<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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 January 14, 1999
----- -------------------------------
Common Stock, $0.01 par value 46,977,566 shares
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Explanatory Note
----------------
This Form 10-Q/A is filed by Premiere Technologies, Inc. to amend certain
portions of its Quarterly Report on Form 10-Q for the Quarter ended March 31,
1999, as filed with the Commission on May 17, 1999, as previously amended by
Form 10-Q/A filed with the Commission on May 27, 1999, in response to comments
from the Commission.
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q/A
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 1999 and December 31, 1998......................... 3
Condensed Consolidated Statements of Operations
for the Three Months ended March 31, 1999 and 1998................. 4
Condensed Consolidated Statements of Cash Flows
for the Three Months ended March 31, 1999 and 1998................. 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 13
SIGNATURES.................................................................. 21
EXHIBIT INDEX
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
1999 1998
--------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and equivalents ................................ $ 15,673 $ 19,226
Marketable securities ............................... 2,919 20,769
Accounts receivable, net ............................ 57,573 55,660
Prepaid expenses and other .......................... 10,398 7,940
Deferred income taxes, net .......................... 25,327 20,977
--------- ---------
Total current assets ............................ 111,890 124,572
PROPERTY AND EQUIPMENT, NET .......................... 126,271 137,311
OTHER ASSETS
Strategic alliances and investments, net ............ 28,364 28,510
Intangibles, net .................................... 469,150 492,185
Other assets ........................................ 20,246 20,173
--------- ---------
$ 755,921 $ 802,751
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable .................................... $ 24,466 $ 24,270
Accrued liabilities ................................. 44,398 48,817
Accrued taxes ....................................... 20,894 16,279
Revolving loan....................................... 102,630 118,082
Current maturities of long-term debt and
capital lease obligations ......................... 1,875 3,370
Accrued restructuring, merger costs
and other special charges ......................... 7,009 7,545
--------- ---------
Total current liabilities ....................... 201,272 218,363
--------- ---------
LONG-TERM LIABILITIES
Convertible subordinated notes ...................... 172,500 172,500
Long-term debt and capital lease obligations ........ 2,967 5,721
Other accrued liabilities ........................... 1,008 1,111
Deferred income taxes, net .......................... 3,748 4,162
--------- ---------
Total long-term liabilities ..................... 180,223 183,494
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value; 150,000,000 shares
authorized, 47,166,147 and 46,894,148 shares
issued in 1999 and 1998, respectively, and
46,069,147 and 45,797,148 shares outstanding in
1999 and 1998, respectively ....................... 472 469
Additional paid-in capital .......................... 562,473 562,106
Treasury stock, at cost ............................. (9,133) (9,133)
Note receivable, shareholder ........................ (973) (973)
Cumulative translation adjustment ................... (541) 1,269
Accumulated deficit ................................. (177,872) (152,844)
--------- ---------
Total shareholders' equity ...................... 374,426 400,894
--------- ---------
$ 755,921 $ 802,751
========= =========
Accompanying notes are integral to these condensed consolidated
financial statements.
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PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998
---- ----
(Unaudited)
REVENUES ....................................... $112,809 $ 84,901
TELECOMMUNICATIONS COSTS ....................... 32,456 26,370
-------- --------
GROSS PROFIT ................................... 80,353 58,531
DIRECT OPERATING COSTS ......................... 15,742 5,942
-------- --------
CONTRIBUTION MARGIN ............................ 64,611 52,589
-------- --------
OTHER OPERATING EXPENSES
Selling and Marketing ......................... 24,124 21,079
General and administrative .................... 21,985 8,208
Depreciation and amortization ................. 40,301 12,538
Restructuring, merger costs and
other special charges ....................... -- 7,545
Acquired research and development ............. -- 15,500
Accrued settlement cost ....................... -- 1,500
-------- --------
Total other operating expenses ............ 86,410 66,370
-------- --------
OPERATING LOSS ................................. (21,799) (13,781)
-------- --------
OTHER INCOME (EXPENSE)
Interest, net ................................. (5,596) (1,480)
Other, net .................................... (445) (112)
-------- --------
Total other income (expense) .............. (6,041) (1,592)
-------- --------
LOSS BEFORE INCOME TAXES ....................... (27,840) (15,373)
INCOME TAX BENEFIT ............................. (2,812) (2,613)
-------- --------
NET LOSS ....................................... $(25,028) $(12,760)
======== ========
BASIC NET LOSS PER SHARE ....................... $ (0.54) $ (0.32)
======== ========
DILUTED NET LOSS PER SHARE ..................... $ (0.54) $ (0.32)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC ......................................... 45,998 39,493
======== ========
DILUTED ....................................... 45,998 39,493
======== ========
Accompanying notes are integral to these condensed consolidated
financial statements.
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PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS)
1999 1998
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .......................................... $(25,028) $(12,760)
Adjustments to reconcile net loss to cash
flows from operating activities:
Depreciation and amortization ................... 40,301 12,538
Deferred income taxes ........................... (3,415) (7,784)
Restructuring, merger costs and other
special charges ............................... -- 7,545
Accrued settlement cost ......................... -- 1,500
Acquired research and development ............... -- 15,500
Payments for restructuring, merger costs
and other special charges ..................... (537) (8,539)
Changes in assets and liabilities:
Accounts receivable, net ........................ (2,024) (5,236)
Prepaid expenses and other ...................... (363) (241)
Accounts payable and accrued expenses ........... (351) 5,697
-------- --------
Total adjustments ........................ 33,611 20,980
-------- --------
Net cash provided by operating activities. 8,583 8,220
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ................ (10,623) (13,644)
Proceeds from disposal of property
and equipment ................................... -- 107
Redemption of marketable securities, net .......... 17,850 29,846
Cash paid for acquired companies, net
of cash acquired ................................ (182) (883)
Strategic investments ............................. (1,000) (3,000)
Other ............................................. (1,527) --
-------- --------
Net cash provided by investing activities. 4,518 12,426
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments under borrowing arrangements ............. (16,717) (4,458)
Debt issue costs .................................. -- (35)
Net funds from exercise of stock options .......... 273 (8,551)
Other ............................................. -- (319)
-------- --------
Net cash used in financing activities .... (16,444) (13,363)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............ (210) --
-------- --------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS .... (3,553) 7,283
CASH AND EQUIVALENTS, beginning of period .......... 19,226 21,770
-------- --------
CASH AND EQUIVALENTS, end of period ................ $ 15,673 $ 29,053
======== ========
Accompanying notes are integral to these condensed consolidated
financial statements.
