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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999
Commission file number: 0-27778
PTEK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-3074176
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3399 Peachtree Road, N.E., The Lenox Building, Suite 600, Atlanta, Georgia
30326
(address of principal executive office)
(Registrant's telephone number, including area code): (404) 262-8400
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of class)
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. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based upon the closing sale price of common stock on March 29,
2000 as reported by The Nasdaq Stock Market's National Market, was
approximately $336,357,756.
As of March 29, 2000 there were 47,625,877 shares of the registrant's common
stock outstanding.
List hereunder the documents incorporated by reference and the part of the
Form 10-K (e.g., Part I. Part II, etc.) into which the document is
incorporated: Portions of the registrant's Proxy Statement for its 2000
meeting of shareholders are incorporated by reference in Part III.
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INDEX
Page
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Part I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 18
Item 3. Legal Proceedings............................................. 19
Item 4. Submission of Matters to a Vote of Security Holders........... 21
Part II
Market for Registrant's Common Equity and Related Stockholder
Item 5. Matters....................................................... 22
Item 6. Selected Financial Data....................................... 22
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations..................................... 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 60
Item 8. Financial Statements and Supplementary Data................... 60
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure...................................... 98
Part III
Item 10. Directors and Executive Officers of the Registrant............ 99
Item 11. Executive Compensation........................................ 99
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................... 99
Item 13. Certain Relationships and Related Transactions................ 99
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K...................................................... 100
Signatures.............................................................. 108
Exhibits
FORWARD LOOKING STATEMENTS
When used in this Form 10-K and elsewhere by management or PTEK Holdings,
Inc. ("PTEK" or the "Company") from time to time, the words "believes,"
"anticipates," "expects," "will" "may," "should," "intends," "plans,"
"estimates," "predicts," "potential," "continue" and similar expressions are
intended to identify forward-looking statements concerning our operations,
economic performance and financial condition. These include, but are not
limited to, forward-looking statements about our business strategy and means
to implement the strategy, our objectives, the amount of future capital
expenditures, the likelihood of our success in developing and introducing new
products and services and expanding our business, and the timing of the
introduction of new and modified products and services. For those statements,
we claim 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 that are
inherently subject to significant risks and uncertainties, many of which are
beyond our control, 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 PTEK's forward-looking statements, including the
following factors:
. Factors described under the caption "Factors Affecting Future
Performance" in this Form 10-K;
. Factors described from time to time in our press releases, reports and
other filings made with the Securities and Exchange Commission;
. Competitive pressures among communications services providers, including
pricing pressures, may increase significantly;
. Our ability to respond to rapid technological change, the development of
alternatives to our products and services and the risk of obsolescence
of our products, services and technology;
. Market acceptance of new products and services;
. Strategic investments in early stage companies, which are subject to
significant risks, may not be successful and returns on such strategic
investments, if any, may not match historical levels;
. The value of our business may fluctuate because the value of some of our
strategic equity investments fluctuates;
. Our ability to manage our growth;
. Costs or difficulties related to the integration of businesses and
technologies, if any, acquired or that may be acquired by us 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 our 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 or adverse
results of current or future infringements claims;
. Risks associated with interruption in our services due to the failure of
the platforms and network infrastructure utilized in providing our
services;
. Risks associated with expansion of our international operations;
. General economic or business conditions, internationally, nationally or
in the local jurisdiction in which we are doing business, may be less
favorable than expected;
. Legislative or regulatory changes may adversely affect the business in
which we are engaged; and
. Changes in the securities markets may negatively impact us.
PTEK cautions that these factors are not exclusive. Consequently, all of the
forward-looking statements made in this Form 10-K and in documents
incorporated in this Form 10-K 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-K. PTEK 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-K, or the date of the statement, if a different
date.
All statements made herein regarding our 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.
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PART I
Item 1. Business
Overview
PTEK Holdings, Inc. ("PTEK" or the "Company") is engaged in business-to-
business e-commerce and communications services through a network of companies
in which the Company has whole or partial ownership and for which it offers
capital, management advice, marketing and partnering support, and other
services. PTEK believes that businesses will increasingly rely on
communications networks, including the Internet, to access, exchange, store
and otherwise manage information to improve business processes and decision
making, to buy and sell goods and services, and to improve customer care. The
Internet and other improvements in information processing have spawned the
creation of on-line markets that enable more efficient economic exchange and
have created significant opportunities for infrastructure service providers
that enable and support this economic activity. PTEK's strategy is to create a
network of market makers and infrastructure service providers that offer
industry leading solutions to their respective business customers and that
complement and support the growth of other members of the network through
technology exchange, co-marketing and other partnering activities. PTEK will
seek to develop this economic network--or EcoNet--through the development,
acquisition and management of wholly or majority owned operating subsidiaries
and by making investments in promising, early stage Internet companies through
its affiliated investment arm, PTEKVentures.
To effect its EcoNet strategy, the Company embarked on a series of
initiatives beginning in the latter half of 1999.
First, the Company realigned its traditional businesses into independent
operating units. This allowed for the elimination of costly administrative
functions and was designed to create more focused, innovative and responsive
service providers. The three wholly owned operating units resulting from this
reorganization are: Xpedite, a global leader in electronic information
distribution; Voicecom, with one of the world's largest private, local-access
messaging networks; and Premiere Conferencing, a leading conferencing
provider. In the process, PTEK decided to dispose of its retail calling card
unit, which was more consumer-oriented and not core to the Company's future
operating strategy.
Second, the Company utilized the proceeds from the partial disposition of
its interest in an early PTEKVentures network company to extinguish
approximately $145 million in relatively high cost short-term debt. This
allowed for greater operating flexibility and eliminated a significant
interest cost drag on the Company's operating cash flow. Combined with the
operating efficiencies achieved from the corporate reorganization, this move
greatly increased the amount of cash flow available for growing the EcoNet.
Finally, the Company began an aggressive expansion of its PTEKVentures
activities and investments in companies that complement the Company's
business-to-business e-commerce and communications services. It began
recruiting a dedicated PTEKVentures management team to identify investment
opportunities, evaluate and close investments, and support those investments
with management and business development resources. It started developing an
alliance network with other Internet investment, incubation and support
organizations to accelerate the flow of investment opportunities and share
economic risk. And it started developing internal and external support
resources, including or to include technical assessment and development,
marketing, human resources and real estate services, to add value to the
members of the EcoNet.
PTEK, a Georgia corporation, was incorporated in 1991, and its principal
executive offices are located at 3399 Peachtree Road, N.E., Lenox Building,
Suite 600, Atlanta, Georgia 30326, telephone number (404) 262-8400.
PTEK Strategy
PTEK believes that the creation of the EcoNet will result in greater revenue
growth for existing products and services in the PTEK operating companies,
while allowing it to capitalize on the rapid growth and dynamic nature of the
new Internet economy. PTEK's goal is to build the Southeast's most profitable
and effective EcoNet
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of Internet companies. This goal leverages one of the Company's most valuable
assets--a powerful investment strategy--that supports the successful growth of
leading Internet companies, while increasing the revenue and technology
exchange opportunities for all of the companies in the EcoNet, including
PTEK's operating units.
This strategy allows the Company to seek opportunities and realize gains
through the positive cash flow of its operating units and the selective sale
of its investments in the EcoNet. The PTEK strategy consists of four key
elements, which the Company believes will add shareholder value:
. Operate PTEK business units independently and develop Internet assets
that can become stand-alone companies within the PTEK network.
. Create or identify and invest in Internet companies that will become
industry leaders.
. Provide strategic guidance and operational support to our network of
companies.
. Promote synergies within our network of companies.
These key elements are described below.
Operate PTEK business units independently and develop Internet assets that
can become stand-alone companies within the PTEK network. The PTEK operating
units--Xpedite, Voicecom and Premiere Conferencing--will continue to focus on
the following operational strategies:
Offer innovative applications and solutions. The operating units plan to
continue to enhance their line of services and to introduce Internet-based
services in 2000 and beyond. Xpedite, one of the market leaders in
electronic information distribution, has developed new Internet managed e-
mail service applications branded MessageREACHSM. These new services are
designed to meet the needs of Xpedite's current customer base and to
attract new users. Voicecom plans to expand its product offerings under the
Orchestrate(R) brand name beyond unified messaging to include personal
communications portal services. Premiere Conferencing is expanding its
conferencing services internationally and is establishing a separate
division offering Internet-based conferencing to its existing client base
and new users.
Leverage the Company's existing customer base. The PTEK operating units
serve a corporate customer base that includes 40% of the Fortune 500
companies. The operating units plan to leverage these long-term
relationships by expanding with clients internationally and by adding new
Internet-based solutions to meet these customers' communications needs.
Continue international expansion. The Company presently maintains
international points-of-presence in more than 60 cities in 25 countries,
and the Company plans to expand its geographical presence in 2000 and
beyond.
Create or identify and invest in companies that will become industry
leaders. PTEKVentures, the Company's investment arm, has acquired and will
continue to acquire equity ownership positions in promising early-stage
Internet companies to complement the Company's operating units and to add
value to its EcoNet.
Provide strategic guidance and operational support to our network of
companies. PTEK intends to play an active role in the business of companies in
which it invests.
Promote synergies within our network of companies. PTEK intends to maximize
the knowledge and experience of its EcoNet through its EcoNet companies and
strategic partners. This strategy includes leveraging our collaborative
network and sharing knowledge and resources.
Operating Units
The Company provides its innovative solutions for simplifying communications
through three business units: Xpedite, Premiere Conferencing and Voicecom.
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Xpedite
Xpedite provides customers with an array of services that manage and
facilitate the electronic distribution of information in multiple formats. The
services are all accessible over the Internet, as well as other
telecommunications protocols. Xpedite provides proprietary software that
supports database (list) management, file format translations and connectivity
to the Xpedite system. Xpedite's services are described below.
Description
Feature -----------
Xpedite Broadcast Service...... This service provides for the broadcast of
information to a list of electronic
addresses via e-mail, fax, X400, telex and
cablegram.
Xpedite Transactional Service.. This service provides for the message
preparation and distribution of information
generated from a computer based application
program to electronic addresses via e-mail,
fax, X400 and telex.
Xpedite MailMERGE.............. Customers can create and distribute
documents to fax addresses with unlimited
fields of variable data in a wide array of
fonts. Graphics and clip art are also
supported.
Fax on Demand.................. Information is selected using a touch-tone
phone and directly delivered to the
requestor's fax machine.
Xpedite also offers discounted international services. These services allow a
customer to use an automatic dialing device to direct international faxes to
the Xpedite network for delivery at a discount from standard international
prices. Xpedite's discounted international service includes "store-and-forward"
service, in which a fax is transmitted and stored for subsequent delivery, and
"real-time" service in which the sender's fax machine is connected directly to
the recipient's fax machine.
Xpedite has created a new division, MessageREACHSM, with a value-added set of
service offerings focusing on the high-volume Internet e-messaging market.
MessageREACHSM provides a Web-based service for the processing and delivery of
enhanced e-mail applications, with extensive tracking and reporting
capabilities. Messages can be sent in e-mail text or html, with or without
personalized inserts, attachments and unique URLs. Outsourcing the delivery and
management of mass e-mail communications using the MessageREACHSM delivery
engine and infrastructure provides a professional, reliable and secure
interactive solution with anti-spam "opt-out" protection. This proprietary
infrastructure, designed and custom built on top of state-of-the-art Internet
technology by Xpedite's technical team, operates solely for the support of
MessageREACHSM customers worldwide.
Xpedite believes that effective customer care is essential to attracting and
retaining its customers. Xpedite's customer care group is responsible for
educating and assisting customers in using Xpedite's services, for resolving
billing and related issues and, in consultation with its technical support
associates, for resolving technical problems customers may have in using
Xpedite services. A customer care call center is located in Eatontown, New
Jersey, and Xpedite also has regionally deployed customer care representatives.
Customer care services are provided 24 hours per day, seven days per week in
the United States, Europe and Asia/Pacific regions.
Xpedite employs separate associates who are responsible for technical support
functions. These employees perform more technically demanding support
activities, such as list and feature management, consulting with strategic
partners regarding technical issues and resolving technical issues brought to
their attention by the customer care department.
Xpedite headquarters are located in Eatontown, New Jersey and it has 10
operations centers in North America, Europe and Asia/Pacific. Xpedite markets
its services through a direct sales force principally based in 50 sales offices
in 16 countries and a significant network of third-party distributors.
5
Premiere Conferencing
Premiere Conferencing offers a full range of traditional and Internet-based
conferencing services for real-time business communications worldwide.
Premiere Conferencing offers three levels of conferencing services:
Service Level Description
------------- -----------
Dialog Services... These automated conferencing services allow users to
begin and conduct their conference without the assistance
of an operator. Security features include passcodes and
tones to introduce the arrival and departure of each
participant. Premiere Conferencing offers automated,
reservation-less conferencing services 24 hours per day,
7 days per week. This service was developed using
proprietary conferencing hardware and software. These
automated conferencing services were designed based on
customers' needs and requirements to give our customers
direct control of the conference call process. Dialog
toll and toll-free services are ideal for a variety of
meetings, including any meeting requiring instant access
to a group of participants.
Legend Services... These conference call services include assistance from
operators and other Premiere Conferencing team members.
Legend services are ideal for sales meetings, strategic
planning sessions, staff meetings and board meetings.
Paragon Services.. This collection of event management services is
customized for each customer through consultation with
Premiere Conferencing team members. These services are
ideal for high profile events such as press conferences,
customer seminars and quarterly earnings releases.
Premiere Conferencing also offers VisionCastSM, a Web-enhanced service that
allows real-time sharing of presentations over the Internet in conjunction
with a conference call (Web-based data collaboration). In addition, Premiere
Conferencing offers a variety of enhanced services, including translation
services, transcription services, consulting services, fulfillment services to
assemble and mail conference materials, invitation design, RSVP and reminder
services, and electronic question-and-answer and electronic survey services.
Premiere Conferencing is currently developing an Internet conferencing
division, which we believe will provide a suite of Internet-based services to
enable customers to schedule, host and conduct meetings and Internet
presentations with streaming media. This should allow the customer to have
complete control of their conferencing services through innovative Web design
and features not available with traditional conferencing service providers.
Internet services will be incorporated to facilitate ease of use, distribution
of services and delivery cost reduction. In addition, Premiere Conferencing
plans to bring a unique value-added feature to high-end services by enhancing
the customer's presentation with TV studio-like production capability. The
goal of this new division is to become the premier application service
provider (ASP) of conferencing and ancillary Internet-based tools to conduct
meetings and other events.
Premiere Conferencing has its own direct sales force, which has a regional
reporting structure and a centrally managed national and international
accounts program. The Premiere Conferencing sales force targets primarily
larger companies. The centrally managed national accounts program focuses on
multi-location businesses that are better served by dedicated representatives
with ultimate responsibility across different geographic regions. Premiere
Conferencing markets its services through its full-time direct sales force and
a significant network of third-party distributors.
Premiere Conferencing believes that effective customer care is essential to
attracting and retaining its customers. Premiere Conferencing is responsible
for educating and assisting customers in using its services, for resolving
billing and related issues and, in consultation with its technical support
associates, for resolving technical problems customers may have in using its
services. Customer call centers are located in Colorado
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Springs, Colorado and Lenexa, Kansas, and Premiere Conferencing also has
regionally deployed customer care representatives. In the United States,
customer care services are provided 24 hours per day, seven days per week.
Premiere Conferencing employs dedicated associates who are responsible for
multiple support functions. These employees perform more demanding support
activities, such as list and feature management, consulting with strategic
partners and resolving technical issues brought to their attention by the
customer.
Premiere Conferencing has headquarters and operations centers in Colorado
Springs, Colorado and Lenexa, Kansas, and international operations centers in
Canada, the UK, Australia, Hong Kong, Singapore and Japan. With a client base
of more than 31,000 domestic and international clients, Premiere Conferencing
works with organizations in various industries including high tech,
pharmaceutical, investor relations, public relations and market research.
Voicecom
Voicecom develops and markets a wide array of communications services to its
customers through its private data network, the Internet and leased fixed
facilities. Voicecom's services are offered both domestically and
internationally. Through its Voice and Data Messaging division, Voicecom
provides communications services including voice messaging, calling cards, 800-
based services, enhanced fax, conference calling, long distance and interactive
voice response ("IVR") applications. Through its Orchestrate.com(R) division,
Voicecom will provide Internet-based communications services and personalized
content delivery. The Voice and Data Messaging division and Orchestrate.com(R)
division are described below.
Voice and Data Messaging Division of Voicecom
The Voice and Data Messaging division's services include:
Service Description
------- -----------
Voice Messaging...... Voicecom's private data network allows Voicecom
customers access to one of the largest "voice
intranets" in the world. Voicecom's intelligent data
network offers voice mail customers functionality
similar to e-mail and the ability to easily
communicate inside the voice intranet with a touch of
a button. Customers can use Voicecom's voice intranet
to record and send messages to hundreds of recipients
by entering their mailbox numbers or sending to a pre-
established distribution list; answer messages simply
by pressing a number on the telephone keypad; and copy
and route received messages to anyone else on the
network.
Corporate Messaging.. Voicecom offers centralized 800-based voice messaging
services to large corporate clients through four
operations centers. Voicecom also offers local access
voice messaging services to large corporate clients
through its worldwide private data network. Both
services offer customers functionality similar to e-
mail and the ability to easily communicate with the
touch of a button. Voicecom Corporate Messaging
services allow customers to record and send messages
to hundreds of recipients by entering their mailbox
numbers or sending to a pre-established distribution
list; answer messages simply by pressing a number on
the telephone keypad; and copy and route received
messages to anyone else on the system or network.
Voicecom Corporate Messaging also includes facilities
management services where the voice messaging
equipment is located on the customer's premises and
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Service Description
------- -----------
Voicecom provides all voice messaging services
to that customer, including equipment
maintenance and end-user service and support.
All of the Voicecom Corporate Messaging
services include end-user support services,
such as the development and distribution of
voice mail directories, the generation and
maintenance of large voice mail distribution
lists, administration services (adds, deletes
and changes), and customer or end-user
training.
Interactive Voice Response.. Voicecom provides various IVR applications
using custom voice prompts and commands from a
caller's telephone keypad to retrieve, process
or route certain information or telephone
calls. This IVR service is used by, among
others, financial institutions (such as Bank of
America), where Voicecom's platform is used to
enhance call processing for checking, savings
and other account information.
Call Greeter................ Voicecom also markets a group of simple IVR
products, branded as "greeter" products, to
certain vertical markets including banks and
retail outlets (including wireless retailers).
The greeter products act as an automated
attendant for companies that want to reduce the
number of calls handled by live staff. An
incoming caller is presented with a simple menu
of options and, depending upon the option
selected, may be asked to leave a message or
may be transferred to a live attendant.
Enhanced Calling Services... Enhanced Calling Services include calling
cards, long distance and enhanced 800-based
communications services, which are offered
directly to consumers and corporate accounts
and on a wholesale basis. During 1999, the
Company decided to sell its retail calling card
service and focus on more core business to
business services.
Voicecom markets its Voice and Data Messaging services through multiple
distribution channels that encompass: (i) direct sales through Voicecom's own
dedicated sales force; (ii) direct marketing efforts where Voicecom is
responsible for lead generation and sales; (iii) co-brand relationships in
which Voicecom offers its services to the customers of other companies, such as
financial institutions, that are seeking to increase their revenue from, and
goodwill with, their customer base by offering value-added services; (iv)
private-label relationships where Voicecom may develop custom applications for
its platforms and market its services jointly with its strategic partners; and
(v) licensing and wholesale relationships where other companies market and sell
Voicecom's services under their names without significant assistance from
Voicecom.
The direct sales force for Voicecom vertically targets companies in the
legal, insurance, medical, property management and banking industries. Voicecom
believes it is currently the messaging market leader in the multilevel
marketing sector, selling its services to the hundreds of thousands of
multilevel marketing representatives in organizations such as Amway, Mary Kay
and Excel Communications.
Voicecom believes that effective customer care is essential to attracting and
retaining its customers. The Voice and Data Messaging customer care group is
responsible for educating and assisting customers in using Voice and Data
Messaging services, for resolving billing and related issues and, in
consultation with its technical support associates, for resolving technical
problems. A customer care call center is located in Atlanta, Georgia, and
Voicecom also has regionally deployed customer care representatives. In the
United States, Voice and Data Messaging customer care services are provided 24
hours per day, seven days per week. In addition, Voice and Data Messaging
customers are supported in centers in Europe, Asia, Canada and Australia during
their business hours.
8
Voicecom employs separate associates who are responsible for technical
support functions. These employees perform more technically demanding support
activities, such as list and feature management, consulting with strategic
partners and licensees regarding technical issues and resolving technical
issues brought to their attention by the customer care department.
Orchestrate.com(R) Division
Orchestrate.com(R) is a division of Voicecom that focuses on the development
and marketing of Orchestrate(R) branded services. Voicecom intends to
establish Orchestrate(R) as a strong, globally-recognized brand associated
with Internet-based communications services and personalized content delivery.
Orchestrate(R) subscribers are able to access a suite of communications tools
and personalized information from a single Web site or any telephone,
combining unified communications with Web content. The term unified messaging
is typically used to describe services that allow a user to access voice, fax
and e-mail messages from multiple devices (such as a computer or a telephone).
The term unified communications is typically used to describe services that
encompass unified messaging and a variety of additional features such as Web-
initiated conference calling and one number / follow me features. Some of the
functions and features currently provided, or that we expect to provide in the
future, under the Orchestrate(R) brand include:
. Web Message Center (voice, fax and e-mail in a single inbox);
. My Orchestrate(R) Web Portal (Web page with communications and content
"channels");
. Web Call & Conference (initiate calls and conference calls with a few
mouse clicks);
. Web Contact Manager (address book that simplifies message addressing and
initiation of calls);
. Web Tasks and Calendar (daily, weekly and monthly views);
. E-Mail by Phone (listen and respond to e-mail with any telephone);
. Web Info by Phone (upcoming feature that converts personalized news,
weather and stock quotes from Web text to voice, so the subscriber can
listen to the information with any telephone); and
. Telephone Locator (one number / follow me service that forwards incoming
calls to up to three numbers simultaneously and allows the subscriber to
hear the name of the incoming caller prior to taking the call).
Orchestrate(R) branded services are or will be marketed through several
distribution channels that include:
Strategic Partnerships. In these arrangements, services are marketed on
a co-branded basis to the customers of the strategic partner. For its
marketing efforts, the strategic partner receives a commission or shares in
the revenues generated by the services. Potential strategic partners
include multilevel marketing organizations, Internet service providers
("ISPs") and various Web portals. For example, Healtheon/WebMD, a leading
end-to-end Internet healthcare company, offers a co-branded version of an
earlier Orchestrate(R) service that allows healthcare professionals to
manage their critical flow of communications.
