<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
COMMISSION FILE NUMBER: 0-27778
PREMIERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
GEORGIA
(State or other jurisdiction of incorporation or organization)
59-3074176
(I.R.S. Employer Identification No.)
3399 PEACHTREE ROAD NE
THE LENOX BUILDING, SUITE 600
ATLANTA, GEORGIA 30326
(Address of principal executive offices, including zip code)
(404) 262-8400
(Registrant's telephone number including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No (2) Yes X No
----- ----- ----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 13, 1998
- - ---------------------------------- --------------------------------
Common Stock, $0.01 par value 45,786,434 shares
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements................................................................. 3
Condensed Consolidated Balance Sheets
as of September 30, 1998 and December 31, 1997....................................... 3
Condensed Consolidated Statements of Operations
for the Three and Nine Month periods ended September 30, 1998 and 1997............... 4
Condensed Consolidated Statements of Cash Flows
for the Nine Month periods ended September 30, 1998 and 1997......................... 5
Notes to Condensed Consolidated Financial Statements................................ 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................... 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk.......................... 22
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................................... 23
Item 2 Changes in Securities............................................................... 25
Item 3 Defaults Upon Senior Securities..................................................... 26
Item 4 Submission of Matters to a Vote of Security Holders................................. 26
Item 5 Other Information................................................................... 26
Item 6 Exhibits and Reports on Form 8-K.................................................... 27
SIGNATURES............................................................................................ 28
EXHIBIT INDEX
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-----------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents.................................................... $ 35,314 $ 43,731
Marketable securities................................................... 30,171 154,569
Accounts receivable (less allowances of $7,625 and $7,248, respectively) 62,283 55,040
Prepaid expenses and other.............................................. 11,843 10,589
Deferred income taxes, net.............................................. 45,108 27,957
--------- ---------
Total current assets................................................ 184,719 291,886
--------- ---------
PROPERTY AND EQUIPMENT, NET................................................ 128,674 87,428
OTHER ASSETS
Deferred income taxes, net.............................................. - 544
Strategic alliances and investments, net................................ 60,211 54,328
Goodwill, net........................................................... 180,054 104,244
Intangibles and other................................................... 32,216 22,937
--------- ---------
$ 585,874 $ 561,367
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses................................... $ 110,810 $ 100,694
Revolving loan, net of issue costs...................................... 126,025 128,456
Current maturities of long-term debt.................................... 4,230 6,243
Accrued restructuring, rebranding and other special charges............. 21,728 22,324
--------- ---------
Total current liabilities........................................... 262,793 257,717
--------- ---------
LONG-TERM LIABILITIES
Convertible subordinated notes, net of issue costs...................... 167,853 167,270
Long-term debt.......................................................... 11,531 3,562
Other accrued liabilities............................................... 3,171 11,879
Deferred income taxes, net.............................................. 5,887 -
--------- ---------
Total long-term liabilities......................................... 188,442 182,711
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value; 150,000,000 shares authorized,
45,786,434 and 44,670,619 shares issued and outstanding, respectively... 458 447
Additional paid-in capital.............................................. 281,126 246,255
Treasury stock, at cost................................................. (9,122) -
Note receivable, shareholder............................................ (973) (973)
Cumulative translation adjustment....................................... (2,780) (3,551)
Accumulated deficit..................................................... (134,070) (121,239)
--------- ---------
Total shareholders' equity.......................................... 134,639 120,939
--------- ---------
$ 585,874 $ 561,367
========= =========
Accompanying notes are integral to these condensed consolidated financial statements.
</TABLE>
-3-
<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES....................................................... $121,540 $ 98,655 $362,001 $289,747
COST OF SERVICES............................................... 37,346 30,531 114,001 92,233
-------- -------- -------- --------
GROSS PROFIT................................................... 84,194 68,124 248,000 197,514
-------- -------- -------- --------
OPERATING EXPENSES
Selling, general and administrative.......................... 64,160 42,883 188,702 127,845
Depreciation and amortization................................ 12,361 7,746 34,139 20,833
Restructuring, rebranding and other special charges.......... - 28,174 24,845 73,597
Accrued settlement cost...................................... - - 2,850 1,500
-------- -------- -------- --------
Total operating expenses.................................. 76,521 78,803 250,536 223,775
-------- -------- -------- --------
OPERATING INCOME (LOSS)........................................ 7,673 (10,679) (2,536) (26,261)
-------- -------- -------- --------
OTHER INCOME (EXPENSE).........................................
Interest, net................................................ (4,319) (248) (10,865) (1,901)
Other, net................................................... 265 218 161 154
-------- -------- -------- --------
Total other income (expense).............................. (4,054) (30) (10,704) (1,747)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES.............................. 3,619 (10,709) (13,240) (28,008)
INCOME TAX PROVISION (BENEFIT)................................. 1,484 (2,593) (409) (2,874)
-------- -------- -------- --------
NET INCOME (LOSS).............................................. $ 2,135 $ (8,116) $(12,831) $(25,134)
======== ======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE.............................. $ 0.05 $ (0.19) $ (0.28) $ (0.59)
======== ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE............................ $ 0.05 $ (0.19) $ (0.28) $ (0.59)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC........................................................ 45,942 42,615 45,723 42,471
======== ======== ======== ========
DILUTED...................................................... 45,942 42,615 45,723 42,471
======== ======== ======== ========
Accompanying notes are integral to these condensed consolidated financial statements.
</TABLE>
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<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
----------------------------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................. $(12,831) $ (25,134)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation and amortization......................................... 34,139 20,833
Gain on disposal of property and equipment............................ (258) -
Deferred income taxes................................................. (16,203) (12,424)
Restructuring, rebranding and other special charges................... 24,845 73,597
Accrued settlement cost............................................... 2,850 1,500
Payments for restructuring, rebranding and other special charges...... (33,591) (16,872)
Payments for accrued settlement costs................................. (1,291) -
Changes in assets and liabilities:
Accounts receivable, net............................................ (5,227) (3,507)
Prepaid expenses and other.......................................... 2,497 (5,087)
Accounts payable and accrued expenses............................... 1,311 1,301
-------- ---------
Total adjustments..................................................... 9,072 59,341
-------- ---------
Cash flows from operating activities................................ (3,759) 34,207
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.................................... (51,402) (49,845)
Proceeds from disposal of property and equipment...................... 570 -
Redemption (purchase) of marketable securities, net................... 124,398 (100,355)
Cash paid for acquired companies, net of cash acquired................ (48,849) (16,198)
Strategic investments................................................. (8,059) -
Other................................................................. 1,706 (294)
-------- ---------
Cash flows from investing activities................................ 18,364 (166,692)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments under borrowing arrangements................................. (11,947) (31,669)
Payments for purchase of treasury stock............................... (9,133) -
Proceeds from issuance of common stock, net........................... - 573
Proceeds from convertible subordinated notes, net..................... - 167,107
Shareholder distributions, primarily S-Corporation distributions...... - (6,661)
Net funds from exercise of stock options.............................. (1,689) 823
Other................................................................. (315) -
-------- ---------
Cash flows from financing activities (23,084) 130,173
-------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................... 62 (298)
-------- ---------
NET DECREASE IN CASH AND EQUIVALENTS....................................... (8,417) (2,610)
CASH AND EQUIVALENTS, beginning of period.................................. 43,731 22,616
-------- ---------
CASH AND EQUIVALENTS, end of period........................................ $ 35,314 $ 20,006
======== =========
Accompanying notes are integral to these condensed consolidated financial statements.
</TABLE>
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<PAGE>
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
have been prepared by management of Premiere Technologies, Inc. (the "Company"
or "Premiere") in accordance with rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, certain information and footnote
disclosures usually found in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. In the
opinion of management of the Company, all adjustments (consisting only of normal
recurring adjustments, except as disclosed herein) considered necessary for a
fair presentation of the condensed consolidated financial statements have been
included. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Examples include provisions for bad debts, carrying
values and useful lives assigned to goodwill and other long-lived assets and
accruals for restructuring costs and employee benefits. Actual results could
differ from those estimates. These interim condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K, for the year ended December 31, 1997.
2. SIGNIFICANT CHARGES AND COSTS
The Company recorded certain charges and costs of approximately $17.1 million
before income taxes in the nine month period ended September 30, 1998. Such
amount consists of approximately $8.4 million of charges associated with
uncollectible accounts receivable related principally to the bankruptcy of two
customers, $2.3 million of start-up costs, primarily executive compensation,
incurred by its Orchestrate.com subsidiary, $1.8 million related to asset
impairments and other costs. Approximately $16.1 million of these nonrecurring
charges and costs are included as selling, general and administrative expenses
in the accompanying condensed consolidated statement of operations.
3. NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 131, "Disclosures About Segments of
an Enterprise and Related Information" effective for fiscal years beginning
after December 15, 1997. Interim period reporting is not required in the
initial year of adoption. Management is currently studying the impact that SFAS
No. 131 will have on its financial statement disclosures.
4. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed in accordance with SFAS No. 128,
"Earnings per Share." Basic and diluted net income (loss) per share are the
same in the three and nine month periods ended September 30, 1998 and 1997
because both of the Company's potentially dilutive securities, convertible
subordinated notes and stock options, are antidilutive in all periods presented.
5. COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income represents the change in equity of a business during a
period, except for investments by owners and distributions to owners. Foreign
currency translation adjustments represent the Company's only component of other
comprehensive income. For the three month periods ended September 30, 1998 and
1997, total comprehensive income (loss) was approximately $2.9 and $(8.4)
million, respectively. For the nine month periods ended September 30, 1998 and
1997, total comprehensive income (loss) was $(12.1) and $(26.4) million,
respectively.
-6-
<PAGE>
6. ACQUISITIONS
AMERICAN TELECONFERENCING SERVICES, LTD. ACQUISITION
Effective April 22, 1998, the Company purchased all of the outstanding common
stock of American Teleconferencing Services, Ltd. ("ATS") for an aggregate
purchase price of approximately $58 million in stock and cash. ATS is a leading
provider of full service conference calling and other forms of group
communications. Excess purchase price over fair value of net assets acquired of
approximately $47 million has been recorded as goodwill based on a preliminary
purchase price allocation and is being amortized on a straight-line basis over
40 years. Such purchase price allocation is subject to change within one year of
the acquisition date under certain circumstances as set forth in Accounting
Principles Board opinion No. 16 "Business Combinations" ("APB No. 16").