<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/A, for the year ended December 31, 1998, as amended.
2. ACCOUNTING CHANGES
Restatement
In February 1999, Premiere announced that as a result of discussions with the
Office of the Chief Accountant of the Securities and Exchange Commission,
Premiere was required to discontinue accounting for its acquisition of Xpedite
Systems, Inc. ("Xpedite") as a pooling-of-interests and to account for such
acquisition under the purchase method of accounting. Accordingly, Premiere has
restated its unaudited interim financial statements for 1998. The Office of the
Chief Accountant determined that Premiere's post-merger share repurchase
program, completed in September 1998, was not implemented in accordance with
pooling requirements. No questions were raised regarding the propriety of the
original accounting for the merger with Xpedite.
Acceleration of Depreciation and Amortization
In the fourth quarter of 1998, the Company accelerated depreciation of certain
assets by shortening their estimated useful lives. These assets consist of
computers and telecommunications equipment associated with certain legacy
technology systems which management intends to remove from service in the
foreseeable future. Effective in the fourth quarter of 1998, these assets are
being amortized over periods ranging from nine months to one year, the
anticipated remaining service period. Prior to the change, such assets were
being amortized over estimated lives ranging from two to five years.
In addition, the Company accelerated the amortization of all remaining goodwill
and other acquired intangible assets effective in the fourth quarter of 1998.
This action resulted from management's determination that the period over which
it anticipates deriving future cash flows from such assets warrants a shorter
estimated useful life for amortization purposes. Goodwill is now being amortized
over seven years as compared with 10 to 40 years prior to the change. Remaining
acquired intangible assets are being amortized over lives ranging from three to
five years as compared with five to eight years prior to the change.
The Company has also shortened the amortization period associated with a
strategic alliance contract intangible asset from 25 years to three years
effective in the fourth quarter of 1998. See Note 8-Strategic Alliances and
Investments for further discussion surrounding events causing this change.
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes accounting and reporting standards for derivatives and
hedging. It requires that all derivatives be recognized as either assets or
liabilities at fair value and establishes specific
<PAGE>
criteria for the use of hedge accounting. The Company's required adoption date
is January 1, 2000. SFAS No. 133 is not to be applied retroactively to financial
statements of prior periods. The Company expects no material impact to its
results of operations or financial position upon adoption of SFAS No. 133.
4. NET INCOME (LOSS) PER SHARE
Net loss per share is computed in accordance with SFAS No. 128, "Earnings per
Share." Basic and diluted net loss per share are the same in the three month
periods ended March 31, 1999 and 1998 because both of the Company's potentially
dilutive securities, convertible subordinated notes and stock options, are
antidilutive in both periods.
5. COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income (loss) 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 (loss) in the three month periods ended March 31, 1999 and
1998. For the three month periods ended March 31, 1999 and 1998, total
comprehensive loss was approximately $(26.8) million and $(12.8) million,
respectively.
6. ACQUISITIONS
AMERICAN TELECONFERENCING SERVICES, LTD. ACQUISITION
In April 1998, the Company purchased all of the issued and outstanding common
stock of American Teleconferencing Services ("ATS"), a provider of full service
conference calling and group communication services. The shareholders of ATS
received an aggregate of approximately 712,000 shares of Premiere common stock
and cash consideration of approximately $22.1 million. Excess purchase price
over fair value of net assets acquired of approximately $47 million has been
recorded as goodwill and is being amortized on a straight-line basis over seven
years. This transaction has been accounted for as a purchase.
XPEDITE SYSTEMS, INC. ACQUISITION
On February 27, 1998, Premiere acquired Xpedite, a worldwide leader in the
electronic document distribution business including, fax, e-mail, telex and
mailgram services. Premiere issued approximately 11.0 million shares of its
common stock in connection with this acquisition. This transaction has been
accounted for as a purchase. The purchase of Xpedite has been allocated as
follows (in thousands):
Operating and other tangible assets.. $ 90,035
Customer lists....................... 35,700
Developed technology................. 34,300
Acquired research and development.... 15,500
Assembled workforce.................. 7,500
Goodwill............................. 384,701
--------
Assets acquired...................... 567,736
Less liabilities assumed............. 203,487
--------
$364,249
========
The customer lists, developed technology and acquired research and development
were valued using the income approach, which consisted of estimating the
expected after-tax cash flows to present values through discounting. The
assembled workforce was valued using a cost approach, which estimates the cost
to replace the asset. Acquired research and development represents the value
assigned to research and development projects in the development stage which had
not reached technological feasibility at the date of acquisition or had no
alternative future use. The acquired research and development costs were
expensed at the date of the acquisition.
<PAGE>
The acquired research and development related to a project to develop a new job
monitor. This project was 50% complete as of the acquisition date and had not
yet completed a successful beta test. The primary high risk at valuation date
involved identifying and correcting the design flaws that would typically arise
during beta testing. Fair value was determined using an income approach.
Revenues from this new job monitor are anticipated beginning in 1999 and a
discount rate of 25% was used for valuation purposes.