Wholesale Relationships. In these arrangements, the wholesale partner
markets and sells Orchestrate(R) services without significant assistance
from Orchestrate.com(R). The wholesale partner determines the retail rates
charged to its customers and pays Orchestrate.com(R) at agreed wholesale
rates. Potential wholesale partners include interexchange carriers,
incumbent and competitive local exchange carriers, and wireless carriers.
Affiliate Marketing. Orchestrate(R) services will be advertised on the
Websites of partners ("Affiliates") in exchange for a fee or bounty.
Affiliates will include a link to Orchestrate.com(R) on their Web site. For
example, Orchestrate.com(R) has entered into a contract with Be Free, an
Internet marketing firm that acts like an advertising agency. Be Free has a
large affiliate network and operates software that tracks all signups. Be
Free will receive a portion of the fees or bounties paid to the Affiliates.
9
Orchestrate(R) believes that excellent customer service is essential to its
success in retaining and attracting new subscribers. We currently provide
customer service through our call center located in Atlanta, Georgia. Our
customer service staff handles all questions regarding a subscriber's account
and are available 24 hours a day, seven days a week. Subscribers can call the
Orchestrate(R) call center facility for customer service through a toll-free
800 number or they can e-mail their questions directly to a customer service
address at Orchestrate(R).
PTEKVentures
PTEKVentures is the Company's Internet investment and strategic networking
arm. PTEKVentures' strategy is to identify and invest in promising early-stage
Internet companies.
As of February 29, 2000, PTEK Venture's portfolio included equity positions
in the following companies:
Heatheon/WebMD. Healtheon/WebMD (Nasdq:HLTH) is a leading end-to-end
Internet healthcare company connecting physicians and consumers to the entire
healthcare industry. Healtheon/WebMD is using the
Internet to facilitate a new system for the delivery of healthcare, resulting
in a single, secure environment for all communications and transactions that
will enable a more efficient and cost effective healthcare system. The company
was formed in November 1999 as a result of the merger of Healtheon
Corporation, WebMD, Inc., MEDE America and Medcast.
S1 Corporation. S1 (Nasdaq:SONE), the pioneer of Internet banking, is one of
the leading global providers of innovative Internet-based financial services
solutions. S1 offers a broad range of applications that empower financial
organizations to increase revenue, strengthen customer relationships and gain
competitive advantage by meeting the evolving needs of their customers across
various lines of business, market segments and delivery channels. Through its
professional services organization, S1's applications can be implemented in-
house or outsourced to the S1 Data Center.
Derivion. Derivion is a leading e-billing application service provider that
leverages the flexibility and power of the Internet to automate the bill
delivery and payment process for companies driven by recurring billing, such
as telecommunications, utility, insurance, and financial services companies.
Derivion's inetBillerSM service provides complete e-billing implementation,
including electronic bill design, email notification, bill presentment,
payment processing, enrollment marketing, and customer care. These
capabilities provide billers with a competitive advantage, enabling them to
make bill delivery and bill payment simple and convenient for their customers
and providing a path to electronic bill consolidation at customer access
points, as needed.
USA.NET. USA.NET, one of the world's largest e-mail outsourcing companies,
delivers industry-leading e-mail services to more than 3,000 businesses--
including American Express, United Airlines, Hewlett-Packard and Mail Boxes
Etc.--and for more than 15 million mailboxes worldwide. Designed to meet the
needs of all audiences, USA.NET's e-mail outsourcing solutions eliminate the
difficulty and expense of installing, upgrading and supporting an in-house e-
mail system. USA. NET launched its Web-based e-mail service in 1996, and
introduced e-mail outsourcing for businesses in 1997. USA.NET received what it
believes is the industry's first patent for its Web-based e-mail filtering and
forwarding technology in 1999.
Webforia. Webforia creates online business communities where business
professionals from a variety of industries can access and exchange specialized
information and services, participate in industry communities and conduct
electronic business.
i2Go.com. i2Go.com is a provider of personalized Internet audio content for
businesses and consumers on the go. The company enables users to select and
customize audio programming from a broad array of content players that is
delivered to mobile Internet appliances. By combining its Web site, its unique
MP3AgentTM media manager desktop application, and its eGo interactive portable
Internet appliance, i2Go.com empowers consumers to personalize their listening
experience by choosing from a wide range of digital audio content such as
news, sports, weather, entertainment and music from the Internet and listen to
it on the go.
10
BuyTrek. BuyTrek is developing a turnkey infrastructure solution that allows
destination Web-sites to generate revenues from their site visitors. The
BuyTrek solution is a technology platform that will be coupled with a network
of tens of thousands of cataloged e-commerce sites across numerous product and
service categories for business to business e-commerce.
Platforms and Network Infrastructure
The Company, through its three operating units, operates global Internet and
telecom-based networks that allow customers to combine the power of the
Internet with the reach of the telephone. Customers can access the Company's
various services through the Internet and through local and/or 800 telephone
numbers.
Xpedite. Xpedite services are provided primarily through a document
distribution platform that uses servers to perform all primary processing and
switching functions. This platform supports multiple input methods including,
but not limited to, fax-to-fax, priority PC based software, e-mail gateways and
high speed IP based interconnects. Outgoing faxes are delivered through line
group controllers, which are deployed in a decentralized fashion to exploit
local delivery costs. The remote line group controllers are connected to the
servers over a wide area network via either private lines or Xpedite's global
TCP/IP based network. Messages are transported in bulk from one location domain
to another using MCP to MCP protocol. The current domains include Sydney,
Australia; Hong Kong; Tokyo, Japan; Seoul, Korea; Singapore; Basel,
Switzerland; York, UK; Leeds, UK; Eatontown, New Jersey; Munich, Germany; and
Paris, France. Remote nodes on the network are located in Belgium, Canada,
Denmark, Italy, Malaysia, Netherlands, New Zealand and Taiwan.
Voicecom. Voicecom offers advanced voice messaging services through platforms
located in more than 240 sites in the United States, Canada, Australia, New
Zealand, UK, Hong Kong, Korea and Japan. The telephony service platforms are
distributed globally and are interconnected via Voicecom's highly available,
global frame relay network infrastructure. This network transports the
subscriber messages between the distributed systems. Voicecom also offers out-
sourced voice messaging services to large corporate clients via tollfree access
to multiple voice messaging platforms located in Atlanta, Georgia; Reno,
Nevada; Arlington, Virginia; and Oakbrook, Illinois.
Voicecom's Corporate Card services are provided through a platform located in
Atlanta, Georgia that consists of Unix-based telephony front-end processors
connected via a network to a Tandem computer database server for subscriber
authentication and billing.
Most of Voicecom's enhanced calling services and IVR services are provisioned
on platforms located in Atlanta, Georgia and Dallas, Texas that include
Dialogic-based telephony nodes, fax nodes and conference nodes. These platforms
are connected to the public switched telephone network via large tandem
switches that are used primarily for least-cost routing functions.
Voicecom's Orchestrate(R) services are provided on a highly available and
highly scaleable platform that includes servers and third-party software
integrated and enhanced with Orchestrate.com(R)'s unified communications
middleware. The core services in the Orchestrate(R) platform are provided by
Sun Microsystems / Netscape, Microsoft, Lucent, Real Audio, Centigram
Communications and LHS Priority Call. The primary Orchestrate(R) service hubs
are located in telecommunications central offices in Atlanta, Georgia, Dallas,
Texas and Toronto, Canada.
Premiere Conferencing. Premiere Conferencing services are provided from
centers in Colorado Springs, Colorado and Lenexa, Kansas on commercially
available conferencing bridges. Complex, operator-assisted calls are supported
on these bridges. Internally developed Dialog conference bridges utilizing
Dialogic hardware and Premiere software are used to support unattended (no
operator assistance) conference calls. These conferences are both scheduled and
reservationless. Customers access the conferencing platform through direct
inward dialing, 800 numbers, Internet and virtual network access. Additional
automated bridges are located in Canada, Australia, China, Singpore, Japan and
the UK.
11
Research and Development
Each PTEK operating unit includes research, development and engineering
personnel who are responsible for developing, testing and supporting
proprietary software applications, as well as creating and improving enhanced
system features and services. The Company's research and development strategy
is to focus its efforts on enhancing its proprietary software and integrating
its software with readily available industry standard software and hardware
when feasible. Research, development and engineering personnel also engage in
joint development efforts with the Company's strategic partners and vendors.
Competition
The PTEK strategy is to gain a competitive advantage for its operating units
by being among the first companies to offer network-based integrated
communications solutions, being an innovator in this market and offering unique
services to its customers. The Company's business units intend to seek to
capitalize on strategic relationships with key technology development and
distribution partners, in order to build its customer base and to maintain and
increase customer loyalty.
The markets for the Company's services are intensely competitive, quickly
evolving and subject to rapid technological change. The Company expects
competition to increase in the future. Many of the Company's
current and potential competitors have longer operating histories, greater name
recognition, larger customer bases and substantially greater financial,
personnel, marketing, engineering, technical and other resources than the
Company. The Company believes that existing competitors are likely to expand
their product and service offerings and that new competitors are likely to
enter the Company's markets. Such competition could materially adversely affect
the Company's business, financial condition and results of operations.
12
Examples of competitors in the markets for our products and services are
shown in the following chart:
Product or Service Example Competitors
- --------------------------------------------------------------------------------------
Electronic Document Distribution AT&T Corporation
(Xpedite) MCI WorldCom, Inc.
Sprint Corporation
International postal telephone and
telegraph companies
- --------------------------------------------------------------------------------------
Voice and Data Messaging AT&T Corporation
(Voicecom) Regional Bell operating companies
Octel Communications Corporation (owned
by Lucent Technologies, Inc.)
Nortel Networks Corporation
Seimens Information and Communications
Networks, Inc.
Centigram Communications Corporation
Boston Technology Inc.
Pulsepoint Communications
- --------------------------------------------------------------------------------------
Interactive Voice Response AT&T Corporation
(Voicecom) MCI WorldCom, Inc.
Lucent Technologies, Inc.
West TeleServices Corporation
Call Interactive
Syntellect Inc.
- --------------------------------------------------------------------------------------
Conferencing AT&T Corporation
(Premiere Conferencing) MCI WorldCom, Inc.
Sprint Corporation
- --------------------------------------------------------------------------------------
Enhanced Calling Services AT&T Corporation
(Voicecom) MCI WorldCom, Inc.
Sprint Corporation
- --------------------------------------------------------------------------------------
Unified Messaging Microsoft Corporation
(Orchestrate(R)) Novell, Inc.
Sun Microsystems, Inc.
Motorola, Inc.
Octel Communications Corporation (owned
by Lucent Technologies , Inc.)
JFAX.com, Inc.
EFAX.com, Inc.
General Magic
Webley
Ureach
One Box
ThinkLink
In addition to the competition faced by PTEK's operating units, PTEK faces
competition in its investing and EcoNet development activities from numerous
other companies including, publically traded Internet companies such as CMGI
and Internet Capital Group, venture capital companies, large corporations with
internal venture units and others.
13
Financial Information About Reportable Segments and Geographic Areas
For financial information about the Company's reportable segments and
geographic areas for the years ended December 31, 1999, 1998 and 1997, see Note
20 to the Consolidated Financial Statements.
Legislative Matters
The Telecommunications Act of 1996 (the "1996 Act") was intended to increase
competition in the long distance and local telecommunications markets. The 1996
Act opens competition in the local services market and, at the same time,
contains provisions intended to protect competitive local telephone companies
from unfair competition by incumbent local exchange carriers ("LECs"),
including the RBOCs. The 1996 Act allows RBOCs to provide long distance service
outside of their local service territories but bars them from immediately
offering in-region, inter-LATA, long distance services until certain conditions
are satisfied. An RBOC must apply to the Federal Communications Commission
("FCC") to provide in-region inter-LATA long distance services and must satisfy
a set of pro-competitive criteria intended to ensure that RBOCs open their own
local markets to competition before the FCC will approve such application.
Further, while the FCC has final authority to grant or deny such RBOC
application, the FCC must consult with the Department of Justice to determine
if, among other things, the entry of the RBOC would be in the public interest,
and with the relevant state to determine if the pro-competitive criteria have
been satisfied. The timing of the various RBOCs' entry into their respective
in-region long distance service businesses is uncertain. In December 1999, Bell
Atlantic's application to provide in-region long distance services in New York
state was granted by the FCC. Given the precedent set by the FCC's grant of
Bell Atlantic's application, the FCC is likely to grant similar applications by
Bell Atlantic and the other RBOCs in other states. In January 2000,
Southwestern Bell Telephone Company filed its application for FCC approval to
provide in-region long distance service in Texas. The FCC is expected to act on
the application before May 2000. As a result of the RBOCs' gaining authority to
offer in-region long distance services, the Company may experience increased
competition from RBOCs in the long distance industry.
Government Regulation
Certain of the Company's subsidiaries, including Premiere Communications,
Inc. ("PCI") (which is part of its Voicecom operating unit), provide both
telecommunications and information services. Consequently, PCI is, and certain
other PTEK subsidiaries may be, subject to federal, state and local regulation
in the United States. Various international authorities may also seek to
regulate the services provided by PCI and possibly other Premiere subsidiaries.
The Company is currently reviewing whether and to what extent additional
regulatory compliance may be required in connection with the Company's
operations.
Tariffs and Detariffing. PCI is classified by the FCC as a non-dominant
carrier for its domestic interstate and international common carrier
telecommunications services. Common carriers that provide domestic interstate
and international telecommunications services must maintain tariffs on file
with the FCC describing rates, terms and conditions of service. While the
tariffs of non-dominant carriers, such as PCI, are subject to FCC review, they
are presumed to be lawful upon filing with the FCC. Currently, PCI has filed
tariffs with the FCC to provide domestic interstate and international
telecommunications services.
In October 1996, the FCC issued an order detariffing long distance services,
thereby prohibiting non-dominant long distance carriers from filing tariffs for
domestic, interstate, long distance services. The FCC's detariffing rules were
scheduled to become effective September 22, 1997. The detariffing rules were
appealed by several parties, and in February 1997, the U.S. Court of Appeals
for the District of Columbia Circuit issued a temporary stay preventing the
rules from taking effect pending judicial review. If the appeals are
unsuccessful and the FCC's detariffing rules become effective, PCI will be
required to obtain agreements with its customers regarding many of the terms
contained in its existing tariffs, thereby creating uncertainties regarding
such new contractual terms, and increasing the risk of customer claims against
either the Company or PCI. However, the Company and PCI are currently unable to
predict what impact the outcome of the FCC's detariffing proceeding will have
on the Company or PCI.
14
Local Interconnection and Resale. In August 1996, the FCC adopted an order
(the "Interconnection Order") which established a minimum set of rules relating
to the manner in which all telecommunications carriers would be able to
interconnect with the LECs' networks. The Interconnection Order addressed
several important interconnection issues, including the purchase of unbundled
network elements, resale of local services at wholesale discounts,
interconnection negotiation and arbitration procedures, and mutual compensation
arrangements for transporting and terminating local calls between competing
carriers.
The RBOCs, several states, various carriers, associations and other entities
appealed the Interconnection Order. On July 18, 1997, the U.S. Court of Appeals
for the Eighth Circuit overturned many of the rules established by the FCC's
Interconnection Order governing, among other things, the pricing of
interconnection, resale and unbundled network elements. On October 14, 1997,
the court further overturned FCC rules requiring that LECs provide unbundled
network elements on a combined basis. In January 1999, the Supreme Court
reversed the Eighth Circuit's decisions, finding that the FCC had jurisdiction
to implement the pricing provisions of the 1996 Act. The Eighth Circuit,
however, is expected on remand to rule on the merits of the FCC's pricing
methodology. The Supreme Court also upheld the FCC's rule requiring LECs to
provide unbundled network elements on a combined basis. Competitors using such
combined network elements may conceivably be able to provide retail local
services entirely through the use of the LEC's facilities at discounts that may
be lower than those available through local resale. However, the Supreme Court
reversed in part the FCC's decision which specifically identified the
particular unbundled network elements that LECs must provide. In September
1999, the FCC, in response to the Supreme Court decision, released new
definitions of unbundled network elements. The Company has at times considered
entering the local exchange market as a so-called competitive local exchange
carrier ("CLEC"). If the Company becomes a CLEC, it will be faced with the
uncertainty of the FCC's interconnection rules and with related state PUC rules
that are likely to vary substantially from state to state. This patchwork of
federal and state regulations could make competitive entry by the Company in
some markets more difficult and expensive than in others and could increase the
costs of regulatory compliance associated with local entry.
Universal Service Reform. On May 8, 1997, the FCC released an order
establishing a significantly expanded federal telecommunications subsidy
regime. Providers of interstate telecommunications service, such as PCI, as
well as certain other entities, must pay for the federal programs. PCI's
contributions to the federal subsidy fund will be based on its share of total
interstate (and certain international) telecommunications services and on
certain defined telecommunications end user revenues. PCI may pass certain of
these costs on to its customers. However, no assurance can be given that the
FCC's universal service requirements will not have a material adverse effect on
the Company's business, financial condition and results of operations.
Payphone Compensation. In September 1996, the FCC issued an order adopting
rules to implement the 1996 Act's requirements establishing "a per call
compensation plan to ensure all payphone service providers are fairly
compensated for each and every completed call using their payphone." This order
included a specific fee to be paid to each payphone service provider by long
distance carriers and intra-LATA toll providers (including LECs) on all "dial
around" calls, including debit card and calling card calls. In decisions
released in July 1997, and September 1997, the U.S. Court of Appeals for the
D.C. Circuit vacated and remanded some of the FCC rules for the implementation
plan.
In response to these decisions, in October 1997, the FCC issued a second
order, revising the per-call, compensation amount to be paid to payphone
service providers. Specifically, the FCC decreased the compensation amount to
$0.284 per call. This compensation amount was to remain in effect until October
6, 1999, when a market-based rate would have become effective. In May 1998, the
U.S. Court of Appeals for the D.C. Circuit again remanded certain issues to the
FCC for further consideration.
In response, in January 1999, the FCC issued a third order in its payphone
compensation proceeding, revising the per-call compensation amount to be paid
to payphone service providers. Specifically, the FCC decreased the compensation
amount to $0.24 per call. In addition, the FCC extended the time period that
this compensation amount will be in effect until January 31, 2001. Portions of
the FCC's third order have been appealed to the U.S. Court of Appeals for the
D.C. Circuit.
15
Although PCI expects to incur additional costs to receive "dial around" calls
that originate from payphones, the FCC has thus far permitted long distance
carriers, such as PCI, to pass such costs through to its customers. However,
the Company is unable to predict what impact the payphone rules will have on
PCI's costs for such calls until the ultimate outcome of the FCC's and the
court's rulings with respect to these payphone compensation obligations.
Additional Requirements. The FCC imposes additional obligations on all
telecommunications carriers, such as PCI, including obligations: (i) to
interconnect with other carriers and not to install equipment that cannot be
connected with the facilities of other carriers; (ii) to ensure that their
services are accessible and usable by persons with disabilities; (iii) to
provide telecommunications relay service, either directly or through
arrangements with other carriers; (iv) to comply with verification procedures
in connection with changing a customer's carrier so as to prevent "slamming", a
practice by which a customer's chosen telecommunications service provider is
switched without the customer's consent; (v) to protect the confidentiality of
proprietary information obtained from other carriers, manufacturers and
customers; (vi) to pay annual regulatory fees; and (vii) to contribute to the
federal Telecommunications Relay Services Fund.
State Regulation. Most state public service and public utility commissions
("PUCs") subject carriers such as PCI that provide intrastate, common carrier
services to entry certification or authorization requirements, typically
requiring such carriers to obtain authority from the state PUC prior to
initiation of service. In most states, PCI is also required to file tariffs
setting forth the terms, conditions and prices for services that are classified
as intrastate. PCI is also required to update or amend its tariffs when it
adjusts its rates or adds new products or services.
PCI either has applied for and received, or is in the process of applying for
and receiving, all necessary certificates or authorizations to provide
intrastate, long distance services. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state PUCs for
failure to comply with state law or with state PUC rules, regulations and
policies. Fines or other penalties also may be imposed for such violations.
There can be no assurance that state PUCs or third parties will not raise
issues with regard to PCI's compliance with applicable laws or regulations.
PCI may be subject to additional regulatory burdens in some states, such as
compliance with quality of service requirements, periodic remittance of
contributions to support state sponsored universal service, or other reporting
requirements. PCI's ability to incur long-term indebtedness is subject to prior
PUC approval in some state jurisdictions. In addition, some state PUCs regulate
the issuance of securities and the transfer of control of entities subject to
their jurisdiction. Currently, the Company is reviewing whether and to what
extent these regulatory compliance requirements attach to its business
operations.
Local Regulation. The Company may be required to obtain various permits and
authorizations from municipalities in which it deploys and operates network
facilities. The issues of whether and to what extent actions of local
governments over the activities of telecommunications carriers, including
requiring payment of franchise fees or other surcharges, pose barriers to entry
for competitive telecommunications companies (and thus may be preempted by the
FCC) have been the subject to much litigation and remain unsettled. Although
the Company relies primarily upon leased network facilities of other telephone
companies, in certain instances the Company deploys its own switching
facilities and therefore may need to obtain certain municipal permits or other
authorizations. The actions of municipal governments in imposing conditions on
the grant of permits or other authorizations or their failure to act in
granting such permits or other authorizations could harm the Company's
business.
The foregoing does not purport to describe all present and proposed federal,
state or local regulations and legislation affecting the telecommunications
industry. Other federal and state regulations are currently the subject of
judicial proceedings, legislative hearings and administrative proposals, which
could change, in varying degrees, the manner in which the communications
industry operates. At this time, the Company cannot predict the outcome of
these proceedings, nor their impact upon the telecommunications industry or
upon the Company.
16
Other. In conducting its business, the Company is subject to various laws and
regulations relating to commercial transactions generally, such as the Uniform
Commercial Code and is also subject to the electronic funds transfer rules
embodied in Regulation E promulgated by the Federal Reserve. Congress has held
hearings regarding, and various agencies are considering, whether to regulate
providers of services and transactions in the electronic commerce market. For
example, the Federal Reserve completed a study, directed by Congress, regarding
the propriety of applying Regulation E to stored value cards. The Department of
Treasury promulgated proposed rules applying record keeping, reporting and
other requirements to a wide variety of entities involved in electronic
commerce. It is possible that Congress, the states or various government
agencies could impose new or additional requirements on the electronic commerce
market or entities operating therein. If enacted, such laws, rules and
regulations could be imposed on the Company's business and industry and could
have a material adverse effect on the Company's business, financial condition
or results of operations. The Company's proposed international activities also
will be subject to regulation by various international authorities and the
inherent risk of unexpected changes in such regulation.