XPEDITE SYSTEMS, INC. ACQUISITION
On February 27, 1998, the Company completed its merger with Xpedite Systems,
Inc. ("Xpedite"). In connection with the merger, the Company issued
approximately 11 million shares of its common stock in exchange for all of the
issued and outstanding common shares of Xpedite. This transaction was accounted
for as a pooling-of-interests and the Company's financial statements have been
restated for all periods presented to include Xpedite.
In October 1998, the Company initiated discussions with the staff of the
Securities and Exchange Commission ("SEC") regarding whether the Company's stock
repurchase program announced in May 1998, and completed in September 1998, might
adversely affect the Company's accounting for the merger with Xpedite as a
pooling-of-interests. These discussions are currently continuing. The Company
believes that pooling-of-interests accounting remains the appropriate accounting
treatment for the merger, as reflected in the results stated herein.
Nevertheless, if it is finally determined that the Company must account for the
merger under the purchase method, material effects on its future operating
results, attributed primarily to increased amortization expense, will result.
After reaching a final determination with the SEC, the Company may be required
to republish its results of operations and amend its periodic and other filings
with the SEC to reflect any adjustments related to the accounting matters
described above.
INTERNATIONAL ACQUISITIONS
During the first quarter of 1998, the Company acquired Xpedite Systems, GmbH
("XSG") for $13.1 million in cash, net of cash acquired. XSG provides electronic
document distribution services in Germany. Excess purchase price over fair value
of net assets acquired of approximately $12.9 million has been recorded as
goodwill based on a preliminary purchase price allocation and is being amortized
on a straight-line basis over 40 years. Such purchase price allocation is
subject to change within one year of the acquisition date under certain
circumstances as set forth in APB No. 16.
On December 17, 1997, the Company purchased substantially all of the outstanding
capital stock of Xpedite Systems Limited ("XSL") for $87.8 million in cash. XSL
is a leading supplier of electronic document distribution services in the United
Kingdom. Excess purchase price over fair value of net assets acquired of
approximately $79.1 million has been recorded as goodwill based on a preliminary
purchase price allocation and is being amortized on a straight-line basis over
40 years. Such purchase price allocation is subject to change within one year of
the acquisition date under certain circumstances as set forth in APB No. 16.
During the second quarter of 1998, the Company acquired two electronic document
distribution companies located in Germany and Singapore. The aggregate purchase
price of these acquisitions approximates $16 million in cash and liabilities
assumed. Both of the acquisitions were accounted for as purchases. Excess
purchase price over fair value of net assets acquired of approximately $12
million has been recorded as goodwill based on a preliminary purchase price
allocation and is being amortized over 40 years. Such purchase price allocation
is subject to change within one year of the acquisition date under certain
circumstances as set forth in APB No. 16.
VOICECOM ACQUISITION
During the third quarter of 1997, the Company completed its merger with Voicecom
Holdings, Inc. ("VoiceCom"), a provider of voice messaging, interactive voice
response and other enhanced communications services. In connection with the
merger, the Company issued approximately 446,000 shares of its common stock in
exchange for all of the issued and outstanding common shares of VoiceCom. This
transaction has been accounted for as a pooling-of-interests and the Company's
financial statements have been restated for all periods presented to include
VoiceCom.
-7-
<PAGE>
VOICE-TEL ACQUISITIONS
On June 12, 1997, the Company completed the acquisitions of Voice-Tel
Enterprises, Inc. ("VTE"), its affiliate Voice-Tel Network Limited Partnership
("VTN") and substantially all of the approximately 100 independently owned
Voice-Tel franchise businesses ("Franchisees") (collectively, the "Voice-Tel
Entities" and "Voice-Tel Acquisitions"). In connection with the acquisitions,
the Company issued approximately 7.4 million shares of its common stock, paid
approximately $16.2 million in cash and assumed approximately $21.3 million in
indebtedness, net of cash acquired. Most of the Voice-Tel Acquisitions were
structured as tax-free mergers or share exchanges and were accounted for under
the pooling-of-interests method of accounting. Accordingly, the financial
results of the Company have been restated for all periods presented to include
the results of the Voice-Tel Acquisitions accounted for using this method. The
Company purchased 15 of the Voice-Tel Entities for an aggregate of approximately
$15.5 million in cash and approximately 94,000 shares of its common stock.
Excess purchase price over fair value of net assets acquired has been recorded
as goodwill based on preliminary purchase price allocations and is being
amortized on a straight-line basis over 40 years. Such purchase price
allocations are subject to change within one year of the acquisition date under
certain circumstances as set forth in APB No. 16.
The following unaudited pro forma consolidated results of operations for the
three and nine month periods ended September 30, 1998 and 1997 assumes the
acquisitions made by the Company in 1997 and 1998 which were accounted for as
purchases occurred on January 1, 1997. Pro forma adjustments consist of
amortization of intangible assets acquired, interest expense associated with
borrowings incurred in connection with the XSG and XSL purchases and lost
interest income reflecting cash paid in the acquisitions (amounts in
thousands).
<TABLE>
<CAPTION>
Three Month Period Ended Nine Month Period Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $121,540 $120,065 $378,040 $351,801
======== ======== ======== ========
Net income (loss) $ 2,135 $ (7,630) $(19,638) $(26,373)
======== ======== ======== ========
Basic net income (loss) per share $ 0.05 $ (0.18) $ (0.43) $ (0.62)
======== ======== ======== ========
Diluted net income (loss) per share $ 0.05 $ (0.18) $ (0.43) $ (0.62)
======== ======== ======== ========
</TABLE>
7. RESTRUCTURING, REBRANDING AND OTHER SPECIAL CHARGES
The Company recorded charges against income of approximately $27.7 million in
the first quarter of 1998 in connection with the Xpedite merger. Such charges
consist of transaction costs, principally investment banking and professional
fees, which must be expensed under the pooling-of-interests method of
accounting. In addition, the Company has accrued the estimated costs to exit
certain facilities and discontinue certain business processes and activities
that are duplicative or redundant in the combined operations of Premiere and
Xpedite. These costs consist of severance associated with workforce reduction,
lease termination costs resulting from exiting certain facilities and asset
impairments resulting from management's decision to upgrade certain network
based telecommunications equipment in order to more efficiently integrate the
Premiere and Xpedite telecommunication networks. The Company also recorded the
costs to settle a patent infringement claim made against Xpedite. This
settlement was paid in April 1998.
Xpedite recorded restructuring and other special charges of approximately $16.5
million before income taxes in the fourth quarter of 1997. Such amounts result
principally from transaction costs incurred by Xpedite in connection with its
merger with the Company, including legal and professional fees and a $9.5
million transaction "break-up" fee paid by Xpedite in connection with an
unsuccessful attempt to acquire Xpedite. In addition,
-8-
<PAGE>
Xpedite recorded charges for severance and asset impairment costs associated
with closing its existing United Kingdom ("UK") based operation. This action
resulted from Xpedite management's plan to restructure its European operations
by acquiring its UK affiliate (XSL) in December 1997 and centralizing
administration of European business operations in the newly acquired
organization.
In connection with the VoiceCom acquisition, the Company recorded restructuring
and other special charges of approximately $28.2 million before income taxes in
the third quarter of 1997. Such amounts consisted of transaction costs, asset
impairments, costs to terminate or restructure certain contractual obligations
and other costs.
Transaction costs associated with the VoiceCom acquisition were expensed as
required by the pooling-of-interests method of accounting. Other restructuring
and special charges recorded in the third quarter of 1997 result principally
from management's plan to restructure VoiceCom's operations by reducing its
workforce, exiting certain facilities, discontinuing duplicative product
offerings and terminating or restructuring certain contractual obligations.
The Company recorded approximately $45.4 million of restructuring and other
special charges in the second quarter of 1997 in connection with the Voice-Tel
Acquisitions. Those charges result from management's plan to restructure the
operations of the Voice-Tel Entities under a consolidated business group model
and discontinue its franchise operations. This initiative involves substantial
reduction in the administrative workforce, abandoning duplicate facilities and
assets and other costs necessary to discontinue redundant business activities.
The Company also recorded a $1.5 million charge for anticipated legal and
settlement costs resulting from bankruptcy proceedings of a customer,
Communications Network Corporation. See Note 10 for further information
regarding this claim. Activity in accrued costs for restructuring and other
special charges during the nine month period ended September 30, 1998 is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
Accrued Costs Accrued Costs
December 31, Charges to Costs September 30,
1997 Operations Incurred 1998
------------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Severance $ 6,672 $ 1,803 $ 3,276 $ 5,199
Asset impairments 12,648 3,490 7,066 9,072
Restructure or terminate contractual obligations 13,354 670 3,542 10,482
Transaction costs 6,948 11,388 16,695 1,641
Accrued settlement costs - 2,850 2,751 99
Rebranding costs - 2,710 1,957 753
Other costs, primarily to exit facilities
and certain activities 3,788 4,784 6,263 2,309
------- ------- ------- -------
$43,410 $27,695 $41,550 $29,555
======= ======= ======= =======
</TABLE>
8. STRATEGIC ALLIANCES AND INVESTMENTS
Assets recorded as strategic alliances and investments at September 30, 1998 and
December 31, 1997 are as follows (amounts in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
MCI WorldCom strategic alliance $30.0 $30.0
Intangible and other assets 12.7 18.5
Less accumulated amortization 3.8 1.9
----- -----
38.9 46.6
Equity investments 21.3 7.7
----- -----
$60.2 $54.3
===== =====
</TABLE>
-9-
<PAGE>
The most individually significant asset in this caption relates to the Company's
strategic alliance agreement entered into with WorldCom, Inc. ("WorldCom"), now
known as MCI WorldCom, Inc. ("MCI WorldCom"), in November 1996. Under the
agreement, MCI WorldCom is required, among other things, to provide the Company
with the right of first opportunity to provide enhanced computer telephony
products for a period of at least 25 years. In connection with the agreement,
the Company issued MCI WorldCom 2,050,000 shares of common stock valued at
approximately $25.2 million (based on an independent appraisal), and paid MCI
WorldCom approximately $4.7 million in cash. Costs capitalized of approximately
$30.0 million are being amortized over the life of the agreement. WorldCom has
recently completed a merger with MCI to form MCI WorldCom. MCI was a competitor
with the Company with respect to certain services and the impact of the merger
between MCI and WorldCom on the Company's strategic alliance with MCI WorldCom
cannot be determined at this time. Current revenue levels under the strategic
alliance agreement are significantly below specified minimum payment levels
in the agreement and the minimum payments ceased at the end of September 1998.