The Company expects to complete the job monitor project during the fourth
quarter of 1999. The job monitor project is approximately 75% complete with less
than $200,000 of anticipated costs left to complete the project.
The developed technology is a software program called the job monitoring system
and related technologies that are primarily related to the Xpedite document
delivery system. This software and the related hardware is the basis for
Xpedite's enhanced facsimile delivery service.
INTERNATIONAL ACQUISITIONS
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 $18 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 $13
million has been recorded as goodwill and is being amortized on a straight-line
basis over seven years.
The following unaudited pro forma consolidated results of operations for the
three month period ended March 31, 1998 assumes the acquisitions made by the
Company in 1998 which were accounted for as purchases occurred on January 1,
1998. Pro forma adjustments consist of amortization of intangible assets
acquired and lost interest income reflecting cash paid in the acquisitions
(amounts in thousands).
Revenues $ 132,079
Net loss $ (27,928)
Basic net loss per share $ (0.61)
Diluted net loss per share $ (0.61)
7. RESTRUCTURING, MERGER COSTS AND OTHER SPECIAL CHARGES
In the first quarter of 1998, Premiere recorded a charge of approximately $7.5
million to restructure the operations of Premiere and Xpedite subsequent to
their merger. Such costs consist of severance associated with workforce
reduction, lease termination costs, costs to terminate certain contractual
obligations and asset impairments. Severance benefits have been provided for
termination of 122 employees. These actions resulted from management's plan to
reduce sales, operations and administrative headcount by exiting duplicative and
under performing operations. Premiere has also provided for lease termination
and clean-up costs associated with these facilities and operations. In addition,
the Company provided for costs associated with commitments under certain
advertising contracts from which the Company was generating no incremental
revenue and for costs to terminate certain unfavorable reseller agreements.
Although certain restructuring actions were being contemplated at the
acquisition date, definitive plans for such actions were not formalized until
after such date. Accordingly, there were no exit costs included in the purchase
price allocation of Xpedite.
Activity in accrued costs for restructuring and other special charges during the
three month period ended March 31, 1999 is as follows (amounts in thousands):
Accrued Accrued
Costs Costs
December 31, Costs March 31,
1998 Incurred 1999
----------- -------- --------
Severance $ 4,837 $ 318 $ 4,519
Asset impairments 4,722 -- 4,722
Restructure or terminate contractual
obligations 417 -- 417
Other costs, primarily to exit
facilities and certain activities 2,291 219 2,072
------- ----- --------
$12,267 $ 537 $ 11,730
======= ===== ========
8. STRATEGIC ALLIANCES AND INVESTMENTS
Assets recorded as strategic alliances and investments at March 31, 1999 and
December 31, 1998 are as follows (amounts in thousands):
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March 31, December 31,
1999 1998
-------- -------
MCI WorldCom strategic alliance $ 16,072 $16,072
Less accumulated amortization 4,591 3,445
-------- -------
11,481 12,627
Equity investments 16,883 15,883
-------- -------
$ 28,364 $28,510
======== =======
Management periodically reviews assets for impairment and in 1998 determined
that a write-down in the carrying value of the MCI WorldCom strategic alliance
was required based upon management's assessment of revenue levels expected to be
derived from this alliance and uncertainties surrounding the merger of WorldCom
and MCI in 1998. Accordingly, Premiere recorded a write-down in the carrying
value of this investment of approximately $13.9 million in 1998. In addition,
the Company accelerated amortization of this asset effective in the fourth
quarter of 1998 by shortening its amortization period to three years as compared
with 25 years prior to the change. In addition, Premiere recorded a write-down
of approximately $3.9 million in the fourth quarter of 1998 in its investment in
certain equity securities of DigiTEC 2000. This charge was necessary to reduce
the carrying value of this investment to its fair market value based upon
management's assessment that the decline in value of these securities below
their carrying value was not temporary. Management continually reviews these and
other assets for impairment. In the event management determines an asset
impairment has occurred, write-downs in the carrying value of such assets
may be required.
Equity investments classified as strategic alliances and investments consist of
initiatives funded by the Company to further its strategic plan. These
investments and alliances involve emerging technologies, such as 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.
Premiere's investments include minority equity interests in WebMD, a provider of
internet-based services to the healthcare industry, USA.NET, a leading provider
of outsourced e-mail services, Intellivoice, an entity engaged in developing
internet-enabled communications products, VerticalOne, a network-based services
provider that increases frequency, duration, and quality of its customers'
visits to Web sites and Webforia, a provider of Web services, tools and
communities that assist individuals in presenting high quality information from
the Internet. Management will continue to make such investments in the future in
complementary businesses and other initiatives that further its strategic
business plan. All equity investments held by the Company in other organizations
represent a less than 20 percent ownership and are being accounted for under the
cost method.
9. STOCK-BASED COMPENSATION PLANS
The Company has three stock based compensation plans, the 1994 Stock Option
Plan, the 1995 Stock Plan and the 1998 Stock Plan, which provide for the
issuance of restricted stock, stock options, warrants or stock appreciation
rights to employees, directors, non-employee consultants and advisors of the
Company. These plans are administered by committees consisting of members of the
Board of Directors of the Company.
Options for all 960,000 shares of common stock available under the 1994 Stock
Option Plan have been granted. Generally, all such options are non-qualified,
provide for an exercise price equal to fair market value at date of grant, vest
ratably over three years and expire eight years from date of grant.
The 1995 Stock Plan provides for the issuance of stock options, stock
appreciation rights and restricted stock to employees. A total of 8,000,000
shares of common stock have been reserved in connection with this plan. Options
issued under this plan may be either incentive stock options, which permit
income tax deferral upon exercise of options, or non-qualified options not
entitled to such deferral.
Sharp declines in the market price of the Company's common stock during 1998
resulted in many outstanding employee stock options being exercisable at prices
that exceeded the current market price of the Company's common stock, 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. 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) to $10.25, which
was the closing price of Premiere's common stock on such date.