Proprietary Rights and Technology
The Company's ability to compete is dependent in part upon its proprietary
technology. The Company relies primarily on a combination of intellectual
property laws and contractual provisions to protect its proprietary rights and
technology. These laws and contractual provisions provide only limited
protection of the Company's proprietary rights and technology. The Company's
proprietary rights and technology include confidential information and trade
secrets which the Company attempts to protect through confidentiality and
nondisclosure provisions in its licensing, services, reseller and other
agreements. The Company typically attempts to protect its confidential
information and trade secrets through these contractual provisions for the
terms of the applicable agreement and, to the extent permitted by applicable
law, for some negotiated period of time following termination of the agreement.
PTEK currently has three patents, seven patent applications pending, numerous
worldwide registrations of trademarks and service marks, and numerous worldwide
trademark and service mark registrations pending. Despite the Company's efforts
to protect its proprietary rights and technology, there can be no assurance
that others will not be able to copy or otherwise obtain and use the Company's
proprietary technology without authorization, or independently develop
technologies that are similar or superior to the Company's technology. However,
the Company believes that, due to the rapid pace of technological change in the
information and telecommunications service industry, factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements and the timeliness and quality of support
services are of equal or greater importance to establishing and maintaining a
competitive advantage in the industry.
Many patents, copyrights and trademarks have been issued in the general areas
of information services and telecommunications, computer telephony, the
Internet and unified messaging. From time to time, in the ordinary course of
our business, we have been and expect to continue to be, subject to third party
claims that our current or future products or services infringe the patent,
copyright or trademark rights or other intellectual property rights of third
parties. Claims alleging patent, copyright or trademark infringement may be
brought against us with respect to current or future products or services. If
these types of actions or claims are brought we may not ultimately prevail and
any claiming parties may have significantly greater resources than we have to
pursue litigation of these types of claims. Any infringement claims, whether
with or without merit, could:
. be time consuming and a diversion to management;
. result in costly litigation;
. cause delays in introducing new products and services or enhancements;
. result in costly royalty or licensing agreements; or
. cause us to discontinue use of the challenged technology, tradename or
service mark at potentially significant expense associated with the
marketing of a new name or the development or purchase of replacement
technology.
17
Examples of prior and current infringement claims include the following:
In October 1996, one of our subsidiaries received a letter from a third party
claiming that aspects of our subsidiary's voice messaging products and services
may be infringing upon one or more of the third party's patents. We have
reviewed the patent claims of this third party and we do not believe that any
of our subsidiary's products or services infringe on the claims of the third
party. No patent infringement claims have been filed against us by the third
party at this time. Should this third party file patent infringement claims
against us, we believe that we would have meritorious defense to those claims.
However, due to the inherent uncertainties of litigation, we are unable to
predict the outcome of any potential litigation with the third party, and any
adverse outcome could have a material adverse effect on our business, results
of operations and financial condition. Even if we were to ultimately prevail,
our business could be adversely affected by the diversion of management
attention and litigation costs. Because of this risk, we withheld in escrow
approximately 123,000 shares of our common stock from the purchase price paid
to acquire one of our voice messaging subsidiaries. This escrow arrangement
terminates in April 2000. This escrow may not be sufficient to fully cover our
exposure in the event of litigation or an adverse outcome to the potential
infringement claims.
In February 1997, we entered into a long-term nonexclusive license agreement
with AudioFAX IP LLC settling a patent infringement suit filed by AudioFAX in
June 1996. Effective April 1, 1998, this initial license agreement was amended
to include Xpedite within the coverage of the license. In September 1997, one
of our subsidiaries also entered into a long-term nonexclusive license
agreement with AudioFAX.
Prior to its acquisition by us, Xpedite received a letter from Cable &
Wireless, Inc. informing Xpedite that Cable & Wireless had received a demand
letter from AudioFAX claiming that some Cable & Wireless products and services
infringed AudioFAX's patent rights. Cable & Wireless initially sought
indemnification from Xpedite for this claim. Subsequent to our acquisition of
Xpedite, Cable & Wireless notified us of the AudioFAX claim and sought
indemnification directly from us. We have requested, but as yet are without,
sufficient information to evaluate the merits of this claim and we are unable
at this time to predict the outcome of this matter.
In 1999, we received separate letters from Ronald Katz, Aerotel
Limited/Aerotel USA, Inc. and Cable & Wireless informing us of the existence of
their respective patents or patent portfolios and the potential applicability
of those patents on our products and services. We are currently considering
each of these matters. However, we currently lack sufficient information to
assess the potential outcomes of these matters. Due to the inherent
uncertainties of litigation, however, we are unable to predict the outcome of
any potential litigation, and any adverse outcome could have a material effect
on our business, financial condition and results of operations. Even if we were
to prevail in this type of challenge, our business could be adversely affected
by the diversion of management attention and litigation costs.
In the fourth quarter of 1999, we entered into a license agreement with
Aspect Telecommunications, Inc. ("Aspect") settling a patent infringement suit
filed by Aspect in March 1999. See Item 3--"Legal Proceedings."
Employees
As of December 31, 1999, the Company employed 2,467 persons, substantially
all of whom were employed on a full-time basis. Of these employees, 803 were
engaged in sales and marketing; 391 in engineering and research and
development; 965 in customer service and technical support; and 308 were in
general and administrative activities. None of the Company's employees are
members of a labor union or are covered by a collective bargaining agreement.
Item 2. Properties
PTEK Holdings corporate headquarters occupy approximately 21,000 square feet
of office space in Atlanta, Georgia under a lease expiring August 31, 2007. The
headquarters of the Company's Voicecom business unit occupies approximately
74,800 square feet of office space in the same building under leases expiring
August 31, 2007 and August 31, 2006 plus 12,100 square feet in a nearby
building whose lease expires December 31, 2003. Xpedite occupies approximately
61,500 square feet of office space in Eatontown, New Jersey under three
18
separate leases expiring on September 30, 2000, May 31, 2001 and October 31,
2001, respectively. Premiere Conferencing occupies approximately 103,000 square
feet of office space in Colorado Springs, Colorado under a lease expiring
August 31, 2006, and approximately 46,000 square feet of office space in
Lenexa, Kansas under a lease expiring August 31, 2009.
The Company also has data and switching centers and sales offices within and
outside the United States. The Company believes that its current facilities and
office space is sufficient to meet its present needs and does not anticipate
any difficulty securing additional space, as needed, on terms acceptable to the
Company.
Item 3. Legal Proceedings
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 (including a subclass of former Voice-Tel
franchises and a subclass of former Xpedite shareholders) who purchased or
otherwise acquired the Company's common stock from as early as February 11,
1997 through June 10, 1998. 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, among other things, 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. We filed a motion to
dismiss the complaint on April 14, 1999. On December 14, 1999, the court issued
an order that dismissed the claims under Sections 10(b) and 20 of the Exchange
Act without prejudice, and dismissed the claims under Section 12(a)(1) of the
Securities Act with prejudice. The effect of this order was to dismiss from
this lawsuit all open-market purchase by the plaintiffs. The plaintiffs filed
an amended complaint on February 29, 2000, which the Company intends to move to
dismiss.
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, the Company's relationship with customers Amway
Corporation and DigiTEC 2000, Inc., and the Company's 800-based calling card
service. Plaintiffs allege causes of action against the Company for breach of
contract, against all defendants for negligent misrepresentation, violations of
Sections 11 and 12(a)(2) of the Securities Act of 1933, 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 of 1933, punitive damages, costs and attorneys' fees. The
defendants' motion to transfer venue to Georgia has been granted. The
defendants' motion to dismiss has been granted in part and denied in part. The
Company intends to file an answer.
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
19
with the plaintiffs' investment in securities of Xpedite and in unrelated
investments involving insurance-related products. 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.
In March 1999, Aspect Telecommunications, Inc. ("Aspect"), the purported
current owner of certain patents, filed suit against the Company and Premiere
Communications, Inc. ("PCI") alleging that they had violated claims in these
patents and requesting damages and injunctive relief. In the fourth quarter of
1999, the Company and PCI entered into a settlement agreement with Aspect,
which settled and disposed of Aspect's claims in this litigation. This
settlement will not have a material adverse effect on the Company's business,
financial condition or results of operations.
On June 11, 1999, the Company filed a complaint against MCI WorldCom in the
Superior Court of Fulton County for the State of Georgia. The Company
subsequently filed an amended complaint on June 18, 1999. The amended complaint
alleges that MCI WorldCom breached the Strategic Alliance Agreement, dated
November 13, 1996, between the Company and MCI WorldCom by, inter alia,
awarding various contracts to vendors other than the Company and to which the
Company was entitled either exclusive or preferential consideration. In
addition to injunctive relief, the Company seeks damages of not less than
$10 million, per- and post-judgment interest, cost and expenses of litigation,
including attorneys' fees. On July 1, 1999 the court entered an order staying
all proceedings pending arbitration. In connection with that order, MCI
WorldCom agreed that it would not issue any requests for information, requests
for proposals or enter into any contracts with respect to the proposals
challenged by the Company.
A lawsuit was filed on November 1, 1999 by Donald H. Turner, a former officer
of the Company against the Company, Boland T. Jones and Jeffrey A. Allred in
the Superior Court of Fulton County, Georgia. Against the Company the plaintiff
alleges breach of contract and promissory estoppel relating to the termination
of his employment against, and against all defendants the plaintiff alleges
fraudulent inducement relating to his hiring by the Company. The plaintiff
seeks compensatory damages of $875,000, forgiveness of a $100,000 loan,
interest, attorneys' fees and punitive damages in an unspecific amount.
On September 3, 1999, Elizabeth Tendler filed a complaint in the Superior
Court of New Jersey Law Division: Union County, against 17 named defendants
including the Company and Xpedite, and various alleged current and former
officers, directors, agents and representatives of Xpedite. Plaintiff alleges
that the defendants engaged in wrongful activities in connection with the
management of the plaintiff's investments, including investments in Xpedite.
The allegations against Xpedite and the Company are limited to plaintiff's
investment in Xpedite. Plaintiff's claims against Xpedite and the Company
include breach of contract, breach of fiduciary duty, unjust enrichment,
conversion, fraud, interference with economic advantage, liability for ultra
vires acts, violation of the New Jersey Consumer Fraud Act and violation of New
Jersey RICO. Plaintiff seeks an accounting of the corporate stock of Xpedite,
compensatory damages of approximately $1.3 million, accrued interest and/or
dividends, a constructive trust on the proceeds of the sale of any Xpedite or
PTEK stock, shares of Xpedite and/or PTEK to satisfy defendants' obligations to
plaintiff, attorneys' fees and costs, punitive and exemplary damages in an
unspecified amount, and treble damages. On February 25, 2000, Xpedite filed its
answer, as well as cross claims and third party claims. The Company has not
been served with the summons and complaint.
20
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security holders during
the fourth quarter of the fiscal year covered by this report.
21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock, $.01 par value per share (the "Common Stock"),
has traded on the Nasdaq National Market under the symbol "PTEK" since its
initial public offering on March 5, 1996. The following table sets forth the
high and low sales prices of the Common Stock as reported on the Nasdaq
National Market for the periods indicated. Such prices are based on inter-
dealer bid and asked prices without markup, markdown, commissions or
adjustments and may not represent actual transactions.
1999 High Low
---- ------- -------
First Quarter................................................ $13.000 $ 6.000
Second Quarter............................................... 20.875 11.000
Third Quarter................................................ 11.875 5.688
Fourth Quarter............................................... 8.625 4.375
1998 High Low
---- ------- -------
First Quarter................................................ $34.625 $20.875
Second Quarter............................................... 35.000 7.688
Third Quarter................................................ 11.313 3.625
Fourth Quarter............................................... 8.250 2.500
The closing price of the Common Stock as reported on the Nasdaq National
Market on March 29, 2000 was $7.0625. As of March 28, 2000 there were
approximately 605 record holders of the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock, and the
current policy of the Company's Board of Directors is to retain any available
earnings for use in the operation and expansion of the Company's business. The
payment of cash dividends on the common stock is unlikely in the foreseeable
future. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will depend upon the Company's
earnings, capital requirements, financial condition and any other factors
deemed relevant by the Board of Directors.
During the year ended December 31, 1999, certain current and former
employees, directors and investors exercised options to purchase an aggregate
of 372,589 shares of Common Stock at prices ranging from $0.42 to $1.61 per
share in transactions exempt from registration pursuant to Section 4(2) and
Rule 701 of the Securities Act.
Item 6. Selected Financial Data
The following selected consolidated balance sheet and statement of operations
data as of and for the years ended December 31, 1999, 1998, 1997, 1996 and
1995, and the consolidated balance sheet data as of December 31, 1999 and 1998,
have been derived from the audited consolidated financial statements of the
Company, which give retroactive effect to the acquisitions of Voice-Tel and
VoiceCom Systems, Inc., both of which were accounted for as poolings-of-
interests, and are qualified by reference to such consolidated financial
statements including the related notes thereto. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and the notes thereto.
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), depreciation, amortization,
accrued settlement costs, acquired research and development costs and
restructuring, merger costs and other special charges.
22
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 effect 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.
Year Ended December 31
-------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations
Data:
Revenues................... $ 458,448 $444,818 $229,352 $197,474 $147,543
Gross profit............... 328,757 309,782 165,378 141,873 103,675
Operating income
(loss)(1)................. (138,081) (91,053) (16,714) 6,806 7,003
Net income (loss).......... (33,491) (84,254) (18,428) 3,458 4,171
Net income (loss)
attributable to common and
common equivalent shares
for shareholders for:
--basic net income (loss)
per share................ $ (33,491) $(84,254) $(18,428) $ 3,429 $ 3,863
--diluted net income
(loss) per share......... (33,491) (84,254) (18,428) 3,429 3,863
Net income (loss) per
common and common
equivalent shares for:
--basic(2)................ $ (0.72) $ (1.90) $ (0.57) $ 0.12 $ 0.19
--diluted(2).............. $ (0.72) $ (1.90) $ (0.57) $ 0.11 $ 0.17
Shares used in computing
net income (loss) per
common and common
equivalent shares for
--basic................... 46,411 44,325 32,443 27,670 19,868
--diluted................. 46,411 44,325 32,443 31,288 24,312
Balance Sheet Data (at
period end):
Cash, cash equivalents and
investments............... $ 101,981 $ 40,609 $176,339 $ 83,836 $ 11,759
Working capital............ 34,746 (92,628) 132,906 45,377 (16,093)
Total assets............... 770,481 796,416 379,593 201,541 78,131
Total debt................. 179,625 299,673 181,698 47,975 52,650
Total shareholders' equity
(deficit)................. 422,220 397,793 107,761 104,533 (11,639)
Statement of Cash Flow Data:
Cash provided by operating
activities................ 9,927 22,248 27,159 36,889 13,559
Cash provided by (used) in
investing Activities...... 107,216 21,292 (160,055) (96,112) (13,186)
Cash (used in) provided by
financing activities...... (120,924) (46,115) 138,730 66,196 3,523
- --------
(1) Excluding charges for restructuring, merger costs and other special
charges of approximately $8.0 million in 1999, $24.1 million in 1998 and
$54.0 million in 1997, charges for acquired research and development of
approximately $15.5 million in 1998 and $11.0 million in 1996, and accrued
settlements costs of approximately $1.5 million in 1998 and 1997, and
$1.3 million in 1996, operating income (loss) would have been
approximately $(130.1) million in 1999, $(50.0) million in 1998,
$38.8 million in 1997 and $19.1 million in 1996. EBITDA would have been
$38.8 million in 1999, $61.8 million in 1998, $60.1 million in 1997 and
$33.3 million in 1996.
(2) Basic net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding during the period. Diluted
net income (loss) per share is computed using the weighted average number
of shares of common stock and dilutive common stock equivalents
outstanding during the
23
period from convertible preferred stock, convertible subordinated notes
(using the if-converted method) and from stock options (using the treasury
stock method).
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
PTEK Holdings, Inc., a Georgia corporation, and its subsidiaries
(collectively, the "Company") began operations in 1991 and the Company
completed its initial public offering in March 1996. The Company provides an
array of innovative solutions which are designed to simplify everyday
communications of businesses and individuals. The Company's services include
voice and electronic messaging, electronic document distribution, conferencing,
calling card services and Internet-based communications services. Through a
series of acquisitions from September 1996 through September 1999, the Company
has assembled a suite of communications services, an international private data
network and points-of-presence in regions covering North America, Asia/Pacific
and Europe. The Company has also invested in Internet companies that have
developed their own innovative service offerings that will enable these
companies to become industry leaders.
The Company's reportable segments align the Company into six areas of focus
that are driven by product offering, investment strategy and functional cost
control. The Company was realigned into a decentralized organization in the
third quarter of 1999 from the previous market segment focus of the Emerging
Enterprise Solutions (EES) and Corporate Enterprise Solutions (CES) business
units. The Company's realignment was a further refinement of the EES and CES
business unit organization previously established in the fourth quarter of 1998
and positioned the Company as an operating and investing business. The Company
has focused its management on the various products within CES and EES through
further decentralization, bringing in new management into the various new
segments. These six business segments are called Voicecom (formerly in both EES
and CES), Xpedite (formerly in CES), Premiere Conferencing (formerly in CES),
Retail Calling Card Services (formerly in EES), PTEKVentures and Corporate.
Voicecom focuses on local and 800-based voice messaging services, Internet-
enabled communications with its Orchestrate(R) product, along with interactive
voice response services and wholesale communications platform outsourcing
solutions. Its customer base ranges from small office/home office to multi-
level marketing organizations to Fortune 1000 corporate accounts. Xpedite
focuses on store and forward fax, real time fax services, electronic messaging
services with its MessageReachSM product and voice messaging in the
Asia/Pacific region, primarily to Fortune 1000 corporate accounts and
governments. Premiere Conferencing focuses on attended and unattended
conferencing services, primarily to Fortune 1000 customers. Retail Calling Card
Services is a business unit whose operations the Company has decided to exit.
It consists of the Premiere WorldLink calling card product, which was primarily
marketed through direct response advertising and co-branding relationships to
single retail users. Discontinued operations treatment of this business unit is
not available as the Company will continue pursuing the wholesale and corporate
account distribution channels of this product, both of which operate with
positive EBITDA, as defined by the Company. PTEKVentures focuses on investments
in companies in the Internet with innovative service offerings that will enable
these companies to become industry leaders. Corporate focuses on being a
holding company with minimal headcount leaving the day to day operations of
running the business at the operating business segments. 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.
The Company has pursued its goal of becoming a provider of a suite of
telecommunications and Internet- enabled communications services both
domestically and internationally through various acquisitions from 1996 through
1999. Through these acquisitions, the Company has been able to assemble a
variety of product and service offerings, as described above. In 1996, the
Company acquired TeletT, which became the foundation for the Company's
Orchestrate(R) product offering. In 1999 the Company acquired Intellivoice
Communications, a company that was previously a consultant in developing the
next generation Orchestrate(R) product offering, Orchestrate(R) 2000. The
Orchestrate(R) product is offered under the Voicecom business segment. In 1997,
the Company acquired the franchise network of Voice-Tel, which provided local
access voice mail and voice
24
messaging. The Company also acquired VoiceCom Systems, Inc. in 1997, which
provided 800-based corporate voice-mail and calling card services. Both the
Voice-Tel and VoiceCom Systems, Inc. acquisitions, as well as the Orchestrate
product offering, provide the basis of the Voicecom operating segment. In 1998,
the Company acquired Xpedite, a provider of domestic and international fax
services. Also in 1998, the Company acquired the international affiliates of
Xpedite and other complimentary international fax service providers. These
acquisitions, along with the Australian operations of Voice-Tel, have formed
the basis for the Xpedite operating segment. The Company acquired ATS in 1998,
which, along with the conferencing business from the VoiceCom Systems, Inc.
acquisition, forms the basis of the Premiere Conferencing operating segment.
During 1998 and 1999, the Company invested in Internet-based companies that it
believes will be leaders in their market niches in the expanding Internet
economy. The Company has formed the PTEKVenutures segment of the Company with
dedicated resources to develop these kinds of investments. The Company
anticipates future growth of investments in the PTEKVentures segment with the
establishment of dedicated management in 1999 focused on growing this aspect of
the Company's business.
The Company's revenues are based on usage in the Xpedite, Premiere
Conferencing and Retail Calling Card Services business segments and a mix of
both usage and monthly fixed fee's in the VoiceCom business segment.
Telecommunications costs consist primarily of the cost of metered and fixed
telecommunications related costs incurred in providing the Company's services.
Direct operating costs consist primarily of salaries and wages, travel,
consulting fees and facility costs associated with maintaining and operating
the Company's various revenue generating platforms and telecommunications
networks, regulatory fees and non-telecommunications costs directly associated
with providing services.
Direct sales and marketing costs consist primarily of salaries and wages,
travel and entertainment, advertising, commissions and facility costs
associated with function of selling or marketing the Company's services.
Research and development costs consist primarily of salaries and wages,
travel, consulting fees and facilities costs associated with developing product
enhancements and new product development.
General and administrative costs consist primarily of salaries and wages
associated with billing, customer service, order processing, executive
management and administrative functions that support the Company's operations.
Bad debt expense associated with customer accounts is also included in this
caption.
Depreciation and amortization includes depreciation of computer and
telecommunications equipment, furniture and fixtures, office equipment,
leasehold improvements 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 useful life of the assets. Intangible assets being
amortized include goodwill, customer lists, developed technology and 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), depreciation, 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
25
that affect current period profitability and the effect of one time cash or
non-cash charges associated with cash flow before payments for interest and
taxes. EBITDA before accrued settlement costs, acquired research and
development cost 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 the estimates. The following
discussion and analysis provides information which management believes is
relevant to an assessment and understanding of the Company's consolidated
results of operations and financial condition. This discussion should be read
in conjunction with the consolidated financial statements and notes thereto.