The Company periodically reviews this asset for impairment. Based on such
reviews, management currently believes this asset is appropriately valued.
Management will continue to review this asset periodically, and there can be no
assurance that future reviews will not require a write-down in the carrying
value of this asset. Intangible assets and equity investments classified as
strategic alliances and investments consist of investments made by the Company
to further its strategic plan. These investments and alliances involve emerging
technologies, such as telemedicine and the Internet, as well as marketing
alliances and outsourcing programs designed to reduce costs and develop new
markets and distribution channels for the Company's products. All equity
investments held by the Company in other organizations represent a less than 20%
ownership and are being accounted for under the cost method. Management
periodically reviews these assets for impairment. Based on such reviews,
management believes that these assets are appropriately valued. Management will
continue to periodically review these assets and there can be no assurance that
future reviews will not require a write-down of these assets.
9. STOCK PLANS
Sharp declines in the market price of the Company's common stock resulted in
many outstanding employee stock options being exercisable at prices that exceed
the current market price, thereby substantially impairing the effectiveness of
such options as performance incentives. Consistent with the Company's philosophy
of using equity incentives to motivate and retain management and employees, the
Board of Directors determined it to be in the best interests of the Company and
its shareholders to restore the performance incentives intended to be provided
by employee stock options by repricing such options to the current market price.
Consequently, on July 22, 1998, the Board of Directors of the Company determined
to reprice or regrant all employee stock options which had exercise prices in
excess of the closing price on such date (other than those of Chief Executive
officer Boland T. Jones, who requested that his options not be repriced) to
$10.25, which was the closing price of Premiere's common stock on July 22, 1998.
While the vesting schedules remain unchanged, the repriced and regranted options
are generally subject to a twelve-month black-out period, during which the
options may not be exercised. If optionee's employment is terminated during the
black-out period, he or she will forfeit any repriced or regranted options that
first vested during the twelve-month period preceding his or her termination of
employment. By imposing the black-out and forfeiture provisions on the repriced
and regranted options, the Board of Directors intends to provide added incentive
for the optionees to continue service.
On July 22, 1998, the Board of Directors approved a new 1998 Stock Plan (the
"1998 Plan") that essentially mirrors the terms of the Company's existing Second
Amended and Restated 1995 Stock Plan (the "1995 Plan"), except that it is not
intended to be used for officers or directors. In addition, the 1998 Plan,
because it was not approved by the shareholders, does not provide for the grant
of incentive stock options. Under the 1998 Plan, 4,000,000 shares of Common
Stock are reserved for the grant of nonqualified stock options and other
incentive awards to employees and consultants of the Company. The objective of
the 1998 Plan is to provide the grantees with an incentive to achieve the
Company's objectives by encouraging their continued service and contribution.
In connection with the repricing of options, as discussed above, some of the
options currently outstanding under the 1995 Plan will be cancelled and replaced
with market-value options under the 1998 Plan, thereby achieving greater
availability for the grant of incentive stock options and other performance
incentives under the 1995 Plan.
-10-
<PAGE>
On June 23, 1998, the Company's Board of Directors declared a dividend of one
preferred stock purchase right (a "Right") for each outstanding share of the
Company's Common Stock. The dividend was paid on July 6, 1998, to the
shareholders of record on that date. Each Right entitles the registered holder
to purchase from the Company one one-thousandth of a share of Series C Junior
Participating Preferred Stock, par value $0.01 per share (the "Preferred
Shares"), at a price of sixty dollars ($60.00) per one-thousandth of a Preferred
Share, subject to adjustment. The description and terms of the Rights are set
forth in the Shareholder Protection Rights Agreement, as the same may be amended
from time to time, dated as of June 23, 1998, between the Company and SunTrust
Bank, Atlanta, as rights agent. The Rights may have certain anti-takeover
effects. The Rights will cause substantial dilution by a person or group that
attempts to acquire the Company on terms not approved by the Board of Directors
of the Company. However, the Rights should not interfere with any merger,
statutory share exchange or other business combination approved by the Board of
Directors since the Rights may be terminated by the Board of Directors at any
time on or prior to the close of business ten business days after announcement
by the Company that a person has become an Acquiring Person. Thus, the Rights
are intended to encourage persons who may seek to acquire control of the Company
to initiate such an acquisition through negotiations with the Board of
Directors. However, the effect of the Rights may be to discourage a third party
from making a partial tender offer or otherwise attempting to obtain a
substantial equity position in the equity securities of, or seeking to obtain
control of, the Company.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
Since June 25, 1998, the Company and certain of its current and former officers
have been named as defendants in multiple shareholder class action lawsuits
filed in the United States District Court for the Northern District of Georgia.
Plaintiffs seek to represent a class of individuals who purchased or otherwise
acquired the Company's Common Stock from as early as February 11, 1997 through
June 10, 1998. Class members allegedly include those who purchased the
Company's Common Stock as well as those who acquired stock through a merger.
Plaintiffs allege the defendants made positive public statements concerning the
Company's growth and acquisitions. In particular, plaintiffs allege the
defendants spoke positively about the Company's acquisition of Voice-Tel,
Xpedite, ATS, TeleT and VoiceCom, as well as its venture with UniDial
Communications, Inc., its investment in USA.NET, Inc. and the commercial release
of Orchestrate. Plaintiffs allege these public statements were fraudulent
because the defendants knowingly failed to disclose that the Company allegedly
was not successfully consolidating and integrating these acquisitions. Alleged
evidence of scienter include sales by certain individual defendants during the
class period and the desire to keep the Common Stock price high so that future
acquisitions could be made using the Company's Common Stock. Plaintiffs allege
the truth was purportedly revealed on June 10, 1998, when the Company announced
it would not meet analysts' estimates of second quarter 1998 earnings because,
in part, of the financial difficulties experienced by a licensing customer and
by a strategic partner in the Company's enhanced calling services product group,
revenue shortfalls in its voice messaging product group, as well as other
unanticipated costs and one-time charges totaling approximately $17.1 million on
a pre-tax basis. Plaintiffs allege the Company admitted it had experienced
difficulty in achieving anticipated revenue and earnings from its voice
messaging product group, due to difficulties in consolidating and integrating
its sales function. Plaintiffs allege violation of Sections 10(b), 14(a) and
20(a) of the Securities Exchange Act of 1934 and Sections 11, 12 and 15 of the
Securities Act of 1933. The Company believes the alleged claims in these
lawsuits are without merit. The Company intends to defend these lawsuits
vigorously, but due to the inherent uncertainties of the litigation process and
the judicial system, the Company is unable to predict the outcome of this
litigation. If the outcome of any of this litigation is adverse to the Company,
it could have a material adverse effect on the Company's business, financial
condition and results of operations.
On June 28, 1996, AudioFAX IP LLC ("AudioFAX") filed a lawsuit against the
Company alleging that the Company infringed certain patents held by AudioFAX for
enhanced facsimile products. In the third quarter of 1996, the Company recorded
a charge to operations of $1.5 million for the estimated legal fees and other
costs to resolve this matter. On February 11, 1997, the Company entered into a
long-term, non-exclusive license agreement with AudioFAX settling this
litigation. Costs accrued in the third quarter of 1996 were adequate to cover
the actual costs of litigation. The final payment under the license agreement
was made in April 1998.
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<PAGE>
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 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 requests to intervene and to file a third party
action and has transferred the remainder of the Intervention Suit to the
Bankruptcy Case. Based upon the bankruptcy examiner's findings and the
subsequently appointed bankruptcy trustee's investigation of potential actions
directed at PCI, including an avoidable preference claim under the Bankruptcy
Code of an amount up to approximately $950,000, the bankruptcy trustee (the
"Trustee") and PCI have reached a tentative settlement on all issues, subject to
Bankruptcy Court approval. The terms of the proposed settlement have been
incorporated into a motion requesting approval of the settlement and a proposed
plan of reorganization (the "Plan") filed by the Trustee. On June 23, 1998, the
Bankruptcy Court approved the settlement whereby PCI obtained a release from the
Trustee and the Trustee dismissed the Intervention Suit in consideration of PCI
making a cash payment of $l.2 million to the Trustee. If the Plan is
subsequently approved by the Bankruptcy Court, PCI will make an additional cash
payment of up to $300,000 to the Trustee in consideration of PCI obtaining
certain allowed subordinated claims and the Court granting an injunction in
Premiere's favor against possible nuisance suits relating to the CNC business.
The Company has previously recorded a reserve for the settlement and Plan
payment.
On 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 then
president, Boland T. Jones, in the Superior Court of Fulton County, Georgia. In
December 1997, the Company, PCI and Mr. Jones entered into a settlement
agreement with Mr. Bott that settled and disposed of Mr. Bott's claims in
connection with this litigation. In August 1998, the Company, PCI and Mr. Jones
entered into a settlement agreement with Mr. Elliott and CRS which settled and
disposed of Mr. Elliott's and CRS's claims in connection with this litigation.
These settlements will not have a material adverse effect on the Company's
business, financial condition or results of operations.
On July 8, 1997, various limited partners purporting to act on behalf of
Telentry Research Limited Partnership, Telentry Development Limited Partnership,
Telentry XL Limited Partnership, Telentry Research Limited Partnership II and
Telentry Development Limited Partnership II (collectively, the "Telentry
Partnerships") filed a complaint in the Superior Court of New Jersey for Morris
County against Xpedite and two other defendants. The complaint alleges, inter
alia, that Xpedite is in breach of its obligations to make royalty payments
under a series of license agreements between Xpedite and the Telentry
Partnerships. In this action, the plaintiffs seek damages of approximately
$2.0 million and an accounting of royalties. The Company believes that Xpedite
has meritorious defenses to the plaintiff's allegations and Xpedite will
vigorously defend the same, but due to the inherent uncertainties of the
litigation process and the judicial system, the Company is unable to predict the
outcome of this litigation. If the outcome of this litigation is adverse to
Xpedite, it could have a material adverse effect on the Company's business,
financial condition and results of operations.