<PAGE>
On December 14, 1998, the Board of Directors determined to reprice or regrant at
an exercise price of $5.50, all employee stock options which had an exercise
price in excess of $5.50, which was above the closing price of Premiere's common
stock on such date. The vesting schedules remained the same and the repriced or
regranted options are generally subject to a twelve-month black-out period
during which the option may not be exercised. If the optionee's employment is
terminated during the black-out period, he or she will forfeit any repriced or
regranted options that first vested during the twelve-month period preceding his
or her termination of employment. By imposing the black-out and forfeiture
provisions on the repriced and regranted options, the Board of Directors intends
to provide added incentive for the optionees to continue service with the
Company.
On July 22, 1998, the Board of Directors approved the 1998 Stock Plan (the "1998
Plan") that essentially mirrors the terms of the Company's existing 1995 Stock
Plan, except that it is not intended to be used for executive 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
non-qualified stock options and other incentive awards to employees and
consultants of the Company.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company has several litigation matters pending, as described below, which it
is defending vigorously. Due to the inherent uncertainties of the litigation
process and the judicial system, the Company is unable to predict the outcome of
such litigation matters. If the outcome of one or more of such matters is
adverse to the Company, it could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company and certain of its officers and directors 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 the Company's acquisitions of Voice-
Tel Enterprises, Inc. ("Voice-Tel"), Voice-Tel's franchisees and Xpedite.
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 acquisitions of Voice-Tel,
Xpedite, American Teleconferencing Services, TeleT Telecommunications, LLC
("TeleT") and VoiceCom Holdings, Inc. ("VoiceCom"), as well as its venture with
UniDial Communications, its investment in USA.NET and the commercial release of
Orchestrate(R). 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 with respect to the Company's Enhanced Calling Services,
revenue shortfalls from its Voice and Data Messaging services, as well as other
unanticipated costs and one-time charges totaling approximately $17.1 million on
a pre-tax basis. Plaintiffs allege the Company admitted it had experienced
difficulty in achieving its anticipated revenue and earnings from voice
messaging services 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 filed a motion to dismiss this complaint in
April 1999.
A lawsuit was filed on November 4, 1998 against the Company, as well as
individual defendants Boland T. Jones, Patrick G. Jones, George W. Baker, Sr.,
Eduard J. Mayer and Raymond H. Pirtle, Jr. in the Southern District of New York.
Plaintiffs were shareholders of Xpedite who acquired common stock of the Company
as a result of the merger between the Company and Xpedite in February 1998.
Plaintiffs' allegations are based on the representations and warranties made by
the Company in the prospectus and the registration statement related to the
merger, the merger agreement and other documents incorporated by reference,
regarding the Company's acquisitions of Voice-Tel and VoiceCom, the Company's
roll-out of Orchestrate(R), the Company's relationship with customers Amway
Corporation and DigiTEC, 2000, Inc., and the Company's 800-based calling card
service. Based on these factual allegations, plaintiffs allege causes of action
against the Company for breach of contract against all defendants for negligent
misrepresentation, violations of Sections 11 and
<PAGE>
12(a)(2) of the Securities Act of 1933 ("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 as to violation of Section 12(a)(2) of
the Securities Act, punitive damages, costs and attorneys' fees. A motion to
dismiss and a motion to transfer venue to Georgia are presently pending.
On November 26, 1997, Wael Al-Khatib ("Al-Khatib"), the sole shareholder and
former president of Communications Network Corporation ("CNC"), and his company,
Platinum NetworkCorp. ("Platinum"), filed a complaint against Premiere
Communications, Inc. ("PCI"), WorldCom Network Services, Inc. f/k/a WilTel, Inc,
("WorldCom"), Bernard J. Ebbers, David F. Meyers, Robert Vetera, Joseph Cusick,
William Trower, Don Wilmouth, Digital Communications of America, Inc., Boland
Jones, Patrick Jones, and John Does I-XX in the United States District Court for
the Eastern District of New York. 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. This matter has
been settled, pending payment of $250,000 by Khatib to WorldCom. The settlement
does not require PCI or Premiere to make any payments.
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. Plaintiffs allege that Xpedite knew or should have known of alleged
wrongdoing on the part of other defendants. 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. On November
16, 1998 the court entered an order transferring all disputes between plaintiffs
and certain defendants to arbitration and dismissing without prejudice
plaintiff's complaint against those defendants. On or about December 23, 1998,
Xpedite filed a motion to stay the action pending the resolution of the
arbitration or in the alternative to compel plaintiffs to provide discovery. On
January 22, 1999, the court granted Xpedite's motion to stay further proceedings
pending the arbitration. On March 11, 1999, plaintiffs filed a motion for
reconsideration of the court's decision. A trial date has been tentatively set
for July 1999.
On or about May 27, 1998, 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 and PCI are two of the largest creditors in this
bankruptcy case. In August 1998, WorldCom filed a separate lawsuit in the
Federal District Court for the Middle District of Florida against certain
insiders of TCCF alleging payment of improper distributions to the insiders in
excess of $1.0 million and asserting a constructive trust claim against the
amounts received by the insiders. On August 10, 1998, TCCF filed a motion with
the Bankruptcy Court requesting authority to hire counsel for the purpose of
pursuing certain alleged claims against WorldCom and PCI, alleging service
problems with WorldCom and PCI. PCI and TCCF reached an agreement, approved by
the Bankruptcy Court in November 1998, which provides for mutual releases to be
executed between the parties and certain affiliates and insiders. The mutual
releases have been fully executed, in accordance with the terms of the
settlement. The settlement does not require PCI or Premiere to make any
payments.