Results Of Operations
The following table presents the percentage relationship of certain
statements of operations items to total revenues for the Company's consolidated
operating results for the periods indicated:
Year Ended
December 31, 1999
---------------------
1999 1998 1997
----- ----- -----
REVENUES.................. 100.0 % 100.0 % 100.0 %
COST OF SERVICES.......... 28.3 30.4 27.9
----- ----- -----
GROSS MARGIN.............. 71.7 69.6 72.1
----- ----- -----
Direct operating costs... 15.1 12.1 7.8
----- ----- -----
CONTRIBUTION MARGIN....... 56.6 57.5 64.3
----- ----- -----
OPERATING EXPENSES
Direct sales and
marketing............... 23.5 24.6 24.4
Research and
development............. 2.6 1.2 0.8
General and
administrative.......... 21.9 17.8 13.0
Depreciation............. 15.3 10.4 8.5
Amortization............. 21.6 14.7 0.8
Restructuring, merger
costs and other special
charges................. 1.7 5.4 23.6
Acquired research and
development............. -- 3.5 --
Accrued settlement
costs................... -- 0.3 0.7
----- ----- -----
Total operating
expenses............... 86.6 77.9 71.8
----- ----- -----
OPERATING INCOME (LOSS)... (30.0) (20.4) (7.5)
----- ----- -----
OTHER INCOME (EXPENSE)
Interest, net............ (5.4) (3.3) (0.4)
Gain on marketable
securities.............. 33.2 -- --
Other, net............... 2.7 0.1 0.1
----- ----- -----
Total other income
(expense).............. 30.5 (3.2) (0.3)
INCOME (LOSS) BEFORE
INCOME TAXES............. 0.5 (23.6) (7.8)
INCOME TAX PROVISION
(BENEFIT)................ 7.7 (4.8) 0.4
----- ----- -----
NET LOSS.................. (7.2)% (18.8)% (8.2)%
===== ===== =====
26
The following table presents certain financial information about the
Company's operating segments for the periods presented (amounts in millions):
Year Ended
December 31, 1999
-----------------------
1999 1998 1997
------- ------ ------
REVENUES:
Xpedite.............................................. $ 242.0 $197.0 $ 3.9
Voicecom............................................. 125.7 152.9 166.7
Premiere Conferencing................................ 53.8 36.9 3.5
Retail Calling Card Services......................... 37.2 58.0 55.3
Eliminations......................................... (0.3) -- --
------- ------ ------
Totals............................................... $ 458.4 $444.8 $229.4
======= ====== ======
OPERATING PROFIT (LOSS):
Xpedite.............................................. $ (30.4) $(19.7) $ (0.1)
Voicecom............................................. (6.9) 23.7 49.1
Premiere Conferencing................................ (3.8) 1.8 0.7
Retail Calling Card Services......................... (43.8) (27.3) (5.8)
Corporate............................................ (45.3) (28.5) (5.1)
Eliminations......................................... (0.3) -- --
Restructuring, merger costs and other special
charges............................................. (7.6) (24.1) (54.0)
Acquired research and development.................... -- (15.5) --
Accrued settlement costs............................. -- (1.5) (1.5)
------- ------ ------
Totals............................................... $(138.1) $(91.1) $(16.7)
======= ====== ======
EBITDA:
Xpedite.............................................. $ 61.2 $ 54.1 $ (0.1)
Voicecom............................................. 16.8 51.0 67.7
Premiere Conferencing................................ 9.0 7.0 0.7
Retail Calling Card Services......................... (5.8) (22.1) (3.1)
Corporate............................................ (42.1) (28.2) (5.1)
Eliminations......................................... (0.3) -- --
------- ------ ------
Totals............................................... $ 38.8 $ 61.8 $ 60.1
======= ====== ======
Analysis
The Company's financial statements reflect the results of operations of
Xpedite, Xpedite international affiliates, ATS and Intellivoice from the date
of their respective acquisition. These acquisitions have been accounted for
under the purchase method of accounting. The Company's financial statements
have been restated for all periods presented to reflect the Voice-Tel and
VoiceCom Systems, Inc. acquisitions, which have been accounted for under the
pooling-of-interests method of accounting. The following discussion and
analysis is prepared on that basis and is discussed on an operating segment
basis.
Revenues
Consolidated revenues increased 3.1% to $458.4 million in 1999 and 93.9% to
$444.8 million in 1998. Revenues in the Company's operating segments increased
as follows:
. Xpedite revenues increased 22.8% to $242.0 million in 1999 and 4,951.3%
to $197.0 million in 1998. The increase in 1999 was attributable to (1)
twelve months of revenue in 1999 versus ten months in 1998 from Xpedite
Systems, Inc. which was acquired in 1998 and accounted for under the
purchase method of accounting, (2) growth in this unit's Asia/Pacific
region and (3) acquisitions made in this segment's European region
during the second quarter of 1999. The increase in 1998 was primarily
attributable to the acquisition of Xpedite Systems, Inc. in February of
1998.
27
. VoiceCom revenues decreased 17.8% to $125.7 million in 1999 and 8.3% to
$152.9 million in 1998. The decrease in 1999 was attributable to the
expiration of revenue commitments under the strategic alliance agreement
with MCIWorldcom in September 1998, the bankruptcy of two wholesale
platform calling card customers in the second quarter of 1998, decreases
in its local based voice messaging distribution channel with Amway,
decreases in its 800-based corporate messaging and calling card
programs. These decreases were offset, in part, by increases in revenue
from the Company's call center IVR service with Bank of America and its
Orchestrate strategic alliance with Healtheon/WebMD. The decrease in
1998 was attributable to having twelve months of the MCIWorldcom revenue
commitment in 1997 versus only nine months in 1998 when it expired in
September 1998, decreases in its local based voice messaging
distribution channel with Amway and decreases in its 800-based corporate
messaging and calling card programs.
. Premiere Conferencing revenues increased 45.8% to $53.8 million in 1999
and 954.3% to $36.9 in 1998. The increase in 1999 is attributable to (1)
twelve months of revenue in 1999 versus nine months in 1998 for ATS,
which was acquired in the second quarter of 1998 and accounted for under
the purchase method of accounting and (2) increases from its unattended
conferencing product. Management of this segment anticipates growing
this portion of its business in which the conferencing event is fully
automated and more profitable as less labor costs are required to
support and maintain.
. Retail calling card services revenues decreased 35.9% to $37.2 million
in 1999 and increased 4.9% to $58.0 million in 1998. The decrease in
1999 is attributable to (1) the exiting of unprofitable prepaid calling
card programs in the third quarter of 1998, (2) management's decision in
the first quarter of 1998 to discontinue its unprofitable direct
response advertising in in-flight magazines for its Worldlink calling
card and (3) management's decision in 1999 to discontinue unprofitable
direct response advertising of its Worldlink calling card program with
its co-branding partners. In the third quarter of 1999, management
decided not to acquire any new customers in this segment because it
determined that the cost of acquiring such customers outweighed the
revenues generated from these customers. Management expects that further
decreases in revenue will occur in this segment as operations
discontinue. Management is currently seeking potential buyers for this
customer base. The increase in 1998 is attributable to growth in the co-
branding and collegiate distribution channels for calling card services,
offset by declines in its in-flight magazine distribution channel.
Gross Margins
Consolidated gross profit margins were 71.7%, 69.6% and 72.1% in 1999, 1998
and 1997, respectively. Gross margins in the Company's operating segments are
as follows:
Xpedite gross profit margins were 68.3%, 64.9% and 80.0% in 1999, 1998, and
1997, respectively. Gross margins increased in 1999 due to decreases in per
minute telecommunications rates for the Xpedite worldwide network. Lower
telecommunications costs have become the general industry trend over the past
two years. Gross margins were higher in 1997 because this segment's business
that year was primarily composed of local based voice messaging business in
Asia/Pacific, which has inherently higher gross margins due to the absence of
per minute long distance charges. Gross margins declined in 1998 due to the
acquisition of Xpedite Systems, Inc., which had inherently lower gross margins
due to the presence of per minute long distance charges.
VoiceCom gross profit margins were 79.8%, 81.1% and 80.9% in 1999, 1998 and
1997, respectively. Gross margins declined in 1999 primarily due to the
expiration of the MCIWorldcom revenue commitments, offset by lower fixed
telecommunications costs, which is a general industry trend. Gross margins
increased in 1998 due to a better mix of local based messaging revenues versus
800 based corporate messaging services and lower fixed telecommunications
costs.
Premiere Conferencing gross profit margins were 78.3%, 77.0%, 70.0% and in
1999, 1998 and 1997, respectively. Gross margins increased in 1999 due to
better pricing in the product mix, along with lower per
28
minute telecommunications costs, which is a general industry trend. Gross
margins increased in 1998 due primarily to the acquisition of ATS in the second
quarter of 1998. Previously in 1997, the conferencing business was primarily
from VoiceCom Systems, Inc., which had telecommunication per minute rates with
providers that were significantly higher than those of ATS.
Retail calling card services gross profit margins were 56.2%, 48.1% and 44.3%
in 1999, 1998 and 1997, respectively. Gross margins increased in 1999 due to
(1) the exit of prepaid calling card business in the third quarter of 1998,
which had inherently lower gross margins due to the mix of this business being
primarily international and (2) lower per minute telecommunications rates
offered by its telecommunications providers. The increase in 1998 was due
primarily to lower per minute telecommunications rates offered by its
telecommunications providers. Lower telecommunications costs have become the
general industry trend over the past two years.
Direct operating costs
Consolidated direct operating costs as a percent of revenues were 15.1%,
12.1% and 7.8% in 1999, 1998 and 1997 respectively. The increase in direct
operating costs in 1998 as a percent of revenue is primarily attributable to
the acquisition of ATS, which inherently carries a higher percentage of direct
operating costs to revenue versus the other operating segments of the Company
due to the labor-intensive nature of its service delivery associated with its
attended conference calling revenues. Direct operating costs for Premiere
Conferencing are approximately 38% of revenues. This increase was offset in
part by reduced operating costs in the Voicecom segment from 1997 to 1998 due
to the restructuring of Voice-Tel's operations infrastructure. The estimated
annualized impact on this reduction was approximately $8.0 million, of which
approximately $4.0 would have been immediately recognized in 1997. See the
restructuring, merger and other special charges section of this discussion for
further details. The increase in 1999 versus 1998 is attributable to (1) the
growth in the mix of Premiere Conferencing business from 8.3% of consolidated
revenues in 1998 to 11.7% of consolidated revenues in 1999 and (2) decreases in
messaging revenues, as outlined in the revenue section of this discussion,
creating a higher percentage of fixed facilities costs to support the existing
revenue base.
Direct sales and marketing
Consolidated direct sales and marketing costs as a percent of revenues were
23.5%, 24.6% and 24.4% in 1999, 1998 and 1997 respectively. The decrease in
direct sales and marketing costs as a percentage of revenues in 1999 is
attributable to a reduction of 122 employees related to duplicative sales force
in the Voicecom segment as part of the Xpedite acquisition. This duplicative
sales force reduction reduced annualized sales and marketing costs by
approximately $6.0 million. Also contributing to this reduction was
management's exit of direct response advertising in in-flight magazines in its
retail calling card unit in the third quarter of 1998. Management exited this
activity due to the increased costs to acquire customers through this channel
due to saturation of this marketing channel. Direct sales and marketing costs
as a percentage of revenues remained relatively flat between 1998 and 1997.
Research and development
Consolidated research and development costs as a percent of revenues were
2.6%, 1.2% and 0.8% in 1999, 1998 and 1997, respectively. Research and
development costs as a percentage of revenue have increased from 1997 to 1999
as a result of the Company's efforts in developing and bringing to market its
Orchestrate(R) product. In 1998, the Company increased efforts to bring to
market the first version of Orchestrate(R), which was rolled out in the second
quarter of 1998. These costs increased significantly in 1999 as the Company
increased efforts to develop and bring to market its latest version of
Orchestrate(R), called Orchestrate(R) 2000, which management believes will be
ready for market in 2000. These cost increases in 1999 were driven primarily
from the acquisition of Intellivoice Communications, Inc., which was the
primary developer of Orchestrate(R) 2000, and the Sun Microsystems agreement,
which provided the hardware and support. Orchestrate(R) is a unified messaging
product which combines voice, fax and e-mail messaging together on your
computer via the Internet or from your telephone. In addition, Orchestrate(R)
provides features such as contact manager, calendars and personalized portals
to the Internet.
29
General and administrative
Consolidated general and administrative costs as a percent of revenues were
21.9%, 17.8% and 13.0% in 1999, 1998 and 1997, respectively. Excluding one-time
events surrounding approximately $16.1 million of one-time charges in the
second quarter of 1998 and $13.1 million in 1999, consolidated general and
administrative costs as a percent of revenues were 19.1%, 14.2% and 13.0% in
1999, 1998 and 1997, respectively.
These one-time events in the second quarter of 1998 consisted of $8.4 million
of bad debt expense related to bankruptcies of two wholesale calling card
customers, $2.3 million of start-up costs, primarily executive compensation,
incurred in the start-up of Orchestrate(R), $1.5 million related to stay
bonuses earned in connection with the post-merger period of the Xpedite
acquisition and $3.9 million of asset impairment and other costs.
The one-time events in 1999 consisted of restricted stock grants to certain
executives of a limited number of Company-owned shares held in certain
strategic equity investments. These Company-owned shares included
168,000 shares of WebMD Series E Common Stock and 6,461 shares of WebMD
Series F Preferred Stock, and 70,692 shares of USA.NET Series C Preferred
Stock. The vesting periods for these shares ranged from immediately upon grant
to three years, contingent on the executive being employed by the Company.
Excluding the shares subject to these restricted stock grants, the Company
owned an aggregate of 1,932,000 shares of WebMD Series E Common Stock and
74,305 shares of WebMD Series F Preferred Stock, which represented and was
exchanged for 4,804,384 shares of common stock of Healtheon/WebMD, and 812,960
shares of USA.NET Series C Preferred Stock. In connection with this action the
Company recorded $13.1 million of non-cash expense related to the partial
vesting of these grants. The Company will be required to record additional non-
cash charges of $1.3 million in 2000, $138,000 in 2001 and $154,000 in 2002,
reflecting the remaining vesting period associated with these grants.
General and administrative costs, excluding one-time charges, increased in
1998 from 13.0% of revenue in 1997 to 14.2% in 1998. This increase was
primarily driven by costs to build out increased corporate infrastructure, such
as increased rent and salaries, and was offset in part by reduced general and
administrative costs in the Voicecom unit as part of the reduction in field
administrative functions of the Voice-Tel acquisition. The estimated annualized
salary savings from the reduction in field administrative functions was
approximately $6.2 million. See the restructuring, merger and other special
charges section of this discussion for further details. Also contributing to
this increase was the loss of certain revenue, as outlined in the revenue
section of this discussion, without the loss of certain fixed general and
administrative costs, such as facilities costs and support personnel. The
significant increase in general and administrative costs in 1999 as a percent
of revenue from 14.2% to 19.1% was primarily driven by (1) significant revenue
reductions in the Voicecom and retail calling card units as outlined in the
revenue section of this discussion and (2) the continued build out of the
Company's corporate infrastructure in late 1998 and early 1999. Both of these
factors combined to outweigh gains made from the administrative reductions
realized as part of the restructuring plans of the Voice-Tel and VoiceCom
Systems, Inc. acquisitions. Realizing this continued trend, management acted in
the third quarter of 1999 on an aggressive workforce reduction at its Corporate
unit to reverse this unfavorable trend going into 2000.
Approximately $13.1 million of annualized salary and wage savings will be
realized from the third quarter 1999 restructuring plan. For a further outline
of this plan, see the restructuring, merger and other special charges section
of this discussion.
Depreciation
Consolidated depreciation as a percent of revenues was 15.3%, 10.4% and 8.5%
in 1999, 1998 and 1997, respectively. Depreciation in the Company's operating
segments are as follows:
. Xpedite depreciation costs were 5.9% and 8.4% of segment revenues in
1999 and 1998, respectively. The decrease in expense as a percent of
revenues is primarily due to increased business on existing capacity of
the document distribution network and the aging of the network without
significant capital additions to increase the capacity.
30
. Voicecom depreciation costs were 13.7%, 12.6% and 10.1% of segment
revenues in 1999, 1998 and 1997, respectively. The increase in expense
as a percent of revenues from 1997 to 1999 is attributable to an
increase in available capacity due to the revenue decreases, as outlined
in the revenue section of this discussion.
. Premiere Conferencing depreciation costs were 7.8% and 5.7% of segment
revenues in 1999 and 1998, respectively. The increase in expense as a
percent of revenues from 1998 to 1999 is attributable to increased
capital additions as this segment made significant upgrades during 1998
and 1999 to its unattended conferencing platform, which management of
this segment expects to grow over the next several years.
. Retail calling card depreciation costs were 87.6%, 14.1% and 4.9% of
segment revenues in 1999, 1998 and 1997, respectively. The increase in
expense as a percent of revenues from 1997 to 1999 is attributable to
(1) significant declines in the revenue base as outlined in the revenue
section of this discussion, which created significant excess capacity on
this network platform and (2) management's decision in the fourth
quarter of 1998 to reduce the remaining useful life of certain equipment
from two to five years down to twelve to fifteen months, which resulted
from managements' decision in the third quarter of 1999 to cease
acquiring new customers in this segment and exit this business.
. Corporate depreciation costs were $1.6 and $0.2 million in 1999 and
1998, respectively. The increase in these costs were attributable
primarily to the installation of new management information systems, new
financial management systems and increased computer equipment purchases.
The new computer equipment purchases were due in part to the
infrastructure build out at the corporate level during 1998 and early
1999. The new management information systems and financial systems were
put in place as an overall consolidation of the various legacy systems
acquired through the acquisitions of Voice-Tel, VoiceCom Systems, Inc.,
ATS and Xpedite and to address Year 2000 concerns.
Amortization
Consolidated amortization as a percent of revenues was 21.6%, 14.7% and 0.8%
in 1999, 1998 and 1997, respectively. The increase in amortization expense in
1998 was due to (1) the acquisition of Xpedite, ATS and various international
acquisitions, (2) the shortening of the estimated useful economic life of the
MCIWorldcom strategic alliance contract from 25 to three years during the
fourth quarter of 1998, as discussed in Note 6--"Strategic Alliance Contract"
and in the restructuring, merger and other special charges section of this
discussion and (3) the shortening of the estimated useful economic life of
existing goodwill and customer lists from the Voice-Tel and ATS acquisition
from 5 to 40 years to 3 to 7 years during the fourth quarter of 1998. The
increase in 1999 was due to (1) twelve months in 1999 versus ten months in 1998
of amortization related to Xpedite, (2) twelve months in 1999 versus nine
months in 1998 of amortization related to ATS, in addition to a full year of
amortization under shortened lives in 1999 versus three months in 1998, (3) a
full year of amortization in 1999 under a shortened life related to the
MCIWorldcom strategic alliance contract versus three months in 1998, (4) a full
year of amortization of Voice-Tel goodwill and customer lists under shortened
lives versus three months in 1998 and (5) additional amortization from the
acquisitions of Xpedite's French affiliate in the second quarter of 1999 and
the acquisition of Intellivoice in the third quarter of 1999, both accounted
for under the purchase method of accounting.
Net interest expense
Net interest expense increased to $24.7 million in 1999, from $14.7 million
in 1998 and $0.9 million in 1997. Net interest expense increased in 1999 mainly
due to the following factors:
. Increased average borrowings in 1999 versus 1998 under the Company's
revolving line of credit facility that was assumed as part of the
acquisition of Xpedite in February of 1998.
. Reduced interest income on the average balance of marketable securities
in debt and mutual funds that the Company held during 1999 versus 1998.
31
Substantially all of the debt assumed in the acquisition of Xpedite was
associated with a short-term revolving loan facility maintained by Xpedite. In
December 1998, the Company amended and restated this facility for a one-year
period. As discussed in "Liquidity and Capital Resources," the Company has paid
off and terminated this short-term revolving loan facility at December 15,
1999. The increase in average borrowings on the line of credit were primarily
due to certain international acquisitions in 1999 and capital expenditures used
in developing the Company's new Orchestrate(R) operating system for 2000. The
reduced interest income on marketable securities was due to the Company's
liquidation of certain debt and mutual fund holdings in the early part of 1998,
which was used, in part, to fund investments in PTEKVentures and general
capital expenditure needs.
Net interest expense increases in 1998 versus 1997 were primarily due to the
following factors:
. Interest associated with the $132.8 million of debt assumed in the
acquisition of Xpedite in February of 1998 and $5.9 million of debt
assumed in the acquisition of ATS in April of 1998.
. Reduced interest income on the average balance of marketable securities
in debt and mutual funds that the Company held during 1998 versus 1997.
The Company held $154.6 million in 1997 and $20.8 million in 1998 of
marketable securities, primarily debt and mutual funds. The reduction in
these securities was primarily due to the acquisition of ATS, deal costs
associated with the acquisitions of Xpedite and ATS and investments in
companies that have since become investments in PTEKVentures.
Accrued settlement costs
Accrued settlement costs were $1.5 million in 1998 and 1997. See Note 17--
"Commitments and Contingencies" of the Notes to the Consolidated Financial
Statements and "Legal Proceedings" under Item 3 of Part I of this document for
further information about the matters giving rise to these costs.
Acquired research and development costs
Acquired research and development costs of $15.5 million expensed in 1998
were associated with the acquisition of Xpedite. This cost represents the value
assigned to research and development projects in the developmental stage, which
had not reached technological feasibility at the date of the acquisition. The
acquired research and development was valued using the income approach, which
consisted of estimating the expected after-tax cash flows attributable to this
asset over its life and converting this after-tax cash flow to present value
through discounting. See Note 7--"Acquisitions" in Notes to Consolidated
Financial Statements for additional information.
EBITDA
Consolidated EBITDA before accrued settlement costs, acquired research and
development costs and restructuring, merger and other special charges was $38.8
million or 8.5% of revenues in 1999, $61.8 million or 13.9% or revenues in
1998, and $60.1 million or 26.2% of revenues in 1997.
. Xpedite EBITDA was $61.2 million or 25.3% of segment revenues,
$54.1 million or 27.5% of segment revenues and $(0.1) million or (2.6)%
of segment revenues in 1999, 1998 and 1997, respectively. The increase
in EBITDA from 1997 to 1998 was primarily driven by the acquisition of
Xpedite in February of 1998. Prior to the acquisition of Xpedite, this
segment was composed of the messaging business of Voice-Tel in Australia
and New Zealand. The increase in EBITDA to $61.2 million in 1999 was
related to twelve months of operating results for Xpedite versus ten
months in 1998. The decline as a percent of revenue was primarily driven
by lower EBITDA acquisitions made in Europe in the latter half of 1998
and the first half of 1999, along with start up costs associated with
the acquisition of a customer list in the Asia/Pacific region of this
business unit. Management of this segment has focused their efforts in
Europe with the installation of new management focused on bringing the
European acquisition's EBITDA more in line with EBITDA of base
operations.