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, ("WorldCom Network Services"), Bernard J. Ebbers, David F. Meyers, Robert
Vetera, Joseph Cusick, William Trower, Don Wilmouth, Digital Communications of
America, Inc., Boland Jones, Patrick Jones, and John Does I-XX (the
"Defendants") in the United States District Court for the Eastern District of
New York (the "Al-Khatib lawsuit"). Plaintiffs contend that PCI, certain
officers of PCI and the other Defendants engaged in a fraudulent scheme to
restrain trade in the debit card market nationally and in the New York debit
card sub-market and made misrepresentations of fact in connection with the
scheme. The Plaintiffs are seeking at least $250 million in compensatory damages
and $500 million in punitive damages from PCI and the other Defendants. Pursuant
to the local rules of the District Court, PCI has filed a letter stating the
reasons it believes the lawsuit should be dismissed. On May 1, 1998, PCI filed a
motion to dismiss for failure to state a claim and such motion to dismiss is
currently pending. The individual PCI defendants, Mr. Boland Jones and Mr.
Patrick Jones, filed a separate motion to dismiss based upon lack of personal
jurisdiction, and such motion to dismiss is currently pending. The Company
believes that PCI has meritorious defenses to the Plaintiffs' allegations and
PCI will vigorously defend the same, but due to the inherent uncertainties of
the litigation process and the judicial system, the Company is unable to predict
the outcome of this litigation. If the outcome of this litigation is adverse to
PCI, it could have a material adverse effect on the Company's business,
financial condition and results of operations.
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<PAGE>
On February 23, 1998, Rudolf R. Nobis and Constance Nobis filed a complaint in
the Superior Court of Union County, New Jersey against 15 named defendants
including Xpedite and certain of its alleged current and former officers,
directors, agents and representatives. The plaintiffs allege that the 15 named
defendants and certain unidentified "John Doe defendants" engaged in wrongful
activities in connection with the management of the plaintiffs' investments with
Equitable Life Assurance Society of the United States and/or Equico Securities,
Inc. (collectively "Equitable"). More specifically, the complaint asserts
wrongdoing in connection with the plaintiffs' investment in securities of
Xpedite and in unrelated investments involving insurance-related products. The
defendants include Equitable and certain of its current or former
representatives. The allegations 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 approximately $4.85 million,
plus $200,000 in "lost investments," interest and/or dividends that have accrued
and have not been paid, punitive damages in an unspecified amount, and for
certain equitable relief, including a request for Xpedite to issue 139,430
shares of common stock in the plaintiffs' names, attorneys' fees and costs and
such other and further relief as the Court deems just and equitable. Xpedite has
filed an answer denying the material allegations of the complaint and asserting
various affirmative defenses and intends to file a motion to stay the
proceedings against it during the court-ordered arbitration between the
plaintiffs and the non-Xpedite related defendants. The Company believes that
Xpedite has meritorious defenses to the plaintiffs' allegations and Xpedite will
vigorously defend the same, but due to the inherent uncertainties of the
litigation process and the judicial system, 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,
financial condition and results of operations.
On or about May 27, 1998, the Telephone Company of Central Florida ("TCCF"), a
user of the Company's network management system, filed for protection under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Middle District of Florida. WorldCom Network Services and the Company are two
of the largest creditors in this bankruptcy case. In August 1998, WorldCom
Network Services filed a separate lawsuit in the Federal District Court for the
Middle District of Florida against certain insiders of TCCF alleging payment of
improper distributions to the insiders in excess of $1.0 million and asserting a
constructive trust claim against the amounts received by the insiders. On
October 14, 1998, the Bankruptcy Court approved TCCF's motion requesting
authority to hire counsel for the purpose of pursuing certain alleged claims
against WorldCom Network Services and the Company, alleging service problems
with WorldCom Network Services and the Company. No lawsuit has been filed by
TCCF. Due to the inherent uncertainties of the litigation process and the
judicial system, and the lack of specificity of the nature of the claims which
may be asserted by TCCF, the Company is not able to predict with certainty
whether a lawsuit will be filed by TCCF or, if such a lawsuit is filed, whether
the outcome of such litigation will be adverse to the Company. If TCCF pursues
its alleged claims through litigation that is not resolved in the Company's
favor, it could have a material adverse effect on the Company's business,
financial condition and results of operations.
On July 30, 1998, Xfer Communications ("Xfer") filed a lawsuit against VoiceCom
in the United States District Court for the Eastern District of Michigan,
alleging breach of contract, tortious interference with business relationships,
fraudulent inducement, and misappropriation of trade secrets allegedly in
connection with the solicitation by VoiceCom of certain telecommunication
customer accounts of Xfer. The plaintiff seeks to recover actual damages in an
amount alleged to be in excess of $100,000, together with costs, interest,
attorneys' fees and punitive damages. The Company believes that VoiceCom has
meritorious defenses to the plaintiff's allegations and VoiceCom will vigorously
defend the same, but due to the inherent uncertainties of the litigation process
and the judicial system, the Company is unable to predict the outcome of this
litigation. If the outcome of this litigation is adverse to VoiceCom, it could
have a material adverse effect on the Company's business, financial condition
and results of operations.
-13-
<PAGE>
On September 30, 1998, Acculock, Inc. filed a complaint against PCI in the
District Court of Tarrant County, Texas, 342nd Judicial District. In its
complaint, the plaintiff alleges breach of contract, fraud and negligent
misrepresentation arising out of an alleged contractual relationship with PCI
relating to the marketing of the Premiere WorldLink key holder program. The
plaintiff seeks to recover economic damages alleged to be not less than
$250,000, together with costs, interest, attorneys' fees and punitive damages.
The plaintiff also seeks mental anguish damages of an unspecified amount. On
November 5, 1998, PCI removed the case to the United States District Court for
the Northern District of Texas, Fort Worth Division, and filed a motion to
dismiss the lawsuit, which motion is pending. The Company believes that PCI has
meritorious defenses to the Plaintiffs' allegations and PCI will vigorously
defend the same, but due to the inherent uncertainties of the litigation process
and the judicial system, Premiere is unable to predict the outcome of this
litigation. If the outcome of this litigation is adverse to PCI, it could have a
material adverse effect on the Company's business, financial condition or
results of operations.
On November 4, 1998, APA Excelsior III L.P., APA Excelsior III Offshore L.P.,
APA/Fostin Pennsylvania Venture Capital Fund, CIN Venture Nominees Limited,
Stuart A. Epstein and David Epstein, plaintiffs, filed a complaint against the
Company and certain of its current and former officers and directors,
defendants, in the United States District Court for the Southern District of New
York. Plaintiffs were shareholders of Xpedite who acquired Premiere common stock
as a result of the merger between Premiere and Xpedite in November 1997.
Plaintiffs' allegations are based on the representations and warranties made by
Premiere in the prospectus and the registration statement related to the merger,
the merger agreement and other documents incorporated by reference regarding the
Company's roll-out of its Orchestrate product, the Company's relationship with
customers Amway and Digitec and the Company's 800-based calling card service. In
their complaint, plaintiffs allege causes of action against the Company for
breach of contract; against all defendants for negligent misrepresentation,
violation of Section 11 of the Securities Act of 1933, as amended ("Securities
Act") and violation of Section 12(a)(2) of the Securities Act; and, against the
individual defendants for violation of Section 15 of the Securities Act.
Plaintiffs seek undisclosed damages together with pre- and post-judgment
interest, recission or recissory damages, punitive damages, costs and attorneys'
fees.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company operates in one industry segment, enhanced communications services.
The Company's services include enhanced calling services for mobile individuals,
voice messaging, full service conference calling, electronic document
distribution services and Internet-based communications. The Company believes
its principal competitive advantage is that it provides these services through
its private network and offers 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 and
thereby avoid costs associated with purchasing and maintaining technology and
equipment themselves.
Revenues from enhanced calling services consist of usage fees from individual
subscribers that are generally based on per minute rates. Also, license fees
from corporations, primarily telecommunication carriers, under outsource
arrangements by which the carriers license use of the Company's network to offer
enhanced communications services to their customers. License fees are also
generally based on per minute rates. Voice messaging revenues generally consist
of fixed monthly fees and usage fees, based on the messaging activity of a
subscriber. Electronic document distribution services revenues generally
consist of per page or per minute fees, sales of fax message handling systems
and royalties for the use of certain Company software from corporations and
individual subscribers. Revenues from full service conference calling are
generally based on per minute rates. Although the Company does not currently
derive any revenues from its Internet-based services, management anticipates
that revenues from these products will consist of both fixed monthly and usage
based components.
Cost of services consists primarily of transmission costs. License customers
generally arrange for, and directly bear the cost of, transmission.
Consequently, while the per minute fees for licensee platform usage are lower
than those for individual subscriber services, the gross margin from license
arrangements is considerably higher than for subscriber services.
Selling, general and administrative expenses includes the cost of call center,
operations and research and development activities in addition to selling,
general and administrative costs. Such costs consist of salary and wages,
employee benefit costs, direct and indirect commissions, the cost of print
advertisements, travel and entertainment expenses, bad debt expense, rent and
facility expense, accounting and audit fees, legal fees, property taxes and
other administrative and operating expenses.
Depreciation and amortization include depreciation of computer and
telecommunications equipment, office equipment and amortization of intangible
assets. The Company provides for depreciation of equipment using the straight-
line method of depreciation over the estimated useful lives of the assets, which
range from five to ten years. Leasehold improvements are depreciated on a
straight-line basis over the shorter of the term of the lease or the estimated
useful life of the asset. Amortization of intangible assets includes costs
associated with capitalized software development costs, goodwill and other
intangible assets, which are amortized over lives ranging from five to 40 years.
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from estimates. The following discussion
and analysis provides information which management believes is relevant to an
assessment and understanding of the Company's consolidated results of operations
and financial condition. This discussion should be read in conjunction with the
consolidated condensed financial statements and notes thereto.
In October 1998, the Company initiated discussions with the staff of the
Securities and Exchange Commission ("SEC") regarding whether the Company's stock
repurchase program announced in May 1998, and completed in September 1998, might
adversely affect the Company's accounting for the merger with Xpedite as a
pooling-of-interests. These discussions are currently continuing.
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<PAGE>
The Company believes that pooling-of-interests accounting remains the
appropriate accounting treatment for the merger, as reflected in the results
stated herein. Nevertheless, if it is finally determined that the Company must
account for the merger under the purchase method, material effects on its future
operating results, attributed primarily to increased amortization expense, will
result. After reaching a final determination with the SEC, the Company may be
required to republish its results of operations and amend its periodic and other
filings with the SEC to reflect any adjustments related to the accounting
matters described above.
ANALYSIS OF OPERATING RESULTS
The Company's financial statements for all periods presented have been restated
to include the operations of Xpedite, the Voice-Tel Acquisitions and VoiceCom
that were accounted for as poolings-of-interests. The following discussion and
analysis is prepared on that basis.