On December 22, 1998 Shelly D. Swift filed a complain against First USA Bank,
First Credit Card Services USA, and PCI in the United States District Court for
the Northern District of Illinois. Swift alleges that the defendants sent her an
unsolicited "credit card" in violation of the Truth in Lending Act and state
law. Swift seeks an injunction and monetary damages on behalf of a putative
class of persons who received the alleged credit card. On February 19,1999, the
defendants moved to dismiss the complaint for failure to state a claim upon
which relief can be granted.
In March 1999, Aspect Telecommunications, Inc. ("Aspect"), the purported current
owner of certain patents, filed suit against Premiere and PCI alleging that they
had violated certain patent rights owned by Aspect and requesting damages and
injunctive
<PAGE>
relief. The suit asserts that Premiere is offering certain "calling card and
related enhanced services," "single number service" and "call connecting
services" covered by such rights. Premiere has reviewed the subject patents and,
based on that review, believes that its products and services currently being
marketed do not infringe them. On March 29, 1999 the Company filed an answer
denying the allegations and a counterclaim seeking to invalidate the patents.
Additionally, the Company believes that certain licenses it has from third-party
vendors may insulate the Company from some or all of any damages in the event of
an adverse outcome in this litigation.
The Company is also involved in various other legal proceedings which the
Company does not believe will have a material adverse effect upon the Company's
business, financial condition or results of operations, although no assurance
can be given as to the ultimate outcome of any such proceedings.
11. SEGMENT REPORTING
The Company's reportable segments are strategic business groups that align the
Company in two distinct market segments focused on the customers each serves:
large businesses and small office/home businesses and individuals. Corporate
Enterprise Solutions caters to large businesses, such as Fortune 1000 companies.
Its services include those most complementary with large organizations including
electronic document distribution, corporate messaging services, 800-based and
local access voice messaging, interactive voice response and calling card
programs, and full-service conference calling. Emerging Enterprise Solutions
focuses in the small office/home office and individual subscriber segment. Its
services include Orchestrate (R), a suite of internet-based communication
services, local access voice and data messaging and enhanced calling services,
including long distance and enhanced 800-based services.
EBITDA before accrued settlement costs, acquired research and development costs
and restructuring, merger and other special charges is management's primary
measure of segment profit and loss. Information concerning the operations in
these reportable segments for the three months ended March 31, 1999 and 1998 is
as follows (in millions):
1999 1998
---- ----
REVENUES:
Corporate Enterprise Solutions...... $ 81.6 $ 33.5
Emerging Enterprise Solutions....... 31.3 51.4
Corporate and eliminations(1)....... (0.1) --
-------- -------
Totals.............................. $ 112.8 $ 84.9
======== =======
EBITDA:
Corporate Enterprise Solutions...... $ 20.1 $ 11.8
Emerging Enterprise Solutions....... 2.9 12.1
Corporate and eliminations(1)....... (4.9) (.7)
-------- -------
Subtotal............................ 18.1 23.2
Restructuring, merger costs and
other special charges............. -- (7.6)
Acquired research and development... -- (15.5)
Accrued settlement costs............ -- (1.5)
-------- -------
Totals.............................. $ 18.1 $ (1.4)
======== =======
_____________________
(1) Corporate and eliminations is primarily comprised of general and
administrative costs associated with the corporate headquarters management
infrastructure and revenue eliminations of business transacted between Corporate
Enterprise Solutions and Emerging Enterprise Solutions.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Premiere is a leading provider of enhanced communications services designed to
simplify everyday communications of both businesses and individuals. Premiere
provides its innovative solutions for simplifying communications through two
strategic business groups: Corporate Enterprise Solutions ("CES"), which targets
Fortune 1000 and other large companies; and Emerging Enterprise Solutions
("EES"), which targets smaller fast-track companies and individuals. CES's
services include: Premiere Document Distribution, which provides enhanced
electronic document distribution services; Premiere Corporate Messaging, which
provides local access and 800-based voice messaging services; Premiere WorldLink
Corporate Card, an 800-based enhanced calling card service; Premiere Interactive
Voice Response, which provides various IVR applications; and Premiere
Conferencing, which provides a full range of conferencing services. EES's
services include: Premiere Internet-Based Communications Services, featuring
Orchestrate(R) by Premiere, which integrates the Company's service offerings by
allowing customers to access such services through a computer or telephone;
Premiere Voice and Data Messaging, which provides customers access to one of the
largest "voice intranets" in the world; and Premiere Enhanced Calling Services,
which provides long distance and enhanced 800-based services.
Premiere's revenues are generally based on usage. In addition to usage fees,
local access Voice and Data Messaging services, certain of Premiere's Enhanced
Calling Services and the Orchestrate(R) suite of products contain fixed monthly
fees.
Telecommunications costs consist primarily of the cost of long distance
transmission and other telecommunications related charges incurred in providing
Premiere's services.
Direct operating costs consist primarily of rent and facility expense associated
with operations centers, salaries and wages of operations engineering and
support personnel and other operating costs incurred in service delivery
activities.
Selling and marketing costs consist primarily of advertising and promotion
costs, employee and non-employee commissions and salary and wages and other
operating expenses associated with selling and marketing activities.
General and administrative expenses include salaries and wages associated with
customer service, research and development and administrative functions, bad
debt expense, professional and consulting fees, property taxes and other
operating expenses incurred in customer service, research and development and
administrative activities.
Depreciation and amortization includes depreciation of computer and
telecommunications equipment and amortization of intangible assets. The Company
provides for depreciation using the straight-line method of depreciation over
the estimated useful lives of the assets, with the exception of leasehold
improvements which are depreciated on a straight-line basis over the shorter of
the term of the lease or the estimated useful life of the assets. Intangible
assets being amortized include capitalized software development costs, goodwill,
customer lists, assembled work force, and the MCI WorldCom strategic alliance
agreement.