32
. Voicecom EBITDA was $16.8 million or 13.4% of segment revenues, $51.0
million or 33.4% of segment revenues and $67.7 million or 40.6% of
segment revenues in 1999, 1998 and 1997, respectively. The decrease in
EBITDA in 1999 is attributable to (1) the expiration of revenue
commitments from the MCIWorldcom strategic alliance contract in which
little or no telecommunications or selling, general or administrative
costs existed in this high margin offering, (2) increased research and
development costs associated with Orchestrate(R), (3) decreases in high
margin messaging revenues with very little or no selling, general or
administrative costs associated, such as the Amway distribution channel
and certain corporate messaging customers in which the Company provides
only maintenance services and (4) the bankruptcy of two significant high
margin wholesale calling card customers in which the Company incurred
very little or no telecommunications costs or selling, general or
administrative costs. These decreases were offset, in part, by
administrative and customer service workforce reduction as part of the
restructuring plan associated with the reorganization of the Company
into CES and EES during the fourth quarter of 1998. For a further
discussion of this reorganization plan, see the restructuring, merger
and other special charges section of this discussion. The decrease in
EBITDA in 1999 was, to a lesser extent, caused by the same conditions
which drove the decrease in 1999, along with bad debt expenses
associated with the bankruptcy of two wholesale calling card customers.
. Premiere Conferencing EBITDA was $9.0 or 16.7% of segment revenues, $7.0
or 19.0% of segment revenues and $0.7 million or 20.0% of segment
revenues in 1999, 1998 and 1997, respectively. Conferencing revenue in
1997 was primarily from the unattended conferencing product offering
from VoiceCom. The increase in 1998 was driven from the acquisition of
ATS in the second quarter of 1998. The increase in EBITDA in 1999 was
primarily driven from twelve months of operations for ATS versus nine
months of operations in 1998. The decline in EBITDA as a percent of
revenue in 1999 is due to start-up costs associated with sales and
marketing efforts in growing the segment's unattended conferencing
product offering.
. Retail calling card EBITDA was $(5.8) million or (15.6)% of segment
revenues, $(22.1) million or (38.1)% of segment revenues and
$(3.1) million or (5.6)% of segment revenues in 1999, 1998 and 1997,
respectively. The decrease in negative EBITDA in 1999 is attributable
(1) the exiting of unprofitable prepaid calling card programs in the
third quarter of 1998, (2) management's decision in the first quarter of
1998 to discontinue its unprofitable direct response advertising in
in-flight magazines for its Premiere Worldlink calling card and
(3) management's decision in 1999 to discontinue unprofitable direct
response advertising of its Premiere Worldlink calling card program with
its co-branding partners. In the third quarter of 1999, management
decided not to acquire any new customers in this segment because it
determined that the cost of acquiring such customers outweighed the
revenues that these customers could generate for the Company. Management
expects that further decreases in revenue will occur in this unit as
operations wind down. However, management expects that EBITDA will be
break even, absent any costs to acquire customers. Management is
currently seeking potential buyers for this customer base. The increase
in negative EBITDA from 1997 to 1998 was attributable to (1) prepaid
calling card programs, (2) direct response advertising of the Premiere
Worldlink calling card in in-flight magazines and (3) co-branding
relationships to co-market the Premiere Worldlink calling card. All
three programs came under extreme pricing pressures from competitors and
the cost to acquire a customer quickly became greater than the expected
benefit gained over the life of that customer. Accordingly, management
exited the first two programs in 1998 and decided in the third quarter
of 1999 to cease acquiring any new customers.
. Corporate EBITDA was $(42.1) million or (9.2)% of consolidated revenues,
$(28.2) million or (6.3)% of consolidated revenues and $(5.1) million or
(2.2)% of consolidated revenues in 1999, 1998 and 1997, respectively.
Excluding one-time costs of $12.3 million in 1999 and $9.3 million in
1998, EBITDA for those two years would have been $29.8 million or (6.5)%
of consolidated revenues and $18.9 million or (4.2)% of consolidated
revenues. One time costs in 1999 were related to costs associated with
restricted stock grants to certain executives of the Company, as
discussed further in
33
Note 16--"Related Party Transactions." One time costs in 1998 were
associated with a note receivable write-off associated with the
bankruptcy of a strategic wholesale calling card partner, start-up
costs, primarily executive compensation, incurred in the start-up of its
Orchestrate.com, Inc. subsidiary, stay bonuses earned in connection with
the post-merger period of the Xpedite acquisition and asset impairment
and other costs. The increase in negative EBITDA at the Corporate level
in 1998 versus 1997 was primarily driven by the build out of a corporate
infrastructure in the latter half of 1998 and the first half of 1999.
The increase in negative EBITDA in 1999 versus 1998 is a continuation of
the build out of the corporate infrastructure through the third quarter
of 1999. In the third quarter of 1999, management reorganized the
Company into a decentralized business model placing many of the
corporate functions being built up in the corporate infrastructure back
into the new decentralized operating segments. In many cases these
corporate costs were duplicative or deemed unnecessary when pushed down
into each operating segment. Accordingly, management expects significant
cost savings from this third quarter restructuring. For a further
discussion, see the restructuring, merger costs and other special
charges section of this discussion.
Effective income tax rate
In 1999, the Company's effective income tax rate varied from the statutory
rate, primarily as a result of nondeductible goodwill amortization associated
with the Company's acquisitions in 1998 and 1999, which have been accounted for
under the purchase method of accounting. In 1998, the Company's effective
income tax rate varied from the statutory rate primarily as a result of
nondeductible goodwill amortization associated with the Company's acquisitions,
which have been accounted for under the purchase method of accounting. In 1997,
the Company's effective tax rate varied from the statutory rate due to certain
non-taxable investment income and income of Voice-Tel entities, which had
elected to be treated as S-Corporations under U.S. tax law prior to their
acquisition by the Company. See Note 18--"Income Taxes" in the Notes to
Consolidated Financial Statements for additional information.
Liquidity and capital resources
Operating cash flows and working capital--Consolidated operating cash flows
were $9.9 million, $22.2 million and $27.2 million in 1999, 1998 and 1997,
respectively. Excluding payments for restructuring, mergers and other special
charge activities, operating cash flows would have been $18.8 million,
$37.2 million and $53.8 million in 1999, 1998 and 1997. Reduced operating cash
flows from 1997 to 1998 of approximately $13 million was attributable to the
expansion of the Company's corporate infrastructure, a decline in the revenues
of a significant messaging customer, a decline in revenues from the Company's
MCIWorldCom strategic alliance, loss of revenues from two significant wholesale
calling card customers, the addition of resources to develop and market the
Orchestrate(R) product and significant profit deterioration in retail calling
card services. This decline, in part, was offset by headcount reductions in the
Company's messaging unit as part of its restructuring efforts, as discussed
further in the "restructuring, merger and other special charges" section of
this discussion. Reduced operating cash flows from 1998 to 1999 of
approximately $25.9 million is attributable primarily to the continued decline
in revenues from the Company's MCIWorldCom strategic alliance and increased
interest paid on the revolving loan facility due to increased borrowings
outstanding during 1999. Increased interest paid during 1999 versus 1998 was
approximately $13.7 million. Consolidated working capital ratios were 1.23 to 1
at December 31, 1999, as compared with .6 to 1 at December 31, 1998. The
significant improvement in working capital ratios is attributable to the
Company's repayment and termination of its revolving loan facility. On
December 15, 1999, the Company repaid and terminated its revolving loan
facility. Substantially all of the proceeds of approximately $154.4 million
from the sale of approximately 3.5 million shares of the Company's investment
in Healtheon/WebMD were used in order to pay off all outstanding borrowings on
the revolving loan facility. See Note 4--"Marketable Securities, Available for
Sale" and Note 10--"Indebtedness" for related discussions.
34
Investing activities--Consolidated investing activities provided (used) cash
of approximately $107.2, $21.3 million and $(160.1) million in 1999, 1998 and
1997, respectively. Investing activities in the Company's segments, are
discussed below.
. Xpedite investing activities (used) cash of $(14.7), $(11.8) million in
1999 and 1998, respectively. Investing activities in this unit for both
years were primarily replacement of dated equipment in the existing
network.
. Voicecom investing activities (used) cash of $(9.5) million,
$(25.7) million and $(22.0) million in 1999, 1998 and 1997,
respectively. Investing activities in this unit for 1999 were primarily
for equipment and software purchases to develop the latest version of
Orchestrate(R), Orchestrate(R) 2000, and replacement of dated equipment
in the voice mail network. In addition, this segment received
approximately $7.9 million of cash in connection with a note receivable
from a wholesale calling card customer. Investing activities in 1998 and
1997 were primarily expansion of the switching network facilities in
addition to expansion of the Atlanta headquarters of this segment.
. Premiere Conferencing investing activities (used) cash of $(9.7) and
$(7.3) million in 1999 and 1998, respectively. Investing activities in
1998 were primarily for replacement of dated equipment in the
conferencing network. Investing activities in 1999 were primarily for
expansion of the conferencing network for unattended conferencing that
is the primary growth product offering for this unit and the build out
of this segment's new headquarters.
. Retail calling card investing activities (used) cash of $0.0 million,
$(11.2) million and $(11.4) million in 1999, 1998 and 1997,
respectively. Investing activities in 1997 and 1998 were primarily for
replacement of dated switching equipment in the retail calling card
network. No capital expenditures were incurred in 1999 due to
management's decision to exit major marketing channels in 1999 and the
eventual decision to cease acquiring customers in the third quarter of
1999.
. Corporate investing activities (used) provided cash of $(11.4), $50.9
and $(98.8) in 1999, 1998 and 1997, respectively. Cash used in 1999 was
for the acquisitions of the Company's French affiliate, Xpedite France,
S.A., and Intellivoice Communications, as well as for investments in
Webforia, S-1 and Derivion at cost, which are now part of the
PTEKVentures portfolio. For a further discussion of the investments of
PTEKVentures, see Note 5--Investments in Affiliates, at Cost and
Note 4--Marketable Equity Securities, Available For Sale. These
acquisitions and investments have been offset in part by the redemption
of various marketable securities in municipal obligations and mutual
funds that were held during the year. Cash provided in 1998 resulted
primarily from the redemption of various marketable securities in
municipal obligations and mutual funds. These redemptions, in part,
helped to fund the capital expenditure needs of various operating
segments, to acquire ATS, to make the initial investment in Intellivoice
Communications, to acquire various international fax businesses, which
have become part of Xpedite, and to invest in the portfolio of companies
that now make up PTEKVentures. The companies invested in during 1998,
which are now in the PTEKVentures portfolio, were WebMD, Vertical One
(now owned by SI), USA.NET and Webforia. Cash used in 1997 was
attributable to the purchase of municipal obligations and mutual funds
from the proceeds of the Company's $172.5 million convertible
subordinated note issuance. These municipal obligations and mutual funds
were redeemed, in part, to fund capital expenditure needs of the
operating segments and to fund restructuring, merger and other special
charge activity in 1997. In addition, the Company used funds to purchase
various franchises under the Voice-Tel acquisition in 1997.
. PTEKVentures investing activities provided cash of $152.4 million in
1999. Cash provided in 1999 was from the redemption of approximately
3.5 million shares of Healtheon/WebMD. The proceeds from this redemption
were used, in substantial part, to pay off the Company's revolving loan
facility. In addition, PTEKVentures made an additional investment in an
existing portfolio company, Webforia, of approximately $2.0 million.
35
Financing activities--Consolidated financing activities (used) provided cash
of approximately $(120.9), $(46.1) million and $138.7 million in 1999, 1998 and
1999, respectively. Financing activities are managed in the Company's Corporate
segment. The Company's principal financing activities in 1997 included the
issuance of convertible subordinated notes of $172.5 million, net of
$6.0 million of debt issue costs, the reduction of $29.5 million debt acquired
from Voice-Tel and VoiceCom, distributions of $9.4 million related primarily of
S-Corporation distributions from the acquisition of Voice-Tel and $13.8 million
of proceeds from employee stock option exercises. The Company's principal
financing activities in 1998 were payments of $29.8 million on its revolving
loan facility, $9.1 million from the Company's purchase of approximately
1.1 million shares of its stock under its stock repurchase program and the
payment of $5.5 million of the proceeds from the previous years employee stock
options for employer taxes associated with those employee options. The
Company's principal financing activity in 1999 was the repayment and
termination of its revolving loan facility on December 15, 1999. This loan
facility was paid off from the redemption of 3.5 million shares of its
investment in Healtheon/WebMD. The proceeds from this redemption were
approximately $154.4 million. Annualized interest savings from the loan
facility repayment will be approximately $18.0 million annually.
At December 31, 1999, the Company's principal commitments involve minimum
purchase requirements under supply agreements with telecommunications
providers, severance payments to former executive management under the
Company's various restructuring plans, lease obligations, commitments under its
strategic alliances with Healtheon/WebMD and Sun Microsystems, semi-annual
interest on the convertible subordinated debt and notes payable to former
owners of acquired companies. The Company is in compliance with all such
agreements at this date. See also Note 10--Indebtedness and Note 17--
Contingencies and Commitments in the Notes to Consolidated Financial
Statements. The Company maintains a margin loan account with a certain
investment bank where it can borrow up to 45% and 50% of the Company's holdings
in Healtheon/WebMD and S-1 Corporation, respectively. Interest rates on
borrowings under this margin loan arrangement are based on the broker call
rate. At December 31, 1999, the Company had no borrowings outstanding on the
margin loan arrangement.
Management believes that cash and marketable securities, available for sale
and cash flows from operations should be sufficient to fund the Company's
capital expenditure requirements of its operating units and investment
initiatives of PTEKVentures. 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, form time to time, engage capital transactions,
including debt or equity issuances, in order to increase the Company's
financial flexibility and meet other capital needs.
Restructuring, Merger Costs And Other Special Charges
Between the second quarter of 1997 and the fourth quarter of 1998, The
Company made several acquisitions, including the acquisitions of Voice-Tel,
VoiceCom Systems, Inc. and Xpedite. In connection with these acquisitions,
management formulated separate plans to exit activities of those acquired
companies or to exit activities of existing Company operations. The Company
also incurred substantial transaction costs in connection with these
acquisitions. Accordingly, the Company expensed the costs associated with these
management plans and the associated transaction costs. In the second quarter of
1997, the Company recorded costs of $40.0 million in connection with its
acquisition of Voice-Tel, which was accounted for as a pooling-of-interests and
which became part of the EES operating unit. In the third quarter of 1997, the
Company recorded costs of $14.1 million in connection with its acquisition of
VoiceCom Systems, Inc., which was accounted for as a pooling-of-interests and
whose operations became part of the CES operating unit. In the first quarter of
1998, the Company recorded costs of $4.5 million associated with management's
plan to close existing activities of both the Voice-Tel and VoiceCom
acquisitions that were duplicative of those of Xpedite and were not part of any
exit plans associated with those previous acquisitions. Also in the first
quarter of 1998, the Company expensed costs to exit certain activities existing
in its Enhanced Calling Card operations that became part of the EES operating
unit. During the fourth quarter of 1998, the Company recorded a $17.8 million
write-off as part of management's quarterly assessment of the carrying value of
its strategic investments. Certain investments
36
were deemed permanently impaired and accordingly written down to fair value.
Also, during the fourth quarter of 1998, management recorded an $11.4 million
charge in connection with its reorganization of the Company into two operating
units, EES and CES. As part of this reorganization into two business units,
management abandoned its earlier plans to integrate the services and products
acquired in the acquisitions of Voice-Tel, VoiceCom Systems, Inc. and Xpedite
onto a single unified service platform and decided not to exit certain
duplicative services and products. Accordingly, management amended or ceased
certain exit plans that were originally established during these prior
acquisitions resulting in the reduction of $9.7 million of existing
restructuring reserves. A detailed discussion of the components of the costs
for each of these plans is set forth below.
During the third quarter of 1999, management decentralized the Company
further into six segments consisting of Voicecom (formerly in the EES and CES
groups), Xpedite (formerly in the CES group), Premiere Conferencing (formerly
in the CES group), Retail Calling Card Services (formerly in the EES group),
PTEKVentures and Corporate. As part of this reorganization, management
continued its movement away from integrating its service offerings onto a
single unified service platform by further decentralizing the organization from
two customer based operating units, EES and CES, into smaller product based or
functional cost-based operating segments. The primary focus of this plan was to
eliminate a significant portion of the Corporate overhead. In connection with
this reorganization, management recorded a charge of $8.2 million.
Voice-Tel Acquisition
In the second quarter of 1997, the Company recorded restructuring, merger
costs and other special charges of approximately $40.0 million in connection
with its pooling-of-interests with Voice-Tel. These charges result from
management's plan to restructure the operations of the Voice-Tel businesses
under a consolidated business group model and discontinue its franchise
operations. Such amounts consist of $9.5 million of severance and exit costs,
$3.1 million of contractual obligations, $17.2 million of transaction
obligations, $3.1 million of asset impairments and $7 million of other costs,
primarily to exit facilities and certain activities.
Severance and exit costs are attributable to the termination of 234 employees
primarily associated with the former owners and administrative functions of the
Voice-Tel franchise organization that management is reorganizing under a
corporate structure. Severance and exit costs are cash outlays. In 1997 and
1998, the Company paid severance and exit costs of $4.5 million and
$2.0 million, respectively. Employees terminated under this plan in 1997 and
1998 were 129 and 57, respectively. Total estimated annual savings from these
terminations in 1997 and 1998 was approximately $14.2 million. Severance and
exit costs attributable to 48 employees was recognized in the fourth quarter of
1998, which is discussed below under "--Reorganization of Company into EES and
CES Business Units."
Contractual obligations are primarily lease termination costs associated with
the closure of equipment site locations in the Voice-Tel voice messaging
network. Contractual obligations are cash outlays. In 1997 and 1998, the
Company paid contractual obligation costs of $0.4 million and $0.2 million,
respectively. In the fourth quarter of 1998, management revised their plan
regarding the equipment site closures by reducing the number of sites to be
closed, as discussed below under "--Reorganization of Company into EES and CES
Business Units."
Management initially planned to move the Voice-Tel voice messaging network to
the unified messaging platform that the Company was developing. This transition
to the new unified messaging platform was intended to allow for the elimination
of 100 voice mail equipment sites.
This portion of the VoiceTel restructuring plan changed during 1998 for three
reasons. First, development of the unified messaging platform was delayed due
to system customization issues, which delayed the closing of equipment sites.
Second, the voice mail equipment manufacturer developed a Year 2000 software
solution and agreed to support the Company's equipment, which eliminated the
need to replace the existing equipment. Third, the Company decided to
reorganize into two strategic business units, CES and EES, which would focus on
large corporations and smaller enterprises, respectively. Since CES and EES
each contained distinct portions of the
37
legacy platforms acquired, management decided to use those legacy platforms
rather than complete the unified messaging platform. Therefore, as part of this
reorganization, the management for the two new business units determined that
their customers would be better served, and the Company would optimize
operating profits, by continuing to use the existing voice mail equipment and
maintaining substantially all of the equipment sites. See discussion below
under "--Reorganization of Company into EES and CES Business Units."
Transaction obligations are primarily cash outlays for professional services
rendered surrounding the activities of acquiring Voice-Tel and are comprised of
investment banker fees, legal fees, accounting and tax fees and other
consulting services. The Company paid transaction obligations in 1997 and 1998
of $13.1 million and $3.5 million, respectively. Management does not anticipate
additional transaction obligation cash outlays beyond 1998.
Asset valuation allowances relate primarily to administrative site equipment
and leasehold improvements associated with the closure of various
administrative sites in the former franchise organization. Non-cash asset
write-down's against this valuation allowance in 1997 and 1998 were
$0.4 million and $1.4 million, respectively. Management revised their plan in
the fourth quarter of 1998 regarding the plan to close the Cleveland
headquarters of Voice-Tel by postponing closure of that site until 1999.
Accordingly, management reversed the valuation allowance of $1.3 million
associated with this office. Management does not expect any additional write-
downs of equipment beyond 1998 associated with this plan. The annual reduction
in depreciation expense as a result of such disposals is approximately
$0.9 million.
Other costs, primarily to exit facilities and certain activities are
primarily related to office closure clean up costs, costs to terminate
contractual arrangements between franchisors and franchisees in the franchise
network, outplacement service costs associated with termination of employees,
costs to consolidate the financial statements of the acquired franchisor and
the related franchisees, and professional fees associated with predecessor
franchise tax and pension matters. All such costs are cash outlays. The Company
paid other costs in 1997 and 1998 of $6.1 million and $0.9 million,
respectively. Management does not anticipate additional costs beyond 1998 under
this plan.
In the fourth quarter of 1998, management revised this plan, as discussed
below under "--Reorganization of Company into EES and CES Business Units." All
cash outlays for this plan were funded from cash flows from operating
activities and cash and marketable securities investments on hand.
VoiceCom Systems, Inc. Acquisition
In the third quarter of 1997, the Company recorded restructuring, merger cost
and other special charges of approximately $14.1 million in connection with its
pooling-of-interests with VoiceCom Systems, Inc. These charges resulted from
management's plan to restructure the operations of VoiceCom Systems, Inc. by
reducing its workforce and exiting certain facilities. Such amounts consist of
severance and exit costs of $2.4 million, contractual obligations of
$2.3 million, transaction obligations of $2.9 million, asset impairments of
$3.1 million and other exit costs, primarily to exit facilities and certain
activities of $3.4 million.
Severance and exit costs are attributable to the termination of 84 employees.
Severance and exit costs are cash outlays. In 1997 and 1998, the Company paid
severance and exit costs of $1.2 million and $1.2 million, respectively, on the
termination of the 84 employees. Total estimated annualized savings from these
terminations is approximately $3.0 million.
Contractual obligations consist primarily of lease termination costs to exit
certain facilities. In 1997 and 1998, the Company paid contractual obligations
associated with these lease terminations of $0.1 million and $1.2 million,
respectively. During the fourth quarter of 1998 management completed all lease
terminations of certain facilities at lower than expected costs and accordingly
reversed any remaining accrued obligations associated with these contracts.
Management's revised plans are discussed below under "--Reorganization of
Company into EES and CES Business Units."
38
Transaction obligations are primarily cash outlays for professional services
rendered surrounding the activities of acquiring VoiceCom Systems, Inc. and are
comprised of investment banker fees, legal fees, accounting and tax fees and
other consulting services. The Company paid transaction obligations in 1997 and
1998 of $2.0 million and $0.7 million, respectively. Management does not
anticipate additional transaction obligation cash outlays beyond 1998.
Asset valuation allowances relate primarily to certain administrative assets
associated with facility closures, all of which were held for disposal. In 1997
and 1998, non-cash write-offs of administrative assets were $2.1 million and
$1.0 million, respectively. Management does not expect additional write-downs
of equipment beyond 1998 associated with this plan. The annual reduction in
depreciation expense as a result of the disposals is approximately
$0.6 million.