Revenues by product group for the three and nine month periods ended September
30, 1998 and 1997 are as follows (amounts in millions):
<TABLE>
<CAPTION>
Three month period Nine month period
ended September 30, ended September 30,
1998 1997 1998 1997
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Electronic Document Distribution $ 58.7 $42.7 $170.0 $122.4
Voice Messaging 30.0 33.6 94.5 103.8
Enhanced Calling Services 21.0 21.6 73.0 60.9
Conference Calling 11.8 .8 24.5 2.6
------ ----- ------ ------
$121.5 $98.7 $362.0 $289.7
====== ===== ====== ======
</TABLE>
Revenues increased $22.9 million or 23.2% in the three month period ended
September 30, 1998 and increased $72.3 million or 24.9% in the nine month period
ended September 30, 1998 as compared with the same periods in 1997. Revenue grew
in the following areas:
. Conference calling, through the acquisition of ATS in April 1998,
. Electronic Document Distribution Services through internal growth in North
American and Asia/Pacific operations and acquisitions of European-based
electronic document distribution providers XSL and XSG in December 1997 and
January 1998, respectively,
. Strategic partner programs in the Company's Enhanced Calling Services product
group, including American Express, First USA and MBNA, and
. Bank America call center management services.
The Company experienced revenue declines from two customers of the Company's
Enhanced Calling Services product group. Such customers initiated Chapter 11
bankruptcy proceedings in the second quarter of 1998. The Company recorded no
revenue from either of these customers in the second and third quarters of 1998.
Revenue from these customers were $2.5 million and $3.1 million in three and
nine month periods ended September 30, 1997. Revenue declines in the Company's
Voice Messaging product group result from revenue losses at VoiceCom prior to
its acquisition by the Company in September 1997. The VoiceCom acquisition was
accounted for as a pooling of interests and the Company has restated its results
of operations to include VoiceCom. In addition, the Company experienced revenue
declines from a large Voice Messaging customer engaged in the multi-level
marketing industry. Management believes these declines result mainly from
membership attrition in the customer's distributor base.
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<PAGE>
Gross profit margins were 69.3% and 69.1% for three month periods ended
September 30, 1998 and 1997 and 68.5% and 68.2% for the nine month periods ended
September 30, 1998 and 1997. Improving gross margins resulted from the
acquisition of ATS which has higher gross margins than the Company's existing
product groups. The Company has also benefited from least cost transmission
routing practices and general industry trends in which long distance transport
and local access service costs have decreased as a result of increased capacity
and competition among long distance and local exchange carriers.
Selling, general and administrative costs as a percent of revenue were 52.8% and
43.5% for the three month periods ending September 30, 1998 and 1997 and 52.1%
and 44.1% for the nine month periods ended September 30, 1998 and 1997.
Increases in selling, general and administrative costs in 1998 as compared with
1997 result from:
. Acquisition of ATS in April 1998, which was accounted for as a purchase and
has higher relative S,G & A costs as a percent of revenues than the Company's
other business units,
. Increased labor costs associated with the Company's Enhanced Calling Services
and Voice Messaging product groups,
. Addition of management infrastructure in the Company's administrative
headquarters, and
. Approximately $16.1 million of costs and charges recorded in the second
quarter of 1998. These costs included $8.4 million of charges associated with
uncollectible accounts receivable related principally to the bankruptcy of
two customers, $2.3 million of start-up costs, primarily executive
compensation, incurred by its Orchestrate.com subsidiary, $1.8 million
related to asset impairments and other costs. Excluding these costs and
charges, selling, general and administrative costs were 47.7% of revenues for
the nine month period ended September 30, 1998.
The Company recently announced a workforce reduction program designed to
eliminate organizational redundancies and reduce operating costs by
approximately $20 million per year. Implementation of this program began in the
fourth quarter of 1998 and is not expected to produce measurable savings before
1999.
Depreciation and amortization was $12.4 million and $7.7 million or 10.2% and
7.9% of revenues in the three month periods ended September 30, 1998 and 1997,
and $34.1 million and $20.8 million or 9.4% and 7.2% of revenues in the nine
month periods ended September 30, 1998 and 1997, respectively. Increased
depreciation and amortization expense results mainly from depreciation
associated with increased purchases of computer telephony equipment and other
capital expenditures to support new business growth and amortization of goodwill
and other intangibles acquired in connection with the acquisitions of ATS, XSL,
XSG and the Voice-Tel Entities.
Net interest expense increased to $4.3 million and $10.9 million in the three
and nine month periods ended September 30, 1998, respectively, up from $0.2
million and $1.9 million in the same periods of 1997. Increased net interest
expense results from interest on the Company's convertible subordinated notes
issued in June 1997 and borrowings associated with Xpedite's purchase of XSL in
December 1997 and XSG in January 1998. In addition, lower cash and investment
balances throughout 1998 resulted in a decline in interest income to $1.1
million in the three month period ended September 30, 1998 as compared with $3.1
million in the three month period ended September 30, 1997.
In 1998, the Company's effective income tax rate varied from the statutory rate
due to non-deductible goodwill amortization and merger costs. In 1997, the
Company's effective income tax rate varied from the statutory rate due to non
deductible merger costs incurred in connection with the Voice-Tel Acquisitions,
certain non-taxable investment income and income of Voice-Tel Entities which had
elected to be treated as S Corporations or partnerships under U.S. tax law prior
to their acquisition by the Company.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was $3.8 million in the nine month period ended
September 30, 1998. Net cash provided by operations in the same period of 1997
was $34.2 million. Excluding payments for restructuring, rebranding and other
special charges in both periods, net cash provided by operations was $31.1
million in 1998 and $51.1 million in 1997, respectively. Lower cash from
operations before payments for restructuring, rebranding and other special
charges in 1998 resulted primarily from higher selling, general and
administrative costs.
Investing activities provided cash of approximately $18.4 million and used cash
of $166.7 million in the nine month periods ended September 30, 1998 and 1997.
The Company liquidated short-term investments in marketable securities of $124.4
million in the nine month period ended September 30, 1998 to fund capital
expenditure programs, acquisitions and strategic investment activities. Capital
expenditures of $51.4 million in 1998 consisted mainly of purchases of
telecommunications equipment in connection with programs to upgrade and expand
operating infrastructure, including build-out of the Company's London and
Toronto data centers, expansion of the Company's administrative headquarters and
implementation of new management information
-17-
<PAGE>
systems. Cash paid for acquisitions of approximately $48.8 in the nine month
period ended September 30, 1998 consisted mainly of the acquisition of ATS, the
cash portion of which was approximately $29.3 million. Remaining cash paid for
acquisitions resulted principally from the acquisition of Xpedite's German
affiliate, XSG, which was acquired in January 1998. Cash paid for acquisitions
in 1997 of approximately $16.2 million represents cash paid for acquisitions of
Voice-Tel Entities accounted for as purchases. The Company made strategic
investments of $8.1 million in the nine month period ended September 30, 1998 in
businesses involved in emerging technologies which the Company believes will
further its strategic plan. Such investments included increases in the Company's
equity ownership in WebMD, Inc. (formerly Endeavor Technologies, Inc.) and
USA.NET, and new equity investments in Intellivoice, a company involved with
developing voice activation technology, and Live Content, a company engaged in
certain Internet related technology. Purchase of marketable securities in 1997
of approximately $100.4 million represents investment of proceeds from the
Company's issuance of $172.5 million in convertible subordinated notes which are
described further below.
The Company used cash of approximately $23.1 million in financing activities in
the nine month period ended September 30, 1998. Principal uses of cash were to
repay borrowings under the Company's revolving loan facility, term notes and
capital lease obligations. In addition, the Company repurchased approximately
1.097 million shares of its Common Stock for approximately $9.1 million. No
further repurchases of the Company's stock are planned at this time. Financing
activities provided $130.2 million in the nine month period ended September 30,
1997. The principal source of cash from financing activities in 1997 was the
issuance of convertible subordinated notes in June 1997. The net proceeds to the
Company after exercise of the Underwriter's over-allotment option in July 1997
was approximately $167.1 million. The notes bear interest at 5.75% and mature in
2004. The Company also repaid $31.7 million of borrowings in 1997 assumed in
connection with the Voice-Tel Acquisitions and the Xpedite merger. Cash
distributions of $6.7 million in 1997 result from distributions made in periods
prior to the Company's acquisitions of the Voice-Tel Entities. Such
distributions were made to reimburse S Corporation shareholders for taxes paid
on the proportionate share of taxable income of such companies they were
required to report in their individual income tax returns.
At September 30, 1998, the Company's principal commitments involve certain
indebtedness, lease obligations and minimum purchase requirements under supply
agreements with telecommunications providers. The Company is in compliance
under all such agreements at this date.
Management believes that cash and marketable securities on-hand of approximately
$65.5 million and cash generated by operating activities will be adequate to
fund growth in the Company's existing businesses for the next twelve months.
Management is currently studying alternatives in connection with an initiative
to expand and upgrade its network infrastructure. Management believes this
initiative will better enable the Company to integrate its various products
across a common network platform. This initiative is also designed to reduce
operating costs by allowing for more cost efficient routing of transmission
volumes and network management and improve the Company's ability to leverage
company-wide transmission volumes for quantity purchasing benefits. Management
also anticipates the initiative will improve customer service and support
activities by improving the Company's ability to implement and monitor
consistent procedures and practices in this area. The execution of this
initiative may require the Company to seek additional funding by lease or other
borrowing arrangement. In addition, the upgrade of the Company's network may
reduce the utility of certain equipment and other assets which are currently
used in the Company's network operations. To the extent that this initiative
impairs the carrying value of existing assets, the Company may be required to
record a charge to operations to reduce the carrying value of such assets.
Management is in negotiations with its current lenders to refinance certain
indebtedness assumed in connection with the of Xpedite merger. Such
indebtedness consists of a revolving line of credit providing borrowings up to
$150 million, which matures on December 16, 1998. Approximately $125 million was
outstanding under this facility at September 30, 1998. Any refinancing of this
indebtedness could result in higher interest costs to the Company and more
restrictive loan covenants than those currently in effect.
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RESTRUCTURING, REBRANDING AND OTHER SPECIAL CHARGES
The Company recorded charges against income of approximately $27.7 million in
the first quarter of 1998 in connection with the Xpedite merger. Such charges
consist of transaction costs, principally investment banking and professional
fees, which must be expensed under the pooling-of-interests method of
accounting. In addition, the Company has accrued the estimated costs to exit
certain facilities and discontinue certain business processes and activities
which are duplicative or redundant in the combined operations of Premiere and
Xpedite. These costs consist of severance associated with workforce reduction,
lease termination costs resulting from exiting certain facilities and asset
impairments resulting from management's decision to upgrade certain network
based telecommunications equipment in order to more efficiently integrate the
Premiere and Xpedite telecommunications networks. The Company also recorded the
costs to settle a patent infringement claim made against Xpedite. This
settlement was paid in April 1998.