EBITDA before accrued settlement costs, acquired research and development
costs and restructuring, merger and other special charges is defined as net
income before taxes, other income (expense), interest income (expense),
depreciation and amortization, accrued settlement costs, acquired research and
development costs and restructuring, merger costs and other special charges.
EBITDA before accrued settlement costs, acquired research and development costs
and restructuring, merger and other special charges is considered a key
management performance indicator of financial condition because it excludes the
effects of goodwill and intangible amortization attributable to acquisitions
primarily acquired using the Company's common stock, the effects of prior years
cash investing and financing activities that affect current period profitability
and the affect of one time cash or non-cash charges associated with acquisitions
and internal exit activities. EBITDA, as defined by the Company, is used as an
indicator of operating cash flow before payments for interest and taxes. EBITDA
before accrued settlement costs, acquired research and development costs and
restructuring, merger and other special charges may not be comparable to
similarly titled measures presented by other companies and could be misleading
unless all companies and analysts calculate them in the same manner.
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 February 1999, Premiere announced that as a result of discussions with the
Office of the Chief Accountant of the Securities and Exchange Commission,
Premiere was required to discontinue accounting for its acquisition of Xpedite
Systems, Inc. ("Xpedite") as a pooling-of-interests and to account for such
acquisition under the purchase method of accounting. Accordingly, Premiere has
restated its unaudited interim financial statements for 1998. The Office of the
<PAGE>
Chief Accountant determined that Premiere's post merger share repurchase
program, completed in September 1998, was not implemented in accordance with
pooling requirements. No questions were raised regarding the propriety of the
original accounting for the merger with Xpedite.
ANALYSIS OF OPERATING RESULTS
Overview
The following table presents certain financial information about the Company's
strategic business groups for the three months ended March 31, (amounts in
millions):
1999 1998
---- ----
REVENUES:
Corporate Enterprise Solutions $ 81.6 $ 33.5
Emerging Enterprise Solutions 31.3 51.4
Corporate and eliminations (0.1) --
-------- -------
Totals $ 112.8 $ 84.9
======== =======
EBITDA:
Corporate Enterprise Solutions $ 20.1 $ 11.8
Emerging Enterprise Solutions 2.9 12.1
Corporate (4.9) (.7)
-------- -------
Subtotal 18.1 23.2
Restructuring, merger costs and
other special charges -- (7.6)
Acquired research and development -- (15.5)
Accrued settlement costs -- (1.5)
-------- -------
Totals $ 18.1 $ (1.4)
======== =======
Analysis
Premiere's financial statements reflect the results of operations of Xpedite,
acquired in February 1998, and ATS, acquired in April 1998, from the date of
their respective acquisitions. These acquisitions have been accounted for under
the purchase method of accounting. The following discussion and analysis is
prepared on that basis.
Consolidated revenues increased 32.9% to $112.8 million in the three months
ended March 31, 1999 as compared with the same period in 1998. CES revenues
increased 143.6% to $81.6 million over this period principally due to the
acquisition of Xpedite in February 1998 and ATS in April 1998. Revenue growth
from acquisitions in the CES group, was offset by revenue losses in 1998 from
two EES Group customers which declared bankruptcy in the second quarter,
management's decision to discontinue certain unprofitable prepaid calling card
programs and expiration of minimum revenue commitments provided under the
Company's strategic alliance agreement with MCI WorldCom.
Consolidated gross profit margins were 71.2% and 68.9% for the three months
ended March 31, 1999 and 1998, respectively. Consolidated gross profit margins
benefited in 1999 from the discontinuance of unprofitable prepaid calling card
programs in the first half of 1998. In general, Premiere has experienced
favorable trends in per unit telecommunications costs in each of its strategic
business groups by aggressively leveraging increasing minute volumes to
negotiate quantity discounts with telecommunications carriers. Such costs have
also been favorably affected by general industry trends in which long distance
transport and the cost of local access services have decreased as a result of
increased capacity and competition among long distance and local exchange
carriers.
Consolidated direct costs of operations increased to 14.0% of revenues in the
three months ended March 31, 1999 as compared with 7.0% for the same period of
1998. The increase in these costs as a percent of revenues results mainly from
the acquisition of ATS (Premiere Conferencing) in April 1998. The service
delivery processes of Premiere Conferencing include a relatively higher labor
cost than Premiere's other services. Another factor contributing to the increase
in these costs as a percent of revenues in 1999, is revenue losses in the EES
group. Such losses hampered coverage of certain relatively fixed operations,
engineering and support costs.
<PAGE>
Consolidated selling and marketing costs declined to 21.4% of revenues in the
three months ended March 31, 1999 from 24.8% of revenues in the same period in
1998. This decrease principally reflects the discontinuance of certain
ineffective advertising programs in the EES group in 1998. In addition, the
acquisitions of Xpedite (Premiere Document Distribution) and ATS (Premiere
Conferencing) have favorably impacted the ratio of consolidated selling and
marketing costs to revenues. Such costs have generally been lower in relation to
revenues for these businesses as compared with the Company's other businesses.
General and administrative costs were 19.5% of revenues for the three months
ended March 31, 1999 compared with 9.7% of revenues for the same period in 1998.
Contributing to the increase in these costs as a percent of revenues, was the
acquisition of ATS in April 1998. Additionally, Premiere aggressively expanded
its management infrastructure in 1998 to more effectively support anticipated
growth in its business. These actions included hiring additional senior level
managers and expanding its corporate headquarters facilities throughout 1998.