Other costs, primarily to exit facilities and certain activities is related
to office closure clean up costs and outplacement service costs associated with
termination of employees. All such costs are cash outlays. The Company paid
other costs in 1997 and 1998 of $0.5 million and $2.9 million, respectively.
In the fourth quarter of 1998, management revised this plan, as discussed
below under "--Reorganization of Company into EES and CES Business Units."
Management does not anticipate additional costs beyond 1998 under this existing
plan. All cash outlays for this plan were funded from cash flows from operating
activities and cash and marketable securities investments on hand.
Xpedite Acquisition
In the first quarter of 1998, the Company recorded restructuring, merger and
other special charges of approximately $4.5 million in connection with
management's plan to close existing activities of both the Voice-Tel and
VoiceCom Systems, Inc. operations that were duplicative of those of Xpedite and
were not part of any exit plans associated with those previous acquisitions.
Such amounts consist of severance and exit costs of $1.8 million, contractual
obligations of $0.4 million, transaction obligations of $0.8 million, asset
impairments of $0.7 million and other exit costs of $0.8 million.
Severance and exit costs consist of the termination of 122 employees
associated with administrative, operations and sales functions of Voice-Tel and
VoiceCom Systems, Inc. operations that are duplicative of existing Xpedite
operations. The Company paid severance and exit costs of $1.5 million in 1998.
Management terminated 122 employees with annualized salary savings of
approximately $6.0 million. Management does not expect any terminations
associated with this plan beyond 1998.
Contractual obligations were associated with lease termination costs of 65
former Voice-Tel and VoiceCom Systems, Inc. sales locations. Management
discontinued this plan of action in the fourth quarter of 1998 as part of the
reorganization of the Company into the EES and CES business units and,
therefore, no lease termination costs were incurred.
Transaction obligations associated with the merger were related to consulting
fees associated with the termination of the 122 employees. The Company paid
$0.7 million of such fees in 1998. Management does not anticipate additional
costs beyond 1998.
Other exit costs were primarily costs to close former Voice-Tel and VoiceCom
Systems, Inc. facilities that were duplicative to existing Xpedite facilities
and not included in either the Voice-Tel or VoiceCom Systems, Inc.
restructuring plans.
Asset impairments of $0.7 million were attributable to certain switching
equipment related to Voice-Tel that were duplicative of existing equipment at
Xpedite. The Company disposed of this duplicative equipment in 1998.
All cash outlays associated with the above plan were funded from cash flows
from operating activities and cash and marketable securities investments on
hand.
39
Management Assessment of Carrying Value of Strategic Investments
In the fourth quarter of 1998, the Company recorded a non cash charge of
$17.8 million as part of management's quarterly assessment of the carrying
value of its strategic investments. The Company recorded a $13.9 million charge
to write-down the value of its strategic alliance intangible asset with MCI
WorldCom. This charge was required based upon management's evaluation of
revenue levels expected from this alliance. The Company reevaluated the
carrying value and remaining life of the MCI WorldCom strategic alliance in
light of the expiration of certain minimum revenue requirements under the
strategic alliance agreement and the level of revenues expected to be achieved
from the alliance following the merger of WorldCom and MCI in the third quarter
of 1998. Accordingly, the Company recorded a write-down in the carrying value
of this investment based on estimated future cash flows discounted at a rate of
12%. In addition, the Company recorded a charge of $3.9 million to reduce the
carrying value of its investment in certain equity securities to fair market
value. This charge was necessitated based upon management's assessment that the
decline in the value of these securities was not temporary.
Reorganization of Company into EES and CES Business Units
During the fourth quarter of 1998, management reorganized the Company into
two operating units, EES and CES. CES would provide services to corporations
with large professional staff with communications needs and EES would provide
communications services to small office/home office, multi-level marketing
organizations and retail buyers. CES and EES would use the legacy platforms of
the merged companies that made them up. CES was comprised of Xpedite, ATS and
VoiceCom Systems, Inc., which all had large corporate customers. EES would be
comprised of the original calling card business of the Company and the voice-
messaging business of Voice-Tel. As part of this reorganization into two
business units, management abandoned its earlier plans to integrate the
services and products acquired in the acquisitions of Voice-Tel, VoiceCom
Systems, Inc. and Xpedite onto a single unified service platform and decided
not to exit certain duplicative services and products. This was driven, in
part, by the inability of a third party to assist the Company in providing a
platform that would provide functionality acceptable to the Company's
customers, and, in part, due to the lack of cross-selling product offerings
from other acquired businesses. Accordingly, management amended or ceased
certain exit plans that were originally established in connection with the
prior acquisitions discussed above. The reduction of $9.6 million in the fourth
quarter of 1998 is comprised of the following expense reversals related to
remaining reserves with respect to the following charges: $7.4 million related
to the Voice-Tel acquisition, $1.1 million related to the VoiceCom Systems,
Inc. acquisition and $1.1 million related to the Xpedite acquisition. In total,
$9.6 million of reserve was reversed, which related to the aggregate of
$58.4 million of charges. Offsetting the $9.6 million of reserve reversals in
the fourth quarter of 1998 was a fourth quarter charge of $11.4 million that
reflected management's revision of the initial restructuring plans established
in connection with each acquisition.
The major portion of the Voice-Tel restructuring plan that was abandoned was
the reduction in the number of voice messaging equipment sites from 244 to 144.
The impact of the reversal of this reserve was to increase 1998 pretax income
by $2.5 million. This portion of the plan was abandoned due primarily to delays
in developing a unified messaging platform and a new focus on customers on
existing legacy platforms as part of the EES and CES reorganization. See
discussion under "--Voice-Tel Acquisitions."
As a result of the corporate reorganization into two business units, CES and
EES, the Company revised its plan to close its Cleveland site, which was
initiated as part of the Voice-Tel restructuring plan. This closure plan was
behind schedule under the original plan due to the Company's initiatives to
close the VoiceCom Systems, Inc. corporate headquarters into Cleveland first as
an overall step to closing the VoiceCom and Voice-Tel headquarters into the
Company's Atlanta headquarters. Accordingly, new CES and EES management
postponed the closure into the first six months of 1999. The Company reversed
$1.5 million of reserve under this portion of the Voice-Tel restructuring plan,
and established $2.9 million under the new plan. The difference between the two
charges is additional severance from increased headcount at the time of the
revised plan.
40
The fourth quarter 1998 net reduction of $3.4 million in asset valuation
allowances is attributable to a reversal of $1.3 million from the Voice-Tel
acquisition and a new valuation allowance of $4.7 million under the
reorganization of the Company into two business units, EES and CES. The asset
valuation allowances not used as part of the Voice-Tel acquisition related to
the Cleveland administrative office site that management decided in the fourth
quarter of 1998 to postpone closing until 1999.
Also in the fourth quarter of 1998, the Company reversed $0.6 million of
accruals related to transaction costs that were anticipated but ultimately were
not incurred.
The new valuation allowances of $4.7 million related to certain switching
equipment associated with the Company's enhanced calling services. This
switching equipment was determined to be no longer operational due to the
reduced volume of business associated with the enhanced calling services
product and is anticipated to be disposed of within twelve months of
management's decision. These two switches were purchased by the Company in the
second quarter of 1998 but were never placed into service. They remained idle
due to the bankruptcy of two license customers that had significant volumes of
business with the Company. During the third quarter of 1998 management looked
for alternative uses for this equipment including the use in potential prepaid
calling card business and international calling card programs. During the
fourth quarter of 1998, management reorganized the Company into two business
units, CES and EES. The new management of these units decided at that time that
forecasted volume for the type of business used for these switches over the
switches useful lives would not justify the additional capacity that these
switches brought to the Company's network. Either potential buyers would be
sought or the switches would be used for spare parts on like switches in the
Company's network. Therefore the Company charged a valuation reserve in the
fourth quarter of 1998 to reduce the asset carrying value to its estimated
scrap value.
The fourth quarter 1998 net increase of $1.5 million in severance and exit
costs is attributable to a reversal of $3.0 million from the Voice-Tel
acquisition, $0.3 million related to the Xpedite acquisition and a $4.8 million
charge related to the charge taken under the reorganization of the Company into
two business units, EES and CES. The severance and exit costs not used as part
of the Voice-Tel acquisition relate to management's revision of the plan to
exit certain Voice-Tel regional administrative functions and the Voice-Tel
corporate headquarters in the fourth quarter of 1998. Under the plan to
reorganize into business units, EES and CES, additional headcount reduction and
extended timing of the closures were implemented. Under this revised plan, 48
employees were identified, which was an increase of 20 employees from the
original estimate. The annual cost savings from the revised plan is
approximately $2.5 million. Management expects completion of these exit
activities to take 12 months subsequent to the fourth quarter of 1998. The
severance and exit costs not used as part of the first quarter charge relate to
management's revision of the plan to exit a certain operational site. Under the
revised plan, management intends to exit this site within 12 months subsequent
to the fourth quarter of 1998. The annual costs savings from the termination of
19 employees and from this site closure is anticipated to be approximately
$1.0 million. The establishment of additional severance and exit costs from
various other reserve reversals is a result of management's decision in the
fourth quarter of 1998 to terminate 11 managers associated with the
acquisitions of Voice-Tel, VoiceCom Systems, Inc. and Xpedite. The estimated
annual cost savings from these terminations is approximately $2.5 million. The
severance associated with these managers is expected to be paid over one to
three years.
The fourth quarter 1998 net reduction of $3.5 million in contractual
obligations is attributable to a reversal of $2.5 million from the Voice-Tel
acquisition, $1.0 million related to the VoiceCom Systems, Inc. acquisition,
$0.4 million related to the Xpedite acquisition and a new charge of
$0.4 million taken under the reorganization of the Company into two business
units, EES and CES. The contractual obligations not used as part of the
Voice-Tel acquisition relate to management's decision not to exit certain
equipment sites and the revision of management's plan to exit the Voice-Tel
corporate headquarters. The contractual obligations not used as part of the
VoiceCom Systems, Inc. acquisition were attributable to management's ability to
sublease the former headquarters of VoiceCom Systems, Inc. to a third party for
the final year of the lease obligation. The charge taken in the fourth quarter
is associated with management's plan to exit the Voice-Tel corporate
headquarters
41
and a certain Xpedite operational site. Management expects these revised plans
to require a cash outlay within the next 12 months.
The fourth quarter 1998 net reduction of $0.9 million in transaction
obligations is attributable to a reversal of $0.6 million from the Voice-Tel
acquisition, $0.1 million related to the VoiceCom Systems, Inc. acquisition and
$0.2 million from the Xpedite acquisition. The reversals related to the
Voice-Tel, VoiceCom Systems, Inc. and Xpedite acquisition are related to actual
payments being less than anticipated by management's original estimate.
The fourth quarter 1998 net increase of $1.1 million in other costs,
primarily to exit facilities and certain activities, is attributable to a
reversal of approximately $28,000 related to the Voice-Tel acquisition,
$0.3 million related to the first quarter charge and $1.4 million related to
the charge taken as part of the reorganization of the Company into two business
units, EES and CES of various other reserve reversals. The reversals related to
both the Voice-Tel and first quarter charge are related to actual payments
being less than anticipated by management's original estimate. The charge of
$1.4 million is attributable to increased estimates of exit costs associated
with management's revised plan to terminate approximately 11 managers
associated with previous acquisitions, the exit of the Voice-Tel corporate
headquarters and the exit of various Voice-Tel regional administrative
functions. Management estimates that all such costs will be cash outlays, which
will be paid over the next 12 months.
Decentralization of Company
In the third quarter of 1999, the Company recorded restructuring, merger
costs and other special charges of approximately $8.2 million in connection
with its reorganization from the two EES and CES operating units into six
decentralized segments. The $8.2 million charge is comprised of $7.3 million of
severance and exit costs, $0.7 million of lease termination costs and
$0.2 million of facility exit costs.
Severance and exit costs are attributable to the termination of
203 employees, of which 114 employees were associated with the Voicecom
segment, 28 employees associated with the Corporate segment and 61 employees
associated with the Xpedite segment. All 203 employees have been terminated.
The 114 employees in the Voicecom segment were primarily related to the direct
sales force and executive management of the former EES operating unit. The
28 employees at Corporate were primarily related to executive financial and
administrative functions at the Corporate headquarters. The 61 employees at the
Xpedite segment were primarily associated with the operations of a closed
domestic facility and personnel in the Asia/Pacific and European regions.
Severance and exit costs are cash outlays. The Company anticipates annualized
savings of approximately $13.1 million from the termination of these
203 employees. The Company has paid $3.4 million of severance and exit costs
under this plan in 1999. Management expects to pay $3.9 million in severance
and exit costs in 2000 under this plan, related primarily to 11 former
executives from the Corporate business unit. Funding for these costs is
primarily through the operating cash flows of Voicecom and Xpedite segments.
Lease termination costs are attributable to lease termination costs
associated with the abandonment of a facility under the Retail Calling Card
Services segment. Lease termination costs are cash outlays. The Company
incurred $0.7 million in costs in 1999 in terminating this lease. Management
does not anticipate any further costs in terminating this lease in 2000.
Funding for the termination of this lease was primarily through the sale of
marketable securities in the fourth quarter of 1999.
Other costs were attributable to site clean up and exit team travel costs to
exit one facility in the Xpedite segment. The Company incurred $0.1 million of
costs which are cash outlays in the fourth quarter to close this facility.
Management anticipates the remaining $0.1 million to occur in the first six
months of 2000. Funding for the closure of this facility was through operating
cash flows from the Xpedite segment.
The Year 2000 Issue
The term "Year 2000 issue" was a general term used to describe the various
problems that may result or have resulted from the improper processing of dates
and date-sensitive calculations by computers and other machinery as the
Year 2000 was reached. The Company previously formed a Year 2000 Executive
Committee
42
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 evaluated the Company's Year 2000 issue and took appropriate actions to
ensure that the Company experienced minimal disruption from the Year 2000
issue.
As of December 31, 1999, the Company had implemented its Year 2000
initiative. To date, and with the January 1, 2000 date rollover, the Company
has not experienced any material disruptions associated with the Year 2000
issue and the Company's software applications, hardware platforms or suppliers
and vendors. The Company does not expect to experience any material disruptions
and/or material costs associated with the Year 2000 issue in the future.
The majority of the work on the initiative was performed by the Company's
employees and subcontractors, which limited the costs associated with the Year
2000 issue. The Company estimates that the total historical costs of
implementing the Year 2000 initiative was approximately $7 million, the
majority of which related to capital expenditures.
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, 2001. 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.
FACTORS AFFECTING FUTURE PERFORMANCE
Risks Related to Our Industry
The markets for our products and services are intensely competitive and we may
not be able to compete successfully against existing and future competitors,
which may make it difficult to maintain or increase our market share and
revenue.
The markets for our products and services are intensely competitive and we
expect competition to increase in the future. Many of our current and potential
competitors have longer operating histories, greater name recognition, larger
customer bases and substantially greater financial, personnel, marketing,
engineering, technical and other resources than we do. As a result, our
competitors may be able to respond more quickly than we can to new or emerging
technologies and changes in customer demands, and they may also be able to
devote greater resources than we can to the development, promotion and sale of
their products and services. We believe that our current competitors are likely
to expand their product and service offerings and that new competitors are
likely to enter our markets. Existing and new competitors may attempt to
integrate their products and services, resulting in greater competition.
Increased competition could result in price pressure on our products and
services and a decrease in our market share in the various markets in which we
compete, either of which could hinder our ability to grow our revenue.
The Telecommunications Act of 1996 may increase competition in the markets in
which we compete.
The Telecommunications Act of 1996 is intended to increase competition in the
long distance and local telecommunications markets. We may experience increased
competition from others, including the regional Bell operating companies, as a
result of this law. This law opens competition in the local services market
and, at the same time, contains provisions intended to protect consumers and
businesses from unfair competition by incumbent local exchange carriers, which
generally are local telephone companies that provided local telephone services
on the date of the enactment of the law, and which includes the regional Bell
operating companies.
43
The Telecommunications Act of 1996 allows the regional Bell operating
companies to provide long distance service within and between local access and
transport areas that are outside of their local service territories. Local
access and transport areas are geographic areas in the U.S. within which
incumbent local telephone companies traditionally offered local telephone
services. However, this legislation prohibits the regional Bell operating
companies from offering long distance services in their local service territory
that originate in one local access and transport area and terminate in another,
unless they satisfy various conditions. A regional Bell operating company must
apply to the FCC to provide long distance services in their local service
territory and they must satisfy a set of pro-competitive criteria intended to
ensure that they open their own local markets to competition before the FCC
will approve their application. The FCC has recently granted approval to Bell
Atlantic to provide this type of long distance service in New York, and the FCC
may grant approval to similar applicants in the future. We may experience
increased competition if, and when, the FCC grants these applications.
This legislation also grants the FCC broad authority to deregulate other
aspects of the telecommunications industry. If the FCC implements deregulation
of other aspects of the telecommunications industry in the future, it could
facilitate the offering of competitive products and services by the regional
Bell operating companies, which would increase the amount of competition we
face.
The development of alternatives to our products and services may cause us to
lose customers and market share, and may hinder our ability to maintain or grow
our revenue.
The market for our products and services is characterized by rapid
technological change, frequent new product introductions and evolving industry
standards. We expect new products and services, and enhancements to existing
products and services, to be developed and introduced that will compete with
our products and services. Technological advances may result in the development
and commercial availability of alternatives to our products and services or new
methods of delivering our products and services. Companies may develop and
offer product features, service offerings or pricing options which are more
attractive to customers than those currently offered by us. These new products
or services, or methods of delivering these products or services could:
. cause our existing products and services to become obsolete;
. be more cost-effective, which could result in significant pricing
pressure on or products and services; or
. allow our existing and potential customers to meet their own
telecommunications needs without using our services.
Technological changes that make our products obsolete, or changes in technology
that allow competitors to offer products and services that replace our existing
products and services could cause us to lose customers, market share and
revenue.
If new products and services that we develop and introduce are not accepted in
the marketplace, we may lose market share and our revenue may decrease.
We must continually introduce new products and services in response to
technological changes, evolving industry standards and customer demands for
enhancements to our existing products and services. We will not be able to
increase our revenue if we are unable to develop new products and services, or
if we experience delays in the introduction of new products and services, or if
our new products and services do not achieve market acceptance. Our ability to
successfully develop and market new products and services and enhancements that
respond to technological changes, evolving industry standards or customer
demands, is dependent on our ability to:
. anticipate changes in industry standards;
. anticipate and apply advances in technologies;
44
. enhance our software, applications, equipment, systems and networks;
. attract and retain qualified and creative technical personnel;
. develop effective marketing, pricing and distribution strategies for new
products and services; or
. avoid difficulties that could delay or prevent the successful
development, introduction and marketing of new products and services or
enhancements.
We are subject to pricing pressures for our products and services, which could
cause us to lose market share and revenue.
We compete for consumers based on price. A decrease in the rates charged for
communications services by our competitors could cause us to reduce the rates
we charge for our products and services. If we cannot compete based on price,
we may lose market share. If we reduce our rates without increasing our margins
or our market share, our revenue could decrease.
Consolidation in the telecommunications industry could lead to pricing pressure
on our products and services and could be disruptive to our licensing and
strategic relationships.
The telecommunications industry has experienced, and we believe it will
continue to experience, consolidation. For example, WorldCom, a strategic
partner of ours, merged with MCI Communications Corp., a competitor of ours
with respect to some services, to form MCI WorldCom. In addition, MCI WorldCom
has announced a merger with Sprint Corporation, a competitor of ours with
respect to some services. Consolidation in the telecommunications industry,
including consolidations involving our customers, competitors, strategic
partners and licensing partners, could lead to pricing pressure on our products
and services and could be disruptive to our licensing and strategic
relationships.
Risks Related to Our Company
One of our growth strategies is to make investments and form alliances with
early-stage companies involved in emerging technologies, and these investments
may not be successful.
Part of our growth strategy is to make equity investments in companies
involved in emerging technologies. These equity investments allow us to develop
marketing and strategic alliances, which serve as an important vehicle through
which we market our own Web-enabled services, such as Orchestrate(R). We made
investments of approximately $8.3 million in 1998 and $8.2 million in 1999 to
acquire initial equity interests, or increase existing equity interests, in
companies engaged in emerging technologies. Since many of the companies in
which we make investments are small, early-stage companies, our investments are
subject to the significant risks faced by these companies, which could result
in the loss of our investment.
We may not have opportunities to acquire equity interests in additional
companies, which could impede our growth strategy.
Our equity investments, which are typically made through or held by a
subsidiary, have significant value on a stand-alone basis. In the future, we
may not be able to identify companies that complement our strategy, and even if
we identify a company that complements our strategy, we may not be able to
acquire an interest in the company. If we cannot acquire equity interests in
attractive companies, our growth strategy may not succeed. We may not be able
to acquire equity interests in attractive companies for many reasons,
including:
. a failure to agree on the terms of the acquisition, such as the amount
or price of our acquired interest;
. incompatibility between us and management of the company;
. competition with other investors to make equity investments in the same
company;
. a lack of capital to acquire an interest in the company; and
. the unwillingness of the company to enter into a strategic agreement
with us or to provide us with an equity interest.
45
We may be unable to obtain maximum value for our equity investments.
We have significant positions in several public and private companies,
including Healtheon/WebMD Corporation, S1 Corporation, USA.NET, Inc., Webforia,
Inc. and Derivion Corporation. We may from time to time sell or otherwise
monetize all or a portion of these investments to provide working capital or
for other business purposes. For example, in November and December 1999 we sold
a significant portion of our Healtheon/WebMD holdings in open market
transactions and used substantially all of the proceeds to repay our revolving
credit facility. If we divest all or part of any equity interest, we may not
receive maximum value for our position. For equity investments in publicly
traded stock, we may be unable to sell our interests at then quoted market
prices. Furthermore, for those equity interests that are not publicly traded,
the realizable value of our interest may ultimately prove to be lower than the
carrying value currently reflected in our consolidated financial statements.
The value of our business may fluctuate because the value of some of our equity
investments fluctuates.
A portion of our assets includes the equity securities of both publicly
traded and non-publicly traded companies. In particular, we own a significant
number of shares of common stock of Healtheon/WebMD and S1 Corporation, which
are publicly traded companies. The market price and valuations of the
securities that we hold in these and other companies may fluctuate due to
market conditions and other conditions over which we have no control.
Fluctuations in the market price and valuations of the securities that we hold
in other companies may result in fluctuations of the market price of our common
stock and may reduce the amount of working capital we have available.
