
Outstanding at end
of period......................... 743,806 $12.18 1,007,245 $10.46 803,963 $ 8.10
========= ====== ========= ====== ======= ======
Exercisable at end of year.......... 463,662 $11.81 501,018 $ 9.37 397,943 $ 7.44
========= ====== ========= ====== ======= ======
Weighted average fair
value of options granted
during the year................... $18.63 $13.35 $10.24
====== ====== ======
</TABLE>
Stock options outstanding at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OF EXERCISE OUTSTANDING OPTIONS AT REMAINING WEIGHED AVERAGE
PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE
----------------- ---------------------- ------------------ ----------------
<S> <C> <C> <C>
$ 0.00 - $ 0.00 87,812 7.3 $ 0.00
$ 0.50 - $ 0.50 73,860 4.7 $ 0.50
$ 3.00 - $ 3.42 2,750 5.6 $ 3.00
$ 7.00 - $ 7.00 282 5.8 $ 7.00
$ 13.75 - $ 17.50 554,102 7.4 $15.11
$18.63 25,000 9.2 $18.63
</TABLE>
22
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
9. BENEFIT PLANS (CONTINUED)
The Company has a defined contribution 401(k) plan (the "Plan") which
allows all eligible employees to defer a portion of their income through
contributions to the Plan. Under the terms of the Plan, the Company contributes
an amount equal to 50% of the employee's elective deferrals up to 5% of the
total annual compensation paid to the Plan participant. The Company's expense
under the Plan for 1997, 1996 and 1995 was $881,318, $629,054 and $228,294,
respectively.
10. PUBLIC OFFERING
In August 1996, the Company completed an offering of 720,000 shares of its
common stock, at a price of $18.75 per share, less underwriting discounts and
commissions. Of the total shares sold, the Company issued 550,000 shares and
certain stockholders of the Company ("Selling Stockholders") sold 170,000
shares. In September 1996, the underwriters exercised their over-allotment
option, resulting in the issuance by the Company of an additional 82,500 shares
of common stock, and the sale of an additional 25,500 shares by the Selling
Stockholders. Proceeds to the Company from this offering, net of underwriting
fees, amounted to $11.2 million, of which $3.4 million was used to repay debt
and the balance was used for other expenses related to the offering, working
capital and general corporate purposes.
11. SYSTEM AND MARKETING AGREEMENTS
The Company has entered into "put" and "call" arrangements relating to the
outstanding shares of each of XSL, Xpedite Systems, GmbH ("XSG") and Xpedite
Systems, S.A. ("XSSA"). The purchase prices payable in connection with the
exercise of such "put" or "call" options is based on, among other things, the
achievement of certain financial results as set forth in the put and call
agreements. The Company currently has an ownership interest of 18.8% in XSSA.
XSSA has not met the minimum amount of earnings necessary for the put or
call option to be exercisable, and therefore, due to the uncertainties as to the
ability of XSSA to achieve the required financial results in the future, and the
uncertainty of future events, the Company does not consider the exercise of
these options to be probable during the next twelve months. However, assuming
that XSSA achieves the minimum amount of earnings of $1.0 million (at current
exchange rates) and utilizing the Company's stock price and earnings as of the
twelve months ended December 31, 1997, the purchase price payable in connection
with the exercise of 100% of the put option would be approximately $13.1
million. The actual amount of the purchase price will more than likely differ
from this amount due to (1) the variable factors used to determine the purchase
price; and/or (2) the possibility of changes in the Company's capital structure,
and/or its continued status as a publicly traded company.
If exercised, the purchase price payable in connection with the "put" and
"call" option with respect to XSSA is payable in any combination of cash,
negotiable securities or Common Stock of the Company, at the Company's option.
In addition to the foregoing, the Company may purchase XSSA pursuant to
negotiations with the stockholders thereof.
If and when the put and call options are exercised, the investment in XSSA
will be accounted for either on the equity method of accounting or will be
consolidated, depending on the Company's percentage of ownership.
23
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
12. SEGMENT DATA AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment. The following table presents
financial information based on the Company's geographic segments for the years
ended December 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
NET OPERATING IDENTIFIABLE
1997 REVENUES INCOME ASSETS
- ---- ------------------- --------------------- ----------------------
<S> <C> <C> <C>
North America............................ $115,172,245 $ 325,011 $ 79,033,624
Far East................................. 41,223,692 2,833,009 12,625,367
Europe................................... 13,086,611 1,021,705 105,393,117 (a)
Eliminations............................. (3,330,024) (1,376,669) (1,570,854)
------------ ----------- ------------
Total.................................... $166,152,524 $ 2,803,056 $195,481,254
============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
NET OPERATING IDENTIFIABLE
1996 REVENUES INCOME ASSETS
- ---- ------------------- -------------------- ----------------------
<S> <C> <C> <C>
North America............................ $ 95,354,186 $18,042,752 $65,846,412
Far East................................. 25,785,599 769,793 15,788,779
Europe................................... 13,000,865 2,833,778 9,918,090
Eliminations............................. (4,292,999) (1,193,533) (361,693)
------------ ----------- -----------
Total.................................... $129,847,651 $20,452,790 $91,191,588
============ =========== ===========
</TABLE>
(a) The increase in 1997 from 1996 is primarily due to the acquisition of XSL
in 1997.