Depreciation and amortization was $40.3 million for three month period ended
March 31, 1999 as compared with $12.5 million for the same period in 1998. The
increase in depreciation and amortization in 1999 results mainly from
amortization of assets acquired in the acquisitions of Xpedite and ATS and
changes in depreciable lives for certain assets and goodwill. Identifiable
intangible assets and goodwill acquired in the Xpedite and ATS acquisitions are
being amortized over three to seven years. In addition, amortization and
depreciation of certain existing operating and intangible assets were
accelerated, effective in the fourth quarter of 1998, following a reduction in
the estimated useful lives of such assets. This action was based on a
reassessment of the utility of such assets by Premiere's management. The
affected assets consist of goodwill and other intangible assets and computer and
telecommunications equipment associated with certain legacy technology systems,
the use of which is expected to be discontinued in the foreseeable future. Such
assets are being amortized over lives ranging from one to seven years, effective
in the fourth quarter of 1998, as compared with lives ranging from five to 40
years prior to the change.
Net interest expense increased to $5.6 million for the three months ended March
31, 1999 as compared with $1.5 million for the same period in 1998. Net interest
expense increased in 1999 mainly due to interest associated with $132.3 million
of debt assumed in the acquisition of Xpedite in February 1998. Substantially
all of the debt assumed in the acquisition of Xpedite was associated with a
short-term revolving loan facility maintained by Xpedite. In addition, the use
of cash and short-term investments to fund strategic and operating initiatives
reduced interest income in 1999.
In the first quarter of 1998, Premiere recorded a charge of approximately $7.5
million to restructure the operations of Premiere and Xpedite subsequent to
their merger. Such costs consist of severance associated with workforce
reduction, lease termination costs, costs to terminate certain contractual
obligations and asset impairments. Severance benefits have been provided for
termination of 122 employees. These actions resulted from management's plans to
reduce sales, operations and administrative headcount by exiting duplicative and
under performing operations. Premiere has also provided for lease termination
and clean-up costs associated with these facilities and operations. In addition,
the Company provided for costs associated with commitments under certain
advertising contracts from which the Company was generating no incremental
revenue and for costs to terminate certain unfavorable reseller agreements.
Although certain restructuring actions were being contemplated at the
acquisition date, definitive plans for such actions were not formalized until
after such date. Accordingly, there were no exit costs included in the purchase
price allocation of Xpedite.
Premiere expensed approximately $15.5 million in the three months ended March
31, 1998 reflecting costs associated with a research and development project
acquired in the Xpedite acquisition. These costs were valued based upon an
independent appraisal. The acquired research and development related to a
project to develop a new job monitor. This project was 50% complete as of the
acquisition date and had not yet completed a successful beta test. The primary
high risk at valuation date involved identifying and correcting the design flaws
that would typically arise during beta testing. Fair value was determined using
an income approach. Revenues from this new job monitor are anticipated beginning
in 1999 and a discount rate of 25% was used for valuation purposes.
In 1999 and 1998, the Company's effective income tax rate varied from the
statutory rate primarily as a result of non-deductible goodwill amortization
associated with Premiere's acquisitions which have been accounted for under the
purchase method of accounting.
LIQUIDITY AND CAPITAL RESOURCES
<PAGE>
Net cash provided by operations was $8.6 million in the first quarter of 1999 as
compared with $8.2 million in the first quarter of 1998. Excluding payments made
for restructuring, merger costs and other special charges, net cash provided by
operations in the three months ended March 31, 1999 was $9.1 million as compared
with $16.8 million for the same period in 1998. Operating cash flow declined in
1999 primarily as a result of revenue losses in Premiere's EES group and
continued investment by the Company to expand its management infrastructure.
Investing activities provided cash of approximately $4.5 million and $12.4
million in the three months ended March 31, 1999 and 1998, respectively. The
principal source of cash from investing activities in 1999 and 1998 was the
liquidation of short-term investments in marketable securities to fund various
operating and strategic initiatives. Premiere made capital expenditures of $10.6
million and $13.6 million in the three months ended March 31, 1999 and 1998,
respectively. Capital programs in 1999 include construction costs and equipment
purchases associated with the Company's network expansion program, development
costs incurred in connection with the Company's Web-based communications
services and operating infrastructure expansion in support of new business
growth. Management anticipates that capital expenditure levels experienced in
the first quarter of 1999 will continue for the foreseeable future as the
Company continues development of its Web-based communications services and
upgrades and expands operational infrastructure of both its existing computer
telephony network and the networks of its acquired companies.
Significant cash outflows for financing activities in 1999 included a net
reduction in borrowings, mainly repayments under the Company's revolving loan
facility, of approximately $16.7 million. Effective December 16, 1998, Premiere
amended and restated the revolving loan facility it assumed in connection with
the Xpedite acquisition for a period of one year. This arrangement provides for
borrowings of up to $150 million and contains certain covenants which require
the Company to maintain minimum earnings and interest coverage ratios and
achieve certain revenue levels, in addition to other covenants. The Company was
in compliance with all such covenants at March 31, 1999. Continued compliance
under these loan covenants will require that Premiere attain certain revenue
levels, as well as achieve earnings growth or reduce indebtedness in order
to satisfy the minimum ratio requirements required under this arrangement. At
March 31, 1999, the Company had unused borrowing capacity of approximately $47.4
million under the revolving loan facility.
At March 31, 1999, the Company's principal commitments involve indebtedness
under its revolving loan facility which matures December 16, 1999, 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
$18.6 million, cash generated by operating activities and borrowing capacity
under the Company's revolving loan facility will be adequate to fund growth in
the Company's existing businesses in 1999. Premiere's revolving loan arrangement
matures on December 15, 1999 and the Company will be required to repay or
refinance this indebtedness at that time. Management regularly reviews the
Company's capital structure and evaluates potential alternatives in light of
current conditions in the capital markets. Depending upon conditions in these
markets and other factors, the Company, may from time to time, engage in capital
transactions, including debt or equity issuances, in order to increase the
Company's financial flexibility and meet other capital needs.