We may incur significant costs and may be forced to make disadvantageous
business decisions to avoid investment company status, and we may suffer
adverse consequences if we are deemed to be an investment company.
We may incur significant costs and may be forced to make disadvantageous
business decisions to avoid investment company status. For example, we may be
forced to forego attractive investment opportunities or we may have to dispose
of investments before we might otherwise do so in order to avoid investment
company status. Furthermore, we may suffer other adverse consequences if we are
deemed to be an investment company under the Investment Company Act of 1940.
Some investments made by us may constitute investment securities under the 1940
Act. In some instances, a company may be deemed to be an investment company if
it owns investment securities with a value exceeding 40% of its total assets,
subject to various exclusions. In other instances, a company may be deemed to
be an investment company if more than 45% of its total assets consists of, and
more than 45% of its net income after taxes attributable to it over the last
four quarters is derived from, ownership interests in companies it does not
control, subject to various exclusions. Investment companies are subject to
registration under, and compliance with, the 1940 Act, unless a particular
exclusion or safe harbor applies. If we are deemed to be an investment company
and we register as one with the SEC, we would become subject to the
requirements of the 1940 Act. As a consequence, we could be prohibited from
engaging in business or issuing our securities in the manner we have in the
past. If we are deemed to be an unlawfully unregistered investment company, we
might be subject to civil and criminal penalties. In addition, some of our
contracts might be voidable, and a court appointed receiver could take control
of us and liquidate our business.
If we cannot implement a plan to segregate our Web-related assets and develop
strategic partnership and alliances, we may not be able to implement our growth
strategy.
On October 28, 1999, we announced that we are developing plans to segregate
our Web-related assets in stand-alone entities for which we will seek strategic
partnerships and other strategic alliances. We currently have no specific
plans, agreements or commitments with respect to the segregation of our Web-
related assets, or any strategic partnerships or alliances with respect to
those assets. Moreover, we may not be able to identify suitable strategic
partners or alliances with respect to our Web-related assets. Even if we
identify suitable strategic
46
partners and alliances, we may not be able to negotiate or consummate any
particular partnership or alliance. If we cannot implement a plan to segregate
our Web-related assets and develop strategic partnership and alliances, we may
not be able to implement our growth strategy.
If our strategic relationships are not successful we may not be able to
increase our sales and revenue.
A principal element of our strategic plan is the creation and maintenance of
strategic relationships that will enable us to offer our products and services
to a larger customer base than we could otherwise reach through our direct
marketing efforts. Examples of our strategic partners include MCI WorldCom,
Healtheon/WebMD and Webforia. Failure of one or more of our strategic partners
to successfully develop and sustain a market for our services, or the
termination of one or more of our relationships with a strategic partner, could
hinder our ability to increase our sales and our revenue. Although we view our
strategic relationships as a key factor in our overall business strategy and in
the development and commercialization of our products and services, our
strategic partners may not view their relationships with us as significant for
their own businesses and any one of them could reassess their commitment to us
in the future. The ability of our strategic partners to incorporate our
products and services into successful commercial ventures will require us,
among other things, to continue to successfully enhance our existing products
and services and develop new ones. Our inability to meet the requirements of
our strategic partners or to comply with the terms of our strategic partner
arrangements could result in our strategic partners failing to market our
services, seeking alternative providers of communications and information
services or canceling their contracts with us.
If our strategic relationship with MCI WorldCom is not successful we may not be
able to increase our sales and our revenue.
In November 1996, we entered into a strategic alliance agreement with
WorldCom, now known as MCI WorldCom, whereby MCI WorldCom is required, among
other things, to provide us with the right of first opportunity to provide
computer telephony services for a period of at least 25 years. In connection
with this agreement, we issued to MCI WorldCom 2,050,000 shares of common stock
valued at approximately $25.2 million and paid MCI WorldCom $4.7 million in
cash. We recorded the value of this agreement as an intangible asset. If this
strategic relationship is not successful it could hinder our ability to
increase our sales and our revenue. Subsequent to entering into this strategic
alliance agreement, WorldCom merged with MCI, a competitor of ours with respect
to same services, to form MCI WorldCom. The minimum payment levels under the
strategic alliance agreement ceased at the end of September 1998 and current
activity levels are significantly below those prior minimums. In addition, in
June 1999, we filed a lawsuit against MCI WorldCom alleging breach of this
strategic alliance agreement. This lawsuit has been stayed pending arbitration.
We periodically review this intangible asset for impairment and in 1998 we
wrote down the carrying value of the MCI WorldCom strategic alliance intangible
asset by approximately $13.9 million. In addition, we accelerated amortization
of the remaining carrying value of the asset starting in the fourth quarter of
1998 by shortening its estimated remaining useful life to three years from 23
years.
Financial difficulties of our strategic partners or licensees could adversely
impact our earnings.
The majority of companies that have chosen to outsource their communications
services to us are small or medium-sized telecommunications companies that may
be unable to withstand the intense competition in the telecommunications
industry. If any of our strategic partners or licensees suffer financial
difficulties, it could hurt our financial performance and adversely impact our
earnings. For example, during the second quarter of 1998, a licensing customer
and a strategic partner in our enhanced calling services group initiated
proceedings under Chapter 11 of the U.S. Bankruptcy Code. We recorded
approximately $8.4 million of charges in the second quarter of 1998 associated
with uncollectible accounts receivable, primarily related to these financially
distressed customers. The financial difficulties of these two customers, as
well as revenue shortfalls in the voice and data messaging group and other
unanticipated costs and one-time charges, contributed to an after tax loss for
the second quarter of 1998.
47
Our future success depends on market acceptance of our unified messaging
products and services, which includes Orchestrate(R).
Unified messaging, also known as integrated messaging, allows a person to
access all of their messaging devices, such as voice-mail, e-mail and
facsimile, from a computer or telephone. Market acceptance of unified messaging
products and services generally requires that individuals and enterprises
accept new ways of communicating and exchanging information. A decline in the
demand for, or the failure to achieve broad market acceptance of, our unified
messaging products and services could hinder our ability to maintain and
increase our revenue. We believe that broad market acceptance of our unified
messaging products and services will depend on several factors, including:
. ease of use;
. price;
. reliability;
. access and quality of service;
. system security;
. product functionality; and
. the effectiveness of strategic marketing and distribution relationships.
If we do not met these challenges, our unified messaging products and
services, including Orchestrate, may not achieve broad market acceptance or
market acceptance may not occur quickly enough to justify our investment in
these products and services.
Concerns regarding security of transactions and transmitting confidential
information over the Internet may have an adverse impact on the market
acceptance of our Web-enabled products and services, including Orchestrate(R).
We believe the concern regarding the security of confidential information
transmitted over the Internet prevents many potential customers from using
Internet related products and services. If our Web-enabled services, such as
Orchestrate(R), do not include sufficient security features, our Web-enabled
products and services may not gain market acceptance, or there may be
additional legal exposure. Despite the measures we have taken, our
infrastructure is potentially vulnerable to physical or electronic break-ins,
viruses or similar problems. If a person circumvents our security measures, he
or she could misappropriate proprietary information or cause interruption in
our operations. Security breaches that result in access to confidential
information could damage our reputation and expose us to a risk of loss or
liability. We may be required to make significant investments in efforts to
protect against a remedy of these types of security breaches. Additionally, as
electronic commerce becomes more widespread, our customers will become more
concerned about security. If we are unable to adequately address these
concerns, we may be unable to sell our Web-enabled products and services.
If our quarterly results do not meet the expectations of public market analysts
and investors our stock price may decrease.
Quarterly revenue is difficult to forecast because the market for our
services is rapidly evolving. Our expense levels are based, in part, on our
expectations as to future revenue. If revenue levels are below expectations, we
may be unable or unwilling to reduce expenses proportionately and operating
results would likely be adversely affected. As a result, we believe that
period-to-period comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Due to all of
48
the foregoing factors, it is likely that in some future quarter our operating
results will be below the expectations of public market analysts and investors.
In this event, the market price of our common stock will likely decline.
Our operating results have varied significantly in the past and may vary
significantly in the future. Specific factors that may cause our future
operating results to vary include:
. the unique nature of strategic relationships into which we may enter in
the future;
. changes in operating expenses resulting from our strategic relationships
and other factors;
. the financial performance of our strategic partners;
. the performance of strategic equity investments;
. the timing of new product and service announcements;
. market acceptance of new and enhanced versions of our products and
services, including Orchestrate;
. the success or failure of past or potential future acquisitions;
. changes in legislation and regulations that may affect the competitive
environment for our products and services; and
. general economic and seasonal factors.
In the future, revenue from our strategic investments and strategic
relationships may become an increasingly significant portion of our total
revenue. Due to the unique nature of each strategic investment and
relationship, these investments and relationships may change the mix of our
expenses relative to our revenue.
If we are not able to expand our document distribution services, it may
adversely affect customer relationships and perceptions of our business in the
markets in which we provide document distribution services.
We intend to accelerate growth of our document distribution services
throughout the world by expansion of our proprietary private worldwide document
distribution network and the acquisition of entities engaged in the business of
document distribution services. We may not be able to expand our ability to:
. provide document distribution services at a rate or in a manner
satisfactory to meet the demands of existing or future customers;
. increase the capacity of our document distribution network to process
increasing amounts of document traffic;
. integrate and increase the capability of our document distribution
network to perform tasks required by our customers; or
. identify and establish alliances with new partners in order to enable us
to expand our document distribution network into new geographic regions.
If we are not able to accomplish these things it could adversely affect
customer relationships and perceptions of our business in the markets in which
we provide document distribution services. In addition, this growth will
involve substantial investments of capital, management and other resources. We
may not generate sufficient cash for future growth of our document distribution
business through earnings or external financings, and external financings may
not be available on terms acceptable to us. Further, we may not be able to
employ any of these resources in a manner that will result in accelerated
growth.
49
We do not typically have long-term contractual agreements with our customers
and our customers may not transact business with us in the future.
We expect that the information and telecommunications services markets will
continue to attract new competitors and new technologies, possibly including
alternative technologies that are more sophisticated and cost effective than
our technologies. We do not typically have long-term contractual agreements
with our customers, and our customers may not continue to transact business
with us in the future if:
. our products and services become obsolete;
. competitors develop products and services that are more sophisticated,
efficient or cost-effective; or
. technological advances allow our customers to satisfy their own
telecommunications needs.
We rely on Amway Corporation for significant revenue and any loss of business
from Amway may hurt our financial performance and cause our stock price to
decline.
We have historically relied on sales through Amway Corporation for a
substantial portion of our revenue. Sales to Amway accounted for approximately
23.7% of our revenue in 1996, 21.8% in 1997, 9.4% in 1998 and 6.8% in 1999.
Although total revenue from Amway has decreased significantly, Amway remains a
significant customer. Our relationship with Amway and its distributors may not
continue at historical levels, and there is no long-term price protection for
services provided to Amway. Continued loss in total revenue from Amway or
diminution in the Amway relationship, or a decrease in average sales price
without an offsetting increase in volume, could hurt our financial performance
and cause our stock price to decline.
If we do not attract and retain highly qualified and creative technical
personnel we may not be able to sustain or grow our business.
We believe that to be successful we must hire and retain highly qualified and
creative engineering and product development personnel. Competition in the
recruitment of highly qualified and creative personnel in the information and
telecommunications services industry is intense. We have in the past
experienced, and we expect to continue to experience, difficulty in hiring and
retaining highly skilled technical employees with appropriate qualifications.
We may not be able to retain our key technical employees and we may not be able
to attract qualified personnel in the future. If we are not able to locate,
hire and retain qualified technical personnel, we may not be able to sustain or
grow our business.
Our business may suffer if we do not retain the services of our chief executive
officer.
We believe that our continued success will depend to a significant extent
upon the efforts and abilities of Boland T. Jones, our Chairman and Chief
Executive Officer. The familiarity of Mr. Jones with the markets in which we
compete and emerging technologies, such as the Internet, makes him especially
critical to our success. We maintain key man life insurance on Mr. Jones in the
amount of $3.0 million.
Downtime in our network infrastructure could result in the loss of significant
customers.
We currently maintain facilities with telecommunications equipment that
routes telephone calls and computer telephony equipment in approximately 300
locations throughout the world. The delivery of our products and services is
dependent, in part, upon our ability to protect the equipment and data at our
facilities with telecommunications equipment that routes telephone calls
against damage that may be caused by fire, power loss, technical failures,
unauthorized intrusion, natural disasters, sabotage and other similar events.
Despite taking a variety of precautions, we have experienced downtime in our
networks from time to time and we may experience downtime in the future. These
types of service interruptions could result in the loss of significant
customers, which could cause us to lose revenue. We take substantial
precautions to protect ourselves and our customers from events that could
interrupt delivery of our services. These precautions include physical security
systems, uninterruptible power supplies, on-site power generators, upgraded
backup hardware, fire protection
50
systems and other contingency plans. In addition, some of our networks are
designed so that the data on each network server is duplicated on a separate
network server. We also maintain business interruption insurance providing for
aggregate coverage of approximately $86.1 million per policy year. However, we
may not be able to maintain this insurance in the future, it may not continue
to be available at reasonable prices, and it may not be sufficient to
compensate us for losses that we experience due to our inability to provide
services to our customers.
If or our frame relay network architecture becomes obsolete, we may have to
invest significant capital to upgrade or replace our private frame relay
network.
We made a significant investment in a private frame relay network when we
acquired Voice-Tel in 1997. A frame relay network is a telecommunications
network that uses packet switching to transmit data through the network and
relies on high quality phone lines to minimize errors. Packet switching is a
process that allows data to be subdivided into individual packets of data, each
packet carrying its own destination address. The packets are then reassembled
at their final destination. Packet switching is an efficient method of moving
data over a network because each packet can go a different route. There are
alternative network architectures, which are the structures and protocols of
any computer network, including emerging broadband networks. Moreover,
technological advances may lead to the development of additional network
architectures. If the telecommunications industry standardizes on an
architecture other than frame relay or our private frame relay network becomes
obsolete, we would need to invest significant capital to upgrade or replace our
private frame relay network.
If we fail to predict growth in our network usage and add needed capacity, then
the quality of our service offerings may suffer.
At network usage grows, we will need to add capacity to our hardware and
software, our facilities with telecommunications equipment that routes
telephone calls and our private frame relay network. This means that we
continuously attempt to predict growth in our network usage and add capacity
accordingly. If we do not accurately predict and efficiently manage growth in
our network usage, the quality of our service offerings may suffer and we may
lose customers.
Software failures or errors may result in failure of our platforms and/or
networks, which could result in increased costs and lead to interruptions in
our services and losses of significant customers and revenue.
The software that we have developed and utilized in providing our products
and services, including the Orchestrate software, may contain undetected
errors. Although we generally engage in extensive testing of our software prior
to introducing the software onto any of our networks and/or product equipment,
errors may be found in the software after the software goes into use. Any of
these errors may result in partial or total failure of our networks, additional
and unexpected expenses to fund further product development or to add
programming personnel to complete a development project, and loss of revenue
because of the inability of customers to use our networks or the cancellation
of services by significant customers. We maintain technology errors and
omissions insurance coverage of $35.0 million per policy aggregate. However, we
may not be able to maintain this insurance or it may not continue to be
available at reasonable prices. Even if we maintain this insurance, it may not
be sufficient to compensate us for losses we experience due to our inability to
provide services to our customers.
Interruption in long distance telecommunications services could result in
service interruptions and a loss of significant customers and revenue.
Our ability to maintain and expand our business depends, in part, on our
ability to continue to obtain telecommunication services on favorable terms
from long distance carriers. We do not own a transmission network. As a result,
we depend on MCI WorldCom, AT&T, Teleglobe Inc. and Cable & Wireless, and other
long distance carriers for transmission of our customers' long distance calls.
These long distance
51
telecommunications services generally are procured under supply agreements with
multiyear terms. These supply agreements are subject to various early
termination penalties and minimum purchase requirements. We have not
experienced significant losses in the past due to interruptions of long-
distance service, but we might experience these types of losses in the future.
The partial or total loss of our ability to receive or terminate telephone
calls could result in service interruptions and a loss of significant customers
and revenue.
We depend on local phone companies that provide local transmission services,
known as local exchange carriers, as well as companies that purchase and resell
local transmission services, known as competitive local exchange carriers, for
call origination and termination. The partial or total loss of the ability to
receive or terminate calls could result in service interruptions and a loss of
significant customers and revenue. We have not experienced significant losses
in the past due to interruptions of service at terminating carriers, but we
might experience these types of losses in the future.
If we have to relocate our equipment or change our network transmission
provider, we could experience interruptions in our services and increased
costs, which could cause us to lose customers.
We lease capacity on the MCI WorldCom communications network to provide
network connections and data transmission within our private frame relay
network. Our telecommunications agreement with MCI WorldCom expires in
September 2000. We have equipment co-located at various MCI WorldCom sites
under co-location agreements that are terminable by either party upon 30 days
written notice. Our ability to maintain network connections is dependent upon
our access to transmission facilities provided by MCI WorldCom or an
alternative provider. We may not be able to continue our relationship with MCI
WorldCom beyond the terms of our current agreements and we may not be able to
find an alternative provider on terms as favorable as those offered by MCI
WorldCom or on any other terms. If we have to relocate our equipment or change
our network transmission provider, we could experience interruptions in our
service and/or increased costs, which could adversely effect our customer
relationships and customer retention.
Any significant difficulty obtaining voice messaging equipment could lead to
interruption in service and loss of customers and revenue, and technological
obsolescence of our voice messaging equipment could result in substantial
capital expenditures.
We do not manufacture voice messaging equipment used at our voice messaging
service centers, and this equipment is currently available from a limited
number of sources. Although we have not historically experienced any
significant difficulty in obtaining equipment required for our operations and
believe that viable alternative suppliers exist, shortages may arise in the
future or alternative suppliers may not be available. Our inability to obtain
voice messaging equipment in the future could result in delays or reduced
delivery of messages, which could lead to a loss of customers and revenue. In
addition, technological advances may result in the development of new voice
messaging equipment and changing industry standards, which could cause our
voice messaging equipment to become obsolete. These events could require us to
invest significant capital in upgrading or replacing our voice messaging
equipment.
Returned transactions or thefts of services could lead to a loss of revenue,
and could adversely effect customer relationships and perceptions of our
business in the markets in which we do business.
If our internal controls, risk management practices and bad debt reserve
practices are not adequate, returned transactions, unauthorized transactions or
thefts of services could lead to a loss of revenue, and could adversely effect
customer relationships and perceptions of our business in the markets in which
we do business.
We use two principal financial payment clearance systems in connection with
our enhanced calling services: the Federal Reserve's Automated Clearing House
for electronic fund transfers; and the national credit card systems for
electronic credit card settlement. In our use of these established payment
clearance systems, we
52
generally bear credit risks similar to those normally assumed by other users of
these systems arising from returned transactions caused by insufficient funds,
stop payment orders, closed accounts, frozen accounts, unauthorized use,
disputes, theft or fraud. We could experience material revenue losses due to
these types of returned transactions.
From time to time, persons have gained unauthorized access to our network and
obtained services without rendering payment to us by unlawfully using the
access numbers and personal identification numbers of authorized users. In
addition, in connection with our wholesale prepaid telephone card
relationships, we have experienced unauthorized activation of prepaid telephone
cards. We could experience material revenue losses due to unauthorized use of
access numbers and personal identification numbers, unauthorized activation of
prepaid calling cards, activation of prepaid calling cards in excess of the
prepaid amount, or theft of prepaid calling cards.
We attempt to manage these risks through our internal controls and
proprietary billing systems. We attempt to prohibit a single access number and
personal identification number from establishing multiple simultaneous
connections to our telecommunications equipment, and generally we establish
preset spending limits for each subscriber. We also maintain reserves for these
risks. However, past experience in estimating and establishing reserves and our
historical losses are not necessarily accurate indicators of future losses or
the adequacy of the reserves we may establish in the future.
Our debt could harm our liquidity and our ability to obtain additional
financing, and could make us more vulnerable to economic downturns and
competitive pressures.
In 1997, we incurred $172.5 million in indebtedness by issuing convertible
notes to the public. We have significant interest payment obligations as result
of these convertible notes. Our debt could inhibit our ability to obtain
additional financing for working capital, acquisitions or other purposes and
could make us more vulnerable to economic downturns and competitive pressures.
Our debt could also harm our liquidity, because a substantial portion of
available cash from operations may have to be applied to meet debt service
requirements. In the event of a cash shortfall, we could be forced to reduce
other expenditures and forego potential acquisitions and investments to be able
to meet these debt repayment requirements.
An increase in the rate of amortization of goodwill or other intangible assets
or future write-downs could cause our financial performance to suffer in future
periods.
As of December 31, 1999, we had approximately $436.0 million of goodwill and
other intangible assets reflected on our financial statements. We are
amortizing the goodwill and other intangibles over a range of periods we
believe appropriate for the assets. If the amortization period for any of these
assets is accelerated due to a reevaluation of the useful life of these assets
or for any other reason, amortization expense may initially increase on a
quarterly basis or require a write-down of the goodwill or other intangible
assets, which could cause our financial performance to suffer in future
quarters.
Our articles of incorporation and bylaws and Georgia corporate law may inhibit
a takeover, which may not be in the interests of shareholders.
There are several provisions in our articles of incorporation and bylaws and
Georgia corporate law that may inhibit a takeover, even when a takeover may be
in the interests of our shareholders. For example, our board of directors is
empowered to issue preferred stock without shareholder action. The existence of
this "blank-check" preferred stock could render more difficult or discourage an
attempt to obtain control of Premiere by means of a tender offer, merger, proxy
contest or otherwise. Our articles of incorporation also divide the board of
directors into three classes, as nearly equal in size as possible, with
staggered three-year terms. The classification of the board of directors could
make it more difficult for a third party to acquire control of Premiere because
only one-third of the board is up for election each year. We are also subject
to provisions of the Georgia Business Corporation Code that relate to business
combinations with interested shareholders, which can serve to inhibit a
53
takeover. In addition to considering the effects of any action on us and our
shareholders, our articles of incorporation permit our board of directors and
the committees and individual members of the board to consider the interests of
various constituencies, including employees, customers, suppliers, and
creditors, communities in which we maintain offices or operations, and other
factors which they deem pertinent, in carrying out and discharging their duties
and responsibilities and in determining what is believed to be our best
interests.
Our rights plan may also inhibit a takeover, which may not be in the interests
of shareholders.
In June 1998, our board of directors declared a dividend of one preferred
stock purchase right for each outstanding share of common stock. Each right
entitles the registered holder to purchase one one-thousandth of a share of
Series C junior participating preferred stock at a price of sixty dollars per
one-thousandth of a Series C preferred share, subject to adjustment. The rights
may have anti-takeover effects because they will cause substantial dilution to
a person or group that attempts to acquire us on terms not approved by our
board of directors. 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 us that a person has become an acquiring person. The rights are intended to
encourage persons who may seek to acquire control of us to initiate 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, us.