Xpedite recorded restructuring and other special charges of approximately $16.5
million before income taxes in the fourth quarter of 1997. Such amounts result
principally from transaction costs incurred by Xpedite in connection with its
merger with the Company, including legal and professional fees and a $9.5
million transaction "break-up" fee paid by Xpedite to a company which was party
to an unsuccessful attempt to acquire Xpedite. In addition, Xpedite recorded
charges for severance and asset impairment costs associated with closing its
existing United Kingdom ("UK") based operation. These actions were an integral
part of Xpedite management's plan to restructure its European operations by
acquiring its UK affiliate, XSL, and centralizing administration of European
business operations in the newly acquired organization.
In connection with the VoiceCom acquisition, the Company recorded restructuring
and other special charges of approximately $28.2 million in the third quarter of
1997. Such amounts consisted of transaction costs, asset impairments, costs to
terminate or restructure certain contractual obligations and other costs.
Transaction costs associated with the VoiceCom acquisition were expensed as
required by the pooling-of-interests method of accounting. Other restructuring
and special charges recorded in the third quarter of 1997 result principally
from management's plan to restructure VoiceCom's operations by reducing its
workforce, exiting certain facilities, discontinuing duplicative product
offerings and terminating or restructuring certain contractual obligations. The
Company recorded approximately $45.4 million of restructuring and other special
charges before income taxes in the second quarter of 1997 in connection with the
Voice-Tel Acquisitions. Those charges result from management's plan to
restructure the operations of the Voice-Tel Entities under a consolidated
business group model and discontinue its franchise operations. This initiative
involves substantial reduction in the administrative workforce, abandoning
duplicative facilities and assets and other costs necessary to discontinue
redundant business activities.
THE YEAR 2000 ISSUE
Introduction. The term "Year 2000 issue" is a general term used to describe the
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various problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software has historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000s" from dates in the "1900s." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
The Company's State Of Readiness. The Company has formed a Year 2000 Executive
- - --------------------------------
Committee comprised of members of senior management and a Year 2000 Task Force
comprised of project leaders for each of the Company's operating subsidiaries
and key corporate functional areas. The Year 2000 Executive Committee and the
Task Force are charged with evaluating the Company's Year 2000 issue and taking
appropriate actions so that the Company will incur minimal disruption from the
Year 2000 issue ("Year 2000 ready"). The Year 2000 Task Force is currently
developing and implementing a comprehensive initiative (the "Initiative") to
make the
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Company's software applications and/or systems ("Software Applications") and
hardware platforms ("Hardware Platforms") Year 2000 ready. The Initiative covers
the following seven phases: (i) inventory of all appropriate Software
Applications and Hardware Platforms, (ii) assessment of appropriate repair
requirements, (iii) repair of Software Applications and Hardware Platforms,
where appropriate, (iv) testing of appropriate individual Software Applications
and Hardware Platforms to determine correct manipulation of dates and date-
related data regarding the Year 2000 issue, (v) certification by users or
testers within the Company that such Software Applications and Hardware
Platforms appropriately handle dates and date-related data regarding the Year
2000 issue, (vi) system integration testing of multiple Software Applications
and Hardware Platforms to determine correct manipulation of dates and date-
related data regarding the Year 2000 issue, and (vii) creation of contingency
plans in the event certain Year 2000 readiness efforts fail. The Company is
aware that some of its Hardware Platforms contain embedded microprocessors and
it has taken the repair or replacement of the embedded microprocessors into
consideration in developing the Initiative.
The Company has retained a nationally recognized independent consultant
("Consultant") to assist in assessing and recommending revisions to the
Initiative, and several of such recommendations have been incorporated into the
Initiative. The Company will periodically review its progress with respect to
the Initiative as the Year 2000 is approached and reached. This periodic review
by the Company will include additional adjustments to the Initiative, as
required.
The Company has completed the first six phases of the Initiative for certain of
its Software Applications and Hardware Platforms. While each of the Company's
operating subsidiaries is at a different stage of completion of the Initiative,
the Initiative calls for a majority of the Company's operating subsidiaries to
complete the first six phases of the Initiative by June 30, 1999. The system
integration testing of Software Applications and Hardware Platforms required by
phase (vi) of the Initiative has begun with respect to some of the Company's
business activities. The Initiative calls for initiation of final testing
throughout the Company by no later than the end of the first quarter of 1999.
In the process of assessing the Year 2000 readiness of Software Applications and
Hardware Platforms as required by phase (ii) of the Initiative, the Company has
communicated with many of its suppliers of Software Applications and Hardware
Platforms to determine (1) whether the Software Applications and Hardware
Platforms provided to the Company will correctly manipulate dates and date-
related data as the Year 2000 is approached and reached, and (2) whether the
suppliers will solve their Year 2000 problems in order to continue providing the
Company products and services as the Year 2000 is approached and reached. The
Company has received written verification from the majority of suppliers that
Software Applications and Hardware Platforms, with appropriate "version
modification," will correctly manipulate dates and date-related data as the Year
2000 is approached and reached. If a supplier informs the Company that it will
not appropriately rectify its Year 2000 issues, then the Company will use that
information to develop appropriate contingency plans as required by phase (vii)
of the Initiative. As a general matter, the company may be vulnerable to a
supplier's inability to remedy its own Year 2000 issues. Other than the
Company's own remediation efforts, there can be no assurance that the Software
Applications and Hardware Platforms supplied by third parties on which the
Company's business relies will correctly manipulate dates and date-related data
as the Year 2000 is approached and reached. Such failures could have a material
adverse effect on the Company's financial condition and results of operations.
To operate its business, the Company relies upon providers of telecommunication
services, government agencies, utility companies, and other third party service
providers ("External Providers"), over which it can assert little control. If
the inability of any of these entities to correct their Year 2000 issues results
in a failure to provide the Company services, the Company's operations may be
materially adversely impacted and may result in a material adverse effect on the
Company's financial condition and results of operations. The Company depends
upon telecommunications carriers to conduct its business and is heavily
dependent upon the ability of such telecommunications carriers to correctly fix
their Year 2000 issues. If telecommunications carriers and other External
Providers do not appropriately rectify their Year 2000 issues, the Company's
ability to conduct its business may be materially impacted, which could result
in a material adverse effect on the Company's financial condition and results of
operations.
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A significant portion of the Company's business is conducted outside of the
United States. External Providers located outside of the United States may face
significantly more severe Year 2000 issues than similar entities located in the
United States. If such External Providers located outside the United States are
unable to rectify their Year 2000 issues, the Company may be unable to
effectively conduct the international portion of its business, which could
result in a material adverse effect on the Company's financial condition and
results of operations.
Costs to Address the Company's Year 2000 Issues. Thus far the majority of the
- - -----------------------------------------------
work on the Initiative has been performed by the Company's employees, which has
limited the cost spent to date. The Company estimates that the total historical
and future costs of implementing the Initiative will be approximately $40
million, the majority of which relate to capital expenditures. However, because
the Initiative may undergo changes as a result of many factors, including but
not limited to, the results of any phase of the Initiative, the Company's
periodic review of its progress or recommendations of the Consultant, the
Company's estimate of the total cost of implementation may be revised as the
Initiative progresses. In the event such costs need to be revised, such revised
costs could have a material adverse effect on the Company's financial condition
and results of operations. The Company will fund the costs of implementing the
Initiative from cash flows. The Company has not deferred any specific
information technology project as a result of the implementation of the
Initiative. The Company does not expect that the opportunity cost of
implementation of the Initiative will have a material effect on the financial
condition of the Company or its results of operations.
Risks Presented by Year 2000 Issues. Until system integration testing is
- - -----------------------------------
substantially in process, the Company cannot fully estimate the risks of its
Year 2000 issue. As a result of system integration testing, the Company may
identify business activities that are at risk of Year 2000 disruption. The
absence of any such determination at this point represents only the status
currently in the implementation of the Initiative, and should not be construed
to mean that there is no business activity which is at risk of a Year 2000
related disruption. It is possible that one or more disruptions to a major
business activity could have a material adverse effect on the Company's
financial condition and results of operations. In addition, as noted above, many
of the Company's business critical External Providers may not appropriately
address their Year 2000 issues, the result of which could have a material
adverse effect on the Company's financial condition and results of operations.
The Company's Contingency Plans. The Initiative includes the development of
- - -------------------------------
contingency plans for business activities that are susceptible to a substantial
risk of a disruption resulting from a Year 2000 related event. Because the
Company has not fully assessed its risk from potential Year 2000 failures, the
Company has not yet developed detailed contingency plans specific to Year 2000
events for any business activity. The Company is aware of the possibility,
however, that certain business activities may be hereafter identified as at
risk. Consistent with the Initiative, the Company is developing contingency
plans for such business activities as and if such determinations are made.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997 the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." Management is currently studying the
impact the new Standards will have on its financial statement disclosures.