RESTRUCTURING, REBRANDING AND OTHER SPECIAL CHARGES
In the first quarter of 1998, Premiere recorded a charge of approximately $7.5
million to restructure the operations of Premiere and Xpedite subsequent to
their merger. Such costs consist of severance associated with workforce
reduction, lease termination costs, costs to terminate certain contractual
obligations and asset impairments. Severance benefits have been provided for
termination of 122 employees. These actions resulted from management's plans to
reduce sales, operations and administrative headcount by exiting duplicative and
under performing operations. Premiere has also provided for lease termination
and clean-up costs associated with these facilities and operations. In addition,
the Company provided for costs associated with commitments under certain
advertising contracts from which the Company was generating no incremental
revenue and for costs to terminate certain unfavorable reseller agreements.
Although certain restructuring actions were being contemplated at the
acquisition date, definitive plans for such actions were not formalized until
after such date. Accordingly, there were no exit costs included in the purchase
price allocation of Xpedite.
THE YEAR 2000 ISSUE
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have
<PAGE>
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 Company's necessary 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 or replacement of Software
Applications and Hardware Platforms, where appropriate, (iv) researching and/or
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) appropriate 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 commercially reasonable 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
included the repair or replacement of such embedded microprocessors as part of
the Initiative.
The Company retained a nationally recognized independent consultant
("Consultant") to assist in assessing and recommending revisions to the
Initiative, and such recommendations have been taken into consideration in
developing 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 materially 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. In one operating subsidiary, one operational challenge not related to Year
2000 has the potential to delay the completion of software deployment in one
subsystem into the third quarter of 1999. Two contingency plans are being
pursued in parallel with the primary initiative to insure that there is minimal
impact on customers' use of the Company's services. In another subsidiary, the
implementation of a new, enhanced customer care system has been rescheduled
until after the completion of the summer peak usage season. As a contingency
plan, the existing system will also be adapted for Year 2000. 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 second 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 verification that the majority of suppliers' 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
<PAGE>
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 business, 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 business, financial condition and
results of operations.
A significant portion of the Company's business is conducted outside of the
United States. External Providers located outside of the United States may face
significantly more severe Year 2000 issues than similar entities located in the
United States. If such External Providers located outside the United States are
unable to rectify their Year 2000 issues, the Company may be unable to
effectively conduct the international portion of its business, which could
result in a material adverse effect on the Company's business, 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 and
subcontractors, 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 $7 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
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substantially complete, 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 business, 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 business, financial condition and results of operations.
The Company's Contingency Plans. The Initiative includes the development of
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commercially reasonable 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 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 June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS" No. 133"). SFAS No. 133 establishes accounting and reporting
standards for derivatives and hedging. It requires that all derivatives be
recognized as either assets or liabilities at fair value and establishes
specific criteria for the use of hedge accounting. The Company's required
adoption date is January 1, 2000. SFAS No. 133 is not to be applied
retroactively to financial statements of prior periods. The Company expects no
material adverse effect to its financial position upon adoption of SFAS No. 133.
<PAGE>
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q and elsewhere by management or Premiere from time to
time, the words "believes," "anticipates," "expects," "will" and similar
expressions are intended to identify forward-looking statements concerning
Premiere's operations, economic performance and financial condition. These
include, but are not limited to, forward-looking statements about Premiere's
business strategy and means to implement the strategy, Premiere's objectives,
the amount of future capital expenditures, the likelihood of Premiere's success
in developing and introducing new products and services and expanding its
business, and the timing of the introduction of new and modified products and
services. For those statements, Premiere claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. These statements are based on a number of
assumptions and estimates which are inherently subject to significant risks and
uncertainties, many of which are beyond the control of Premiere, 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
Premiere's forward-looking statements, including the following factors:
. factors described from time to time in the Company's press releases,
reports and other filings made with the Securities and Exchange
Commission;
. Premiere's ability to manage its growth and to respond to rapid
technological change and risk of obsolescence of its products,
services and technology;
. market acceptance of new products and services, including
Orchestrate(R);
. development of effective marketing, pricing and distribution
strategies for new products and services, including Orchestrate(R);
. competitive pressures among communications services providers may
increase significantly;
. costs or difficulties related to the integration of businesses, if
any, acquired or that may be acquired by Premiere may be greater
than expected;
. expected cost savings from past or future mergers and acquisitions
may not be fully realized or realized within the expected time
frame;
. revenues following past or future mergers and acquisitions may be
lower than expected;
. operating costs or customer loss and business disruption following
past or future mergers and acquisitions may be greater than
expected;
. the success of Premiere's strategic relationships, including the
amount of business generated and the viability of the strategic
relationships, including the amount of business generated and the
viability of the strategic partners, may not meet expectations;
. possible adverse results of pending or future litigation;
. risks associated with interruption in Premiere's services due to the
failure of the platforms and network infrastructure utilized in
providing its services;
. risks associated with the Year 2000 issue, including Year 2000
problems that may arise on the part of third parties which may
effect Premiere's operations;
. risks associated with expansion of Premiere's international
operations;
. general economic or business conditions, internationally, nationally
or in the local jurisdiction in which Premiere is doing business,
may be less favorable than expected;
. legislative or regulatory changes may adversely affect the business
in which Premiere is engaged; and
<PAGE>
. changes in the securities markets may negatively impact Premiere.
Premiere cautions that these factors are not exclusive. Consequently, all of the
forward-looking statements made in this Form 10-Q and in documents incorporated
in this Form 10-Q are qualified by these cautionary statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Form 10-Q. Premiere takes on no obligation to
publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date of
this Form 10-Q, or the date of the statement, if a different date.
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.
<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.
January 18, 2000 PREMIERE TECHNOLOGIES, INC.
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Date
/s/ Patrick G. Jones
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Patrick G. Jones
Executive Vice President, Chief Legal Officer and
Chief Financial Officer (Principal Financial and
Accounting Officer and duly authorized signatory
of the Registrant)