13. RESTRUCTURING & OTHER SPECIAL CHARGES
Restructuring:
In the fourth quarter of 1997, the Company announced the closure of one of
the Company's facilities located in the United Kingdom. The Company recorded
restructuring charges of approximately $1,148,000 related primarily to: (i) a
severance accrual for the termination of approximately 20 employees, of $471,000
of which none has been paid as of December 31, 1997; and (ii) an impairment of
the fixed assets used at the facility of $677,000.
Costs in excess of fair value of net assets acquired and equipment write-
down:
In the fourth quarter of 1997, the Company initiated a plan to migrate the
customers which are currently serviced by equipment purchased in the acquisition
of Comwave in 1995 to another system used to service the Company's customers.
The Company plans to complete this migration of its customers in the second
quarter of 1998. Accordingly, the Company recorded a charge to "Restructuring &
other non-recurring charges" for the write-down of the unamortized portion of
the costs in excess of fair value of net assets acquired which was recorded in
connection with acquisition of Comwave and of the Comwave equipment totaling
$1,137,000. There is no alternative future use or market for the assets which
were written down.
Reserve for Litigation Settlement:
In the fourth quarter of 1997, the Company recorded a $150,000 charge to
reflect the estimated impact of a settlement of litigation matters and related
expenses.
24
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
OTHER CHARGES:
In connection with the offers to purchase the Company (see Note 2), the
Company incurred professional fees and other costs. In the fourth quarter of
1997, the Company recorded a charge of approximately $4,715,000 related to these
items.
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for income (loss) before extraordinary item:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -------------
<S> <C> <C> <C>
Numerator:
Numerator for basic earnings (loss) per
share before extraordinary item $2,110,643 $10,433,462 ($46,563,944)
========== =========== =============
Numerator for earnings (loss) per share
assuming dilution before extraordinary
item after assumed conversions $2,110,643 $10,433,462 ($46,563,944)
========== =========== =============
Denominator:
Denominator for basic earnings per
share---weighted-average shares 8,993,740 8,179,588 6,982,200
========== =========== =============
Effect of dilutive securities:
Employee stock options
and director warrants 554,274 536,727 -
Dilutive potential common shares 554,274 536,727 -
========== =========== =============
Denominator for earnings (loss) per
share assuming dilution 9,548,014 8,716,315 6,982,200
---------- ----------- -------------
Basic earnings (loss) per share $ 0.17 $ 1.28 $ (6.67)
========== =========== =============
Earnings (loss) per share assuming dilution $ 0.16 $ 1.20 $ (6.67)
========== =========== =============
</TABLE>
15. DISCLOSURE ON YEAR 2000 (UNAUDITED)
Given the preliminary work that the Company has completed to date, the
distributed architecture of the Company's operating system and wide use of
industry standards and software, the Company has every reason to believe that
its services will not be seriously affected by the Year 2000 issues. A project
to provide a detailed review of all aspects of its system, including a test of
running the system into Year 2000, has been initiated. The Company anticipates
that the testing phase of this project will be completed by mid-year 1998. The
results of that review will be to identify problems which the Company's
operating system is likely to experience. In the event that this review
identifies any problem, the remedial work will be scheduled for completion prior
to the end of 1999. The Company expects the overall costs of this project to be
less than $1 million. This estimate includes internal costs, but excludes the
costs to upgrade and replace systems in the normal course of business. The
Company does not expect this project to have a significant effect on operations.
As of December 31, 1997, costs less than $100,000 have been incurred and
expensed.
25
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
16. SUBSEQUENT EVENTS
In January 1998, the Company acquired, directly or indirectly through a
wholly owned subsidiary of the Company, approximately 76.7% of the issued share
capital of XSG and indebtedness of XSG to its former majority shareholder. The
purchase price for the acquisition including transaction costs was approximately
$13.3 million, which included the forgiveness of the $3.2 million loan to XSG.
Together with the 19.9% of the issued share capital of XSG previously owned by
the Company, the Company owned approximately 96.6% of the issued share capital
of XSG upon closing. In addition the Company purchased the remaining 3.4% of
the issued share capital of XSG on February 17, 1998, for approximately
$576,000. The purchase price was funded with bank borrowings.
The Company had entered into a firm commitment to purchase the remaining
issued share capital of XSG on December 17, 1997. The acquisition will be
accounted for as a purchase. Accordingly, the acquired assets and liabilities
assumed through this purchase will be recorded at their estimated fair market
values at the date of acquisition. Identifiable intangible assets acquired
included customer lists estimated to be $1,000,000 and costs in excess of net
assets acquired of approximately $14 million. Prior to the acquisition of a
majority of the issued share capital of XSG in January 1998, the Company
accounted for its investment in XSG on the cost method. Upon completion of the
acquisition, the Company would be required to apply the equity method of
accounting related to its 19.9% ownership interest in XSG prior to the merger.
XSG's accumulated deficit as of December 31, 1997 was approximately DM 6 million
(U.S. Dollar equivalent of approximately $3.3 million using December 31, 1997
exchange rates).
26