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q, in documents incorporated
herein and elsewhere by management or the Company from time to time, the words
"believes," "anticipates," "expects," "will" and similar expressions are
intended to identify forward-looking statements concerning the Company's
operations, economic performance and financial condition, including in
particular, the Company's business strategy and means to implement the strategy,
goals, the amount of capital expenditures, and the likelihood of the company's
success in developing and expanding its business. For those statements, the
Company claims the protection of the safe
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harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. These statements are based on a number of
assumptions and estimates which are inherently subject to significant risks and
uncertainties, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. A variety of factors
could cause actual results to differ materially from those anticipated in the
Company's forward-looking statements, including the following factors: (a) those
set forth under the caption "Risk Factors" in the Company's Registration
Statement on Form S-3 (333-50003) and elsewhere herein; (b) those set forth from
time to time in the Company's press releases and reports and other filings made
with the Securities and Exchange Commission; (c) expected cost savings from the
merger (the "Xpedite Merger") with Xpedite and any other acquisitions may not be
fully realized or realized within the expected time frame; (d) revenues
following the Xpedite Merger and other acquisitions may be lower than expected,
operating costs or customer loss and business disruption following the Xpedite
Merger and any other acquisitions may be greater than expected; (e)
unsatisfactory resolution of accounting issues related to the treatment of the
Xpedite Merger as a pooling-of-interests; (f) competitive pressures among
enhanced communications services providers may increase significantly; (g) costs
or difficulties related to the integration of the businesses of Xpedite and
Premiere and other businesses, if any, that may be acquired by Premiere may be
greater than expected; (h) general economic or business conditions,
internationally, nationally or in the local jurisdiction in which Premiere is
doing business, may be less favorable than expected; (i) legislative or
regulatory changes may adversely affect the business in which Premiere is
engaged; (j) changes that may occur in the securities markets; (k) the Company's
ability to manage the Company's growth and to respond to rapid technological
change and risk of obsolescence of the Company's products, services and
technology; (l) the success of the Company's strategic relationships, including
the amount of business generated and the viability of the strategic partner; (m)
the impact of possible adverse litigation; (n) market acceptance of new products
and services, including Orchestrate; (o) development of effective marketing,
pricing and distribution strategies for new products and services, including
Orchestrate; (p) risks associated with interruption in the Company's services
due to the failure of the communications platforms and networks utilized in
providing the Company's services; and (q) risks associated with the Year 2000
issue, including Year 2000 problems that may arise on the part of third parties
which may effect the Company's operations. The Company cautions that such
factors are not exclusive, consequently, all of the forward-looking statements
made in this Quarterly Report on Form 10-Q are qualified by these cautionary
statements and readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
such forward-looking statements that may be made to reflect events or
circumstances after the date hereof, or thereof, as the case may be, or to
reflect the occurrence of unanticipated events.
All statements made herein regarding the Company's state of readiness with
respect to the Year 2000 issue constitute "Year 2000 readiness disclosures" made
pursuant to the Year 2000 Information and Readiness Disclosure Act, Public Law
No. 105-271.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since June 25, 1998, the Company and certain of its current and former officers
have been named as defendants in multiple shareholder class action lawsuits
filed in the United States District Court for the Northern District of Georgia.
Plaintiffs seek to represent a class of individuals who purchased or otherwise
acquired the Company's Common Stock from as early as February 11, 1997 through
June 10, 1998. Class members allegedly include those who purchased the
Company's Common Stock as well as those who acquired stock through a merger.
Plaintiffs allege the defendants made positive public statements concerning the
Company's growth and acquisitions. In particular, plaintiffs allege the
defendants spoke positively about the Company's acquisition of Voice-Tel,
Xpedite, ATS, TeleT and VoiceCom, as well as its venture with UniDial
Communications, Inc., its investment in USA.NET, Inc. and the commercial release
of Orchestrate. Plaintiffs allege these public statements were fraudulent
because the defendants knowingly failed to disclose that the Company allegedly
was not successfully consolidating and integrating these acquisitions. Alleged
evidence of scienter include sales by certain individual defendants during the
class period and the desire to keep the Common Stock price high so that future
acquisitions could be made using the Company's Common Stock. Plaintiffs allege
the truth was purportedly revealed on June 10, 1998, when the Company announced
it would not meet analysts' estimates of second quarter 1998 earnings because,
in part, of the financial difficulties experienced by a licensing customer and
by a strategic partner in the Company's enhanced calling services product group,
revenue shortfalls in its voice messaging product group, as well as other
unanticipated costs and one-time charges totaling approximately $17.1 million on
a pre-tax basis. Plaintiffs allege the Company admitted it had experienced
difficulty in achieving anticipated revenue and earnings from its voice
messaging product group, due to difficulties in consolidating and integrating
its sales function. Plaintiffs allege violation of Sections 10(b), 14(a) and
20(a) of the Securities Exchange Act of 1934 and Sections 11, 12 and 15 of the
Securities Act of 1933. The Company believes the alleged claims in these
lawsuits are without merit. The Company intends to defend these lawsuits
vigorously, butdue to the inherent uncertainties of the litigation process and
the judicial system, the Company is unable to predict the outcome of this
litigation. If the outcome of any of this litigation is adverse to the Company,
it could have a material adverse effect on the Company's business, financial
condition and results of operations.
On 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, subject to Bankruptcy Court
approval. The terms of the proposed settlement have been incorporated into a
motion requesting approval of the settlement and a proposed plan of
reorganization (the "Plan") filed by the Trustee, On June 23, 1998, the
Bankruptcy Court approved the settlement whereby PCI obtained a release from the
Trustee and the Trustee dismissed the Intervention Suit in consideration of PCI
making a cash payment of $l.2 million to the Trustee. If the Plan is
subsequently approved by the Bankruptcy Court, PCI will make an additional cash
payment of up to $300,000 to the Trustee in consideration of PCI obtaining
certain allowed subordinated claims and the Court granting an injunction in
Premiere's favor against possible nuisance suits relating to the CNC business.
The Company has previously recorded a reserve for the settlement and Plan
payment.
On 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 then
president, Boland T. Jones, in the Superior Court of Fulton County,
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Georgia. In December 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. In August 1998, the Company, PCI and
Mr. Jones entered into a settlement agreement with Mr. Elliott and CRS which
settled and disposed of Mr. Elliott's and CRS's claims in connection with this
litigation. These settlements will not have a material adverse effect on the
Company's business, financial condition or results of operations.
On July 8, 1997, various limited partners purporting to act on behalf of
Telentry Research Limited Partnership, Telentry Development Limited Partnership,
Telentry XL Limited Partnership, Telentry Research Limited Partnership II and
Telentry Development Limited Partnership II (collectively, the "Telentry
Partnerships") filed a complaint in the Superior Court of New Jersey for Morris
County against Xpedite and two other defendants. The complaint alleges, inter
alia, that Xpedite is in breach of its obligations to make royalty payments
under a series of license agreements between Xpedite and the Telentry
Partnerships. In this action, the plaintiffs seek damages of approximately $2.0
million and an accounting of royalties. The Company believes that Xpedite has
meritorious defenses to the plaintiff's allegations and Xpedite will vigorously
defend the same, but due to the inherent uncertainties of the litigation process
and the judicial system, the Company is unable to predict the outcome of this
litigation. If the outcome of this litigation is adverse to Xpedite, it could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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. ("WorldCom Network Services"), Bernard J. Ebbers, David F. Meyers, Robert
Vetera, Joseph Cusick, William Trower, Don Wilmouth, Digital Communications of
America, Inc., Boland Jones, Patrick Jones, and John Does I-XX (the
"Defendants") in the United States District Court for the Eastern District of
New York (the "Al-Khatib lawsuit"). Plaintiffs contend that PCI, certain
officers of PCI and the other Defendants engaged in a fraudulent scheme to
restrain trade in the debit card market nationally and in the New York debit
card sub-market and made misrepresentations of fact in connection with the
scheme. The Plaintiffs are seeking at least $250 million in compensatory damages
and $500 million in punitive damages from PCI and the other Defendants. Pursuant
to the local rules of the District Court, PCI has filed a letter stating the
reasons it believes the lawsuit should be dismissed. On May 1, 1998, PCI filed a
motion to dismiss for failure to state a claim and such motion to dismiss is
currently pending. The individual PCI defendants, Mr. Boland Jones and Mr.
Patrick Jones, filed a separate motion to dismiss based upon lack of personal
jurisdiction, and such motion to dismiss is currently pending. The Company
believes that PCI has meritorious defenses to the Plaintiffs' allegations and
PCI will vigorously defend the same, but due to the inherent uncertainties of
the litigation process and the judicial system, the Company is unable to predict
the outcome of this litigation. If the outcome of this litigation is adverse to
PCI, it could have a material adverse effect on the Company's business,
financial condition and results of operations.
On February 23, 1998, Rudolf R. Nobis and Constance Nobis filed a complaint in
the Superior Court of Union County, New Jersey against 15 named defendants
including Xpedite and certain of its alleged current and former officers,
directors, agents and representatives. The plaintiffs allege that the 15 named
defendants and certain unidentified "John Doe defendants" engaged in wrongful
activities in connection with the management of the plaintiffs' investments with
Equitable Life Assurance Society of the United States and/or Equico Securities,
Inc. (collectively "Equitable"). More specifically, the complaint asserts
wrongdoing in connection with the plaintiffs' investment in securities of
Xpedite and in unrelated investments involving insurance-related products. The
defendants include Equitable and certain of its current or former
representatives. The allegations 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 approximately $4.85 million,
plus $200,000 in "lost investments," interest and/or dividends that have accrued
and have not been paid, punitive damages in an unspecified amount, and for
certain equitable relief, including a request for Xpedite to issue 139,430
shares of common stock in the plaintiffs' names, attorneys' fees and costs and
such other and further relief as the Court deems just and equitable. Xpedite
has filed an answer denying the material allegations of the complaint and
asserting various affirmative defenses and intends to file a motion to stay the
proceedings against it during the court-ordered arbitration between the
plaintiffs and the non-Xpedite related defendants.
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The Company believes that Xpedite has meritorious defenses to the plaintiffs'
allegations and Xpedite will vigorously defend the same, but due to the inherent
uncertainties of the litigation process and the judicial system, 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, financial condition and results of operations.
On or about May 27, 1998, the Telephone Company of Central Florida ("TCCF"), a
user of the Company's network management system, filed for protection under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Middle District of Florida. WorldCom Network Services and the Company are two of
the largest creditors in this bankruptcy case. In August 1998, WorldCom Network
Services filed a separate lawsuit in the Federal District Court for the Middle
District of Florida against certain insiders of TCCF alleging payment of
improper distributions to the insiders in excess of $1.0 million and asserting a
constructive trust claim against the amounts received by the insiders. On
October 14, 1998, the Bankruptcy Court approved TCCF's motion requesting
authority to hire counsel for the purpose of pursuing certain alleged claims
against WorldCom Network Services and the Company, alleging service problems
with WorldCom Network Services and the Company. No lawsuit has been filed by
TCCF. Due to the inherent uncertainties of the litigation process and the
judicial system, and the lack of specificity of the nature of the claims which
may be asserted by TCCF, the Company is not able to predict with certainty
whether a lawsuit will be filed by TCCF or, if such a lawsuit is filed, whether
the outcome of such litigation will be adverse to the Company. If TCCF pursues
its alleged claims through litigation which is not resolved in the Company's
favor, it could have a material adverse effect on the Company's business,
financial condition and results of operations.
On July 30, 1998, Xfer Communications ("Mer") filed a lawsuit against VoiceCom
in the United States District Court for the Eastern District of Michigan,
alleging breach of contract, tortious interference with business relationships,
fraudulent inducement, and misappropriation of trade secrets allegedly in
connection with the solicitation by VoiceCom of certain telecommunication
customer accounts of Xfer. The plaintiff seeks to recover actual damages in an
amount alleged to be in excess of $100,000, together with costs, interest,
attorneys' fees and punitive damages. The Company believes that VoiceCom has
meritorious defenses to the plaintiff's allegations and VoiceCom will vigorously
defend the same, but due to the inherent uncertainties of the litigation process
and the judicial system, the Company is unable to predict the outcome of this
litigation. If the outcome of this litigation is adverse to VoiceCom, it could
have a material adverse effect on the Company's business, financial condition
and results of operations.
On September 30, 1998, Acculock, Inc. filed a complaint against PCI in the
District Court of Tarrant County, Texas, 342nd Judicial District. In its
complaint, the plaintiff alleges breach of contract, fraud and negligent
misrepresentation arising out of an alleged contractual relationship with PCI
relating to the marketing of the Premiere WorldLink key holder program. The
plaintiff seeks to recover economic damages alleged to be not less than
$250,000, together with costs, interest, attorneys' fees and punitive damages.
The plaintiff also seeks mental anguish damages of an unspecified amount. On
November 5, 1998, PCI removed the case to the United States District Court for
the Northern District of Texas, Fort Worth Division, and filed a motion to
dismiss the lawsuit, which motion is pending. The Company believes that PCI has
meritorious defenses to the Plaintiffs' allegations and PCI will vigorously
defend the same, but due to the inherent uncertainties of the litigation process
and the judicial system, Premiere is unable to predict the outcome of this
litigation. If the outcome of this litigation is adverse to PCI, it could have a
material adverse effect on the Company's business, financial condition or
results of operations.
On November 4, 1998, APA Excelsior III L.P., APA Excelsior III Offshore L.P.,
APA/Fostin Pennsylvania Venture Capital Fund, CIN Venture Nominees Limited,
Stuart A. Epstein and David Epstein, plaintiffs, filed a complaint against the
Company and certain of its current and former officers and directors,
defendants, in the United States District Court for the Southern District of New
York. Plaintiffs were shareholders of Xpedite who acquired Premiere common stock
as a result of the merger between Premiere and Xpedite in November 1997.
Plaintiffs' allegations are based on the representations and warranties made by
Premiere in the prospectus and the registration statement related to the merger,
the merger agreement and other documents incorporated by reference regarding the
Company's roll-out of its Orchestrate product, the Company's relationship with
customers Amway and Digitec and the Company's 800-based calling card service. In
their complaint, plaintiffs allege causes of action against the Company for
breach of contract; against all defendants for negligent misrepresentation,
violation of Section 11 of the Securities Act of 1933, as amended ("Securities
Act") and violation of Section 12(a)(2) of the Securities Act; and, against the
individual defendants for violation of Section 15 of the Securities Act.
Plaintiffs seek undisclosed damages together with pre- and post-judgment
interest, recission or recissory damages, punitive damages, costs and attorneys'
fees.
ITEM 2. CHANGES IN SECURITIES.
RECENT SALES OF UNREGISTERED SECURITIES
On September 25, 1998, the Company sold 3,000 shares of its Common Stock to
Harvey A. Wagner, the Company's Executive Vice President of Finance and
Administration and Chief Financial Officer. The aggregate purchase price of the
shares was $13,593, or $4.5313 per share. The shares were issued without
registration
-25-
<PAGE>
under the Securities Act of 1933, as amended (the "Act"), in a transaction
exemption from registration under Regulation D and Section 4(2) of the Act and
the rules promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
An annual meeting of the Company's shareholders was held on July 29, 1998. At
the annual meeting, the following nominees were elected to serve as Class I
directors for terms expiring at the annual meeting of shareholders in 2001:
<TABLE>
<CAPTION>
Name of Director Votes For Votes Withheld Abstentions Nonvotes
- - ------------------- ---------- -------------- ----------- --------
<S> <C> <C> <C> <C>
Jeffrey A. Allred 32,071,747 2,071,300 0 0
William P. Payne 32,772,833 1,370,214 0 0
</TABLE>
ITEM 5. OTHER INFORMATION
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Proposals of shareholders intended to be presented at the 1999 annual meeting of
shareholders must be received by the Company on or before March 10, 1999 to be
eligible for inclusion in the Company's proxy statement and proxy related to
that meeting. If the date of the 1999 annual meeting of shareholders is held
more than 30 days from July 29, 1999 (the month and day of the 1998 annual
meeting), then the deadline will be a reasonable time before the Company begins
to print and mail its proxy materials for the 1999 annual meeting.
The Company's Bylaws provide that shareholders seeking to bring business before
the 1999 annual meeting of the shareholders or to nominate candidates for
election of directors at such meeting must provide notice thereof not less than
60 nor more than 90 days prior to the meeting date, and, in such notice, provide
the Company certain information relating to the proposed nominee.
-26-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Exhibit
Number Description
- - ------ -----------
11.1 Statements re: computation of per share earnings.
27.1 Financial Data Schedule for the Three and Nine Month Periods Ended
September 30, 1998.
27.2 Restated Financial Data Schedule for the Three and Nine Month Periods
Ended September 30, 1997.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the quarter for which this
report is filed:
ENTITIES FOR WHICH
DATE OF REPORT FINANCIAL
(DATE FILED) ITEMS REPORTED STATEMENTS FILED
07/31/98 Item 5 - Reporting certain litigation,
the repricing of options, the adoption
of the 1998 Stock Plan and the appointment
of a new officer. None
-27-
<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 by the
undersigned thereunto duly authorized.
November 16, 1998 PREMIERE TECHNOLOGIES, INC.
- - -----------------
Date
/s/ Harvey A. Wagner
------------------------------------------------------
Harvey A. Wagner
Executive Vice President of Finance and Administration
and Chief Financial Officer (Principal Financial and
Accounting Officer and duly authorized signatory of the
Registrant)
-28-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Exhibit
Number Description
- - ------ -----------
11.1 Statements re: computation of per share earnings.
27.1 Financial Data Schedule for the Three and Nine Month Periods Ended
September 30, 1998.
27.2 Restated Financial Data Schedule for the Three and Nine Month Periods
Ended September 30, 1997.
<PAGE>
EXHIBIT 11.1
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF NET INCOME (LOSS) PER SHARE
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30,
------------------------------------------------------------------
1998 1997
------------------------------- --------------------------------
NET NET
NET WEIGHTED INCOME NET WEIGHTED INCOME
INCOME AVERAGE (LOSS) INCOME AVERAGE (LOSS)
(LOSS) SHARES PER SHARE (LOSS) SHARES PER SHARE
---------- -------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic net income (loss).............. $ 2,135 45,942 $ 0.05 $ (8,116) 42,615 $(0.19)
========== ======== ========= ======== ======== ===========
Dilutive Securities
Stock options....................... -- -- -- -- -- --
Convertible subordinated notes...... -- -- -- -- -- --
--------- -------- -------- -------- -------- -----------
Diluted net income (loss)............ $ 2,135 45,942 $ 0.05 $ (8,116) 42,615 $(0.19)
========== ======== ========= ======== ======== ===========
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,
------------------------------------------------------------------
1998 1997
------------------------------- --------------------------------
NET NET
NET WEIGHTED INCOME NET WEIGHTED INCOME
INCOME AVERAGE (LOSS) INCOME AVERAGE (LOSS)
(LOSS) SHARES PER SHARE (LOSS) SHARES PER SHARE
--------- -------- --------- ------- -------- ---------
Basic net income (loss).............. $(12,831) 45,723 $(0.28) $(25,134) 42,471 $(0.59)
========== ======== ========= ======== ======== ===========
Dilutive Securities
Stock options....................... -- -- -- -- -- --
Convertible subordinated notes...... -- -- -- -- -- --
--------- -------- -------- -------- -------- -----------
Diluted net income (loss)............ $(12,831) 45,723 $(0.28) $(25,134) 42,471 $(0.59)
========== ======== ========= ======== ======== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Premiere Technologies, Inc. for the period ended
September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 35,314 35,314
<SECURITIES> 30,171 30,171
<RECEIVABLES> 69,908 69,908
<ALLOWANCES> 7,625 7,625
<INVENTORY> 0 0
<CURRENT-ASSETS> 184,719 184,719
<PP&E> 218,827 218,827
<DEPRECIATION> 90,153 90,153
<TOTAL-ASSETS> 585,874 585,874
<CURRENT-LIABILITIES> 262,793 262,793
<BONDS> 0 0
0 0
0 0
<COMMON> 458 458
<OTHER-SE> 268,251 268,251
<TOTAL-LIABILITY-AND-EQUITY> 585,874 585,874
<SALES> 121,540 362,001
<TOTAL-REVENUES> 121,540 362,001
<CGS> 37,346 114,001
<TOTAL-COSTS> 37,346 114,001
<OTHER-EXPENSES> 76,521 250,536
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,380 15,775
<INCOME-PRETAX> 3,619 (13,240)
<INCOME-TAX> 1,484 (409)
<INCOME-CONTINUING> 2,135 (12,831)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,135 (12,831)
<EPS-PRIMARY> .05 (.28)
<EPS-DILUTED> .05 (.28)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Premiere Technologies, Inc. for the period ended
September 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 157,470 157,470
<SECURITIES> 31,796 31,796
<RECEIVABLES> 51,099 51,099
<ALLOWANCES> 3,693 3,693
<INVENTORY> 0 0
<CURRENT-ASSETS> 256,915 256,915
<PP&E> 128,407 128,407
<DEPRECIATION> 50,508 50,508
<TOTAL-ASSETS> 417,089 417,089
<CURRENT-LIABILITIES> 103,692 103,692
<BONDS> 0 0
0 0
0 0
<COMMON> 407 407
<OTHER-SE> 225,486 225,486
<TOTAL-LIABILITY-AND-EQUITY> 417,089 417,089
<SALES> 98,655 289,747
<TOTAL-REVENUES> 98,655 289,747
<CGS> 30,531 92,233
<TOTAL-COSTS> 30,531 92,233
<OTHER-EXPENSES> 78,803 223,775
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,371 6,679
<INCOME-PRETAX> (10,709) (28,008)
<INCOME-TAX> (2,593) (2,874)
<INCOME-CONTINUING> (8,116) (25,134)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,116) (25,134)
<EPS-PRIMARY> (.19) (.59)
<EPS-DILUTED> (.19) (.59)
</TABLE>