Risks Related to Past Acquisitions
If we cannot successfully integrate and consolidate the operations of acquired
businesses into our operations, we may not realize sufficient cost savings and
economies-of-scale.
We are continuing to integrate the operations of several businesses acquired
in 1997 and 1998 by attempting to eliminate duplicative and unnecessary costs.
The successful integration and consolidation of the operations of acquired
businesses into our operations is critical to our future performance. If we
cannot successfully integrate and consolidate the operations of acquired
businesses with our operations on schedule or at all, these acquisitions may
not result in sufficient cost savings or economies-of-scale and operational
synergies may not develop. Potential challenges to the successful integration
and consolidation of the operations of acquired businesses include:
. consolidation of service centers and work forces;
. elimination of unnecessary costs; and
. integration and retention of new personnel.
If we cannot successfully integrate technologies, products, services and
systems from acquired businesses with ours, we may not generate sufficient
revenue and operational synergies may not develop.
We are continuing to integrate previously acquired technologies, products,
service offerings and systems with ours. We have experienced and may continue
to experience difficulty integrating incompatible systems of acquired
businesses into our networks. As a result, our integration plans may materially
change in the future. If we cannot successfully integrate technologies,
products, services and systems from acquired businesses with ours, we may not
generate sufficient revenue and operational synergies may not develop.
Challenges to the successful integration of acquired technologies, products,
service offerings and systems include:
. localization of our products and services;
. integration of technologies, telecommunications equipment and networks;
. cross-selling of products and services to our customer base and customer
bases of acquired businesses; and
. compliance with regulatory requirements.
54
If we do not properly manage the growth we have experienced through
acquisitions, our administrative, technical and financial resources may be
strained, which could cause the quality of our products and services to suffer.
We have experienced substantial growth in revenue and personnel in recent
years, particularly in 1997 and early 1998, a substantial portion of which has
been accomplished through our acquisitions of Voice-Tel Enterprises, Inc. and
its related entities and franchisees, VoiceCom Systems, Inc., Xpedite Systems,
Inc. and American Teleconferencing Services Ltd. Our growth through
acquisitions has placed significant demands on all aspects of our business,
including our administrative, technical, and financial personnel and systems.
Additional expansion may further strain our administrative, technical,
financial, management and other resources. Our systems, procedures, controls
and existing space may not be adequate to support expansion of our operations.
If we are unable to do this, then the quality of our services may suffer, which
will make it difficult to grow or maintain our market share in the markets in
which we compete.
Risks Related to Possible Future Acquisitions
We intend to pursue future acquisitions and we may face risks in acquiring and
integrating other businesses, products and technologies.
We intend to pursue future acquisitions of businesses, products and
technologies that we believe will complement our business. As a result, we
regularly evaluate acquisition opportunities, frequently engage in acquisition
discussions, conduct due diligence activities in connection with possible
acquisitions, and, where appropriate, engage in acquisition negotiations. We
may not be able to successfully identify suitable acquisition candidates,
complete acquisitions, integrate acquired operations into our existing
operations or expand into new markets. In addition, we compete for acquisitions
and expansion opportunities with companies that have substantially greater
resources and competition with these companies for acquisition targets could
result in increased prices for possible targets. Acquisitions also involve
numerous additional risks to the company and investors, including:
. difficulties in the assimilation of the operations, services, products
and personnel of the acquired company;
. the diversion of our management's attention from other business
concerns;
. entry into markets in which we have little or no direct prior
experience;
. potentially dilutive issuances of equity securities;
. the assumption of known and unknown liabilities; and
. adverse financial impact from the write-off of software development
costs and the amortization of expenses related to goodwill and other
intangible assets.
If we fail to assimilate and retain key employees of future businesses we
acquire, it could jeopardize the success of the acquisition.
Assimilation and retention of the key employees of an acquired company are
generally important to the success of an acquisition. If we fail to assimilate
and retain any key employees of any business we acquire, the acquisition may
not result in revenue growth, operational synergies or product and service
enhancements, which could jeopardize the success of the acquisition.
Future acquisitions may involve restructuring and other special charges, which
may cause our financial performance to suffer during the period in which the
charge is taken.
We have taken, and in the future may take, charges in connection with
acquisitions, which may cause our financial performance to suffer during the
period in which the charge is taken. In addition, the costs and expenses
55
incurred may exceed the estimates upon which these charges are based. During
the second quarter of 1997, we took a pre-tax charge of approximately $40.0
million in connection with the acquisition of Voice-Tel. During the third
quarter of 1997, we took a pre-tax charge of approximately $14.1 million in
connection with the acquisition of VoiceCom. We also recorded restructuring and
other special charges before income taxes of approximately $4.5 million in
connection with the acquisition of Xpedite.
Risks Related to Intellectual Property
We may not be able to protect our proprietary technology and intellectual
property rights, which could result in the loss of our rights or increased
costs.
We rely primarily on a combination of intellectual property laws and
contractual provisions to protect our proprietary rights and technology, brand
and marks. These laws and contractual provisions provide only limited
protection of our proprietary rights and technology. If we are not able to
protect our intellectual property and our proprietary rights and technology, we
could lose those rights and incur substantial costs policing and defending
those rights. Our proprietary rights and technology include confidential
information and trade secrets that we attempt to protect through
confidentiality and nondisclosure provisions in our licensing, services,
reseller and other agreements. We typically attempt to protect our confidential
information and trade secrets through these contractual provisions for the term
of the applicable agreement and, to the extent permitted by applicable law, for
some negotiated period of time following termination of the agreement,
typically one to two years at a minimum. Our means of protecting our
intellectual property, proprietary rights and technology may not be adequate
and our competitors may independently develop similar technology. In addition,
the laws of some foreign countries do not protect our proprietary rights to as
great an extent as the laws of the U.S. Furthermore, some of our systems, such
as those used in our document distribution business are not proprietary and, as
a result, this information may be acquired or duplicated by existing and
potential competitors.
If claims alleging patent, copyright or trademark infringement are brought
against us and successfully prosecuted against us, it could result in the
substantial costs.
Many patents, copyrights and trademarks have been issued in the general areas
of information services and telecommunications, computer telephony, the
Internet and unified messaging, which allows a person to access all of their
messaging devices from a computer or telephone. From time to time, in the
ordinary course of our business, we have been and expect to continue to be,
subject to third party claims that our current or future products or services
infringe the patent, copyright or trademark rights or other intellectual
property rights of third parties. Claims alleging patent, copyright or
trademark infringement may be brought against us with respect to current or
future products or services. If these types of actions or claims are brought we
may not ultimately prevail and any claiming parties may have significantly
greater resources than we have to pursue litigation of these types of claims.
Any infringements claims, whether with or without merit, could:
. be time consuming and a diversion to management;
. result in costly litigation;
. cause delays in introducing new products and services or enhancements,
. result in costly royalty or licensing agreements; or
. cause us to discontinue use of the challenged technology, tradename or
service mark at potentially significant expense associated with the
marketing of a new name or the development or purchase of replacement
technology.
For detailed descriptions of our prior and current infringement claims, see
Item 1--"Business--Proprietary Rights and Technology."
56
Risks Related to Pending Litigation
Our pending litigation could be costly, time consuming and a diversion to
management and, if adversely determined, could result in the loss of rights or
substantial liabilities for damages.
In the ordinary course of our business, we are subject to a variety of claims
and litigation from third parties, including allegations that our products and
services infringe the patents, trademarks and copyrights of these third
parties. We have several litigation matters pending, which we are defending
vigorously. Due to the inherent uncertainties of the litigation process and the
judicial system, we cannot predict the outcome of these litigation matters.
Regardless of the outcome, these litigation matters could be costly, time
consuming and a diversion of management and other resources. If the outcome of
one or more of these matters is adverse to us, it could result in a loss of
material rights or substantial liabilities for damages.
For detailed descriptions of our material pending litigation, see Item 3--
"Legal Proceedings."
Our pending shareholder litigation in the United States District Court for the
Northern District of Georgia could be costly, time consuming and a diversion to
management and, if adversely determined, could result in substantial
liabilities.
We and some of our 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 (including a subclass of former Voice-Tel franchisees and
a subclass of former Xpedite shareholders) who purchased or otherwise acquired
our common stock between February 11, 1997 through June 10, 1998. Plaintiffs
allege, among other things, 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. We filed a motion to dismiss the complaint on April 14, 1999. On
December 14, 1999, the court issued an order that dismissed the claims under
Section 10(b) and 20 of the Exchange Act without prejudice, and dismissed the
claims under Section 12(a)(1) of the Securities Act with prejudice. The effect
of this order was to dismiss from this lawsuit all open-market purchases by the
plaintiffs. The plaintiffs filed an amended complaint on February 29, 2000,
which we intend to move to dismiss.
Our pending shareholder litigation in the United States District Court for the
Southern District of New York could be costly, time consuming and a diversion
to management and, if adversely determined, could result in substantial
liabilities.
A lawsuit was filed on November 4, 1998 against us, 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 our common stock as a
result of the merger between Premiere and Xpedite in February 1998. Plaintiffs'
allegations are based on the representations and warranties made by us in the
prospectus and the registration statement related to the merger, the merger
agreement and other documents incorporated by reference, regarding our
acquisitions of Voice-Tel and VoiceCom, our roll-out of Orchestrate, our
relationship with customers Amway Corporation and DigiTEC 2000, Inc., and our
800-based calling card service. Plaintiffs allege causes of action against us
for breach of contract, against all defendants for negligent misrepresentation,
violations of Sections 11 and 12(a)(2) of the Securities Act of 1933, and
against the individual defendants for violation of Section 15 of the Securities
Act of 1933. 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 of 1933, punitive damages, costs and attorneys'
fees. The defendants' motion to transfer venue to Georgia has been granted. The
defendants' motion to dismiss has been granted in part and deemed in part. Due
to the inherent uncertainties of the litigation process and the judicial
system, we cannot predict the outcome of this litigation. Regardless of the
outcome, this matter could be costly, time consuming and a diversion to
management and other resources. If the outcome of this matter is adverse to us,
it could result in substantial damages.
57
Risks Related to Government Regulation
U.S. or other government regulations and legal uncertainties related to the
Internet may place financial burdens on our business related to compliance.
Currently, there are few laws or regulations directed specifically at
electronic commerce and the Internet. However, because of the Internet's
popularity and increasing use, new laws and regulations may be adopted. These
laws and regulations may cover issues such as collection and use of data from
Web site visitors and related privacy issues, pricing, content, copyrights, on-
line gambling, distribution and quality of goods and services. The enactment of
any additional laws or regulations may impede the growth of the Internet, which
could impede the growth of our Web-enabled products and services and place
additional financial burdens on our business in order to comply with new laws
and regulations.
Laws and regulations directly applicable to electronic commerce or Internet
communications are becoming more prevalent. For example, the United States
Congress recently enacted laws regarding on-line copyright infringement and the
protection of information collected on-line from children. Although these laws
may not have a direct adverse effect on our business, they add to the legal and
regulatory uncertainty regarding the Internet and possible future costs of
regulatory compliance.
Our failure to comply with various government regulations related to long
distance and operator service could impair our ability to deliver our products
and services.
Premiere Communications, Inc., our operating subsidiary that provides
regulated long distance telecommunications and operator services, is subject to
regulation by the FCC and by various state public service and public utility
commissions, and is affected by regulatory decisions, trends and policies made
by these agencies. Various international authorities may also seek to regulate
the long distance and operator services provided by Premiere Communications. If
Premiere Communications fails to comply with these various government
regulations, we could be prohibited from providing these services and we might
be subject to fines or forfeitures and civil or criminal penalties for non-
compliance.
Interstate and International Long Distance. Premiere Communications has made
the requisite filings with the FCC to provide interstate and international long
distance services. As a condition of providing these types of services,
Premiere Communications must comply with various FCC requirements, including;
. tariff requirements;
. reporting obligations;
. payment of regulatory assessments in connection with programs like
universal-service, telecommunications relay service and payphone
compensation; and
. submission to the FCC's jurisdiction for resolution of complaints.
Intrastate Long Distance. In order to provide intrastate long distance
service, Premiere Communications generally is required to obtain certification
from state public utility commissions, to register with these commissions or to
be found exempt from this registration. Premiere Communications is currently
authorized to provide long distance telecommunications services in 46 states
and in the District of Columbia, and is seeking authorization to provide long
distance telecommunications services in the four other states. In addition, as
a condition of providing intrastate long distance services, Premiere
Communications generally is required to:
. comply with public utility commission tariff requirements, reporting
obligations and regulatory assessments; and
. submit to public utility commission jurisdiction over complaints,
transfers of control and financing transactions.
58
Operator Service. With the exception of three states, Colorado, Michigan and
Arizona, in which its applications to provide operator service (i.e., "0+") are
pending, Premiere Communications is authorized to provide operator service in
each state where it provides long distance telecommunications service.
Premiere Communications uses reasonable efforts to ensure that its operations
comply with these regulatory requirements. However, Premiere Communications may
not be currently in compliance with all FCC and state regulatory requirements.
Furthermore, Premiere Communications' facilities do not prevent its customers
from making long distance calls in any state, including states in which it
currently is not authorized to provide intrastate telecommunications services
and operator services. Premiere Communications' provision of long distance
telecommunications and operator services in states where it is not in
compliance with public utility commission requirements could result in
prohibitions on providing long distance service and subject us to fines or
forfeitures and civil or criminal penalties for non-compliance.
We may become subject to new laws and regulations involving services and
transactions in the areas of electronic commerce, which could increase costs of
compliance.
In conducting our business, we are subject to various laws and regulations
relating to commercial transactions generally, such as the Uniform Commercial
Code, and we are also subject to the electronic funds transfer rules embodied
in Regulation E promulgated by the Board of Governors of the Federal Reserve
System. Congress has held hearings regarding, and various agencies are
considering, whether to regulate providers of services and transactions in the
electronic commerce market. For example, the Federal Reserve completed a study,
directed by Congress, regarding the propriety of applying Regulation E to
stored value cards. The Department of Treasury has promulgated proposed rules
applying record keeping, reporting and other requirements to a wide variety of
entities involved in electronic commerce. It is possible that Congress, the
states or various government agencies could impose new or additional
requirements on the electronic commerce market or entities operating therein.
If enacted, these laws, rules and regulations could be imposed on our business
and industry and could result in substantial compliance costs.
Risks Related to International Operations and Expansion
Our future success depends on our expansion into international markets and
revenue from international operations may not grow enough to offset the cost of
expansion.
A component of our strategy is our planned expansion into international
markets. Revenue from international operations may not grow enough to offset
the cost of establishing and expanding these international operations. We
currently deliver document distribution services worldwide. We also operate
voice and data messaging service centers in Canada, Australia, New Zealand,
Puerto Rico, the United Kingdom, Italy, Japan, Hong Kong, Taiwan and South
Korea. In addition, we have conferencing operations in Canada and Australia.
While we have significant international experience in the delivery of our
document distribution services, we have only limited experience in marketing
and distributing our conferencing services, voice and data messaging services,
and unified messaging services internationally. Accordingly, we may not be able
to successfully market, sell and deliver our voice and data messaging,
conferencing and unified messaging services in the new international markets.
There are risks inherent in international operations that could hinder our
international growth strategy.
Our ability to achieve future success will depend in part on the expansion of
our international operations. There are difficulties and risks inherent in
doing business on an international level that could prevent us from selling our
products and services in other countries or hinder our expansion once we have
established international operations, including:
. burdensome regulatory requirements and unexpected changes in these
requirements;
. export restrictions and controls relating to technology;
. tariffs and other trade barriers;
59
. difficulties in staffing and managing international operations;
. longer payment cycles;
. problems in collecting accounts receivable;
. political and economic instability;
. fluctuations in currency exchange rates;
. seasonal reductions in business activity during the summer months in
Europe and other parts of the world; and
. potentially adverse tax consequences.
We could experience losses from fluctuations in currency exchange rates.
We conduct business outside the U.S. and some of our expenses and revenue are
derived in foreign currencies. In particular, a significant portion of our
document distribution business is conducted outside the U.S. and a significant
portion of our revenue and expenses from that business are derived in foreign
currencies. Accordingly, we could experience material losses due to
fluctuations in foreign currencies. We have not experienced any material losses
from fluctuations in currency exchange rates, but we could in the future. We
typically denominate foreign transactions in foreign currency and have not
regularly engaged in hedging transactions, although we may engage in hedging
transactions from time to time in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and
foreign currency exchange rates. The Company manages its exposure to these
market risks through its regular operating and financing activities. Derivative
instruments are not currently used and, if utilized, are employed as risk
management tools and not for trading purposes.
At December 31, 1999, no derivative financial instruments were outstanding to
hedge interest rate risk. A hypothetical immediate 10% increase in interest
rates would decrease the fair value of the Company's fixed rate convertible
subordinated notes outstanding at December 31, 1999, by $6.8 million.
Approximately 27.2% of the Company's sales and 17% of its operating costs and
expenses were transacted in foreign currencies in 1999. As a result,
fluctuations in exchange rates impact the amount of the Company's reported
sales and operating income. A hypothetical positive or negative change of 10%
in foreign currency exchange rates would positively or negatively change
revenue for 1999 by approximately $12.5 million and operating expenses for 1999
by approximately $10.3 million. Historically, the Company's principal exposure
has been related to local currency operating costs and expenses in the United
Kingdom and local currency sales in Europe (principally the United Kingdom and
Germany). The Company has not used derivatives to manage foreign currency
exchange risk and no foreign currency exchange derivatives were outstanding at
December 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PTEK Holdings, Inc. and Subsidiaries Index to Consolidated Financial Statements
Report of Independent Public Accountants.................................. 61
Consolidated Balance Sheets, December 31, 1999 and 1998................... 62
Consolidated Statements of Operations, Years Ended December 31, 1999, 1998
and 1997................................................................. 63
Consolidated Statements of Shareholders' Equity (Deficit), Years Ended
December 31, 1999, 1998 and 1997......................................... 64
Consolidated Statements of Cash Flows, Years Ended December 31, 1999, 1998
and 1997................................................................. 65
Notes to Consolidated Financial Statements................................ 66
60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PTEK Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of PTEK
HOLDINGS, INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31,
1999 and 1998 and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the years ended December 31,
1999, 1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PTEK Holdings, Inc. and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the years ended December 31, 1999, 1998
and 1997 in conformity with accounting principles generally accepted in the
United States.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 2, 2000
61
PTEK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(in thousands, except share data)
1999 1998
--------- ---------
ASSETS
CURRENT ASSETS
Cash and equivalents.................................... $ 15,366 $ 19,226
Marketable securities, available for sale............... 86,615 21,383
Accounts receivable (less allowances of $11,421 and
$9,437, respectively).................................. 67,652 55,660
Prepaid expenses and other.............................. 13,299 7,940
Deferred income taxes, net.............................. -- 20,626
--------- ---------
Total current assets................................... 182,932 124,835
PROPERTY AND EQUIPMENT, NET.............................. 118,725 131,327
OTHER ASSETS
Strategic alliance contract, net........................ 8,036 12,627
Investments in associated companies, at cost............ 14,620 15,269
Intangibles, net........................................ 435,978 492,185
Other assets............................................ 10,190 20,173
--------- ---------
$ 770,481 $ 796,416
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................ $ 33,512 $ 24,270
Deferred revenue........................................ 1,586 1,877
Accrued taxes........................................... 31,607 16,279
Accrued liabilities..................................... 57,686 46,940
Revolving loan.......................................... -- 118,082
Deferred income taxes, net.............................. 15,426 --
Current maturities of long-term debt.................... 1,814 1,412
Current portion of capital lease obligations............ 857 1,958
Accrued restructuring, merger costs and other special
charges................................................ 5,698 6,645
--------- ---------
Total current liabilities.............................. 148,186 217,463
--------- ---------
LONG-TERM LIABILITIES
Convertible subordinated notes.......................... 172,500 172,500
Long-term debt.......................................... 3,822 4,191
Obligations under capital lease......................... 632 1,530
Other accrued liabilities............................... 7,419 1,111
Deferred income taxes, net.............................. 15,702 1,828
--------- ---------
Total long-term liabilities............................ 200,075 181,160
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 17)
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 150,000,000 shares
authorized, 48,074,566 and 46,894,148 shares issued in
1999 and 1998, respectively, and 46,977,566 and
45,797,148 shares outstanding in 1999 and 1998,
respectively........................................... 481 469
Unrealized gain on marketable securities, available for
sale................................................... 50,774 --
Additional paid-in capital.............................. 570,054 562,106
Treasury stock, at cost................................. (9,133) (9,133)
Note receivable, shareholder............................ (1,047) (973)
Cumulative translation adjustment....................... 527 1,269
Accumulated deficit..................................... (189,436) (155,945)
--------- ---------
Total shareholders' equity............................. 422,220 397,793
--------- ---------
$ 770,481 $ 796,416
========= =========
Accompanying notes are integral to these consolidated financial statements.
62
PTEK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
(in thousands, except per share data)
1999 1998 1997
--------- --------- --------
Revenues...................................... $ 458,448 $ 444,818 $229,352
Telecommunications Costs...................... 129,691 135,036 63,974
--------- --------- --------
Gross Profit.................................. 328,757 309,782 165,378
--------- --------- --------
Direct Operating Costs........................ 69,436 53,992 17,798
--------- --------- --------
Contribution Margin........................... 259,321 255,790 147,580
--------- --------- --------
Operating Expenses
Direct sales and marketing................... 107,872 109,382 56,014
Research and development..................... 12,100 5,257 1,750
General and administrative................... 100,594 79,314 29,716
Depreciation................................. 69,944 46,252 19,482
Amortization................................. 98,912 65,588 1,785
Restructuring, merger costs and other special
charges..................................... 7,980 24,050 54,047
Acquired research and development............ -- 15,500 --
Accrued settlement costs..................... -- 1,500 1,500
--------- --------- --------
Total operating expenses.................... 397,402 346,843 164,294
--------- --------- --------
Operating Loss................................ (138,081) (91,053) (16,714)
Other Income (Expense)
Interest, net................................ (24,728) (14,664) (912)
Gain on sale of marketable securities........ 152,094 -- --
Other, net................................... 12,522 286 226
--------- --------- --------
Total other income (expense)................ 139,888 (14,378) (686)
--------- --------- --------
Income (Loss) Before Income Taxes............. 1,807 (105,431) (17,400)
Income Tax Provision (Benefit)................ 35,298 (21,177) 1,028
--------- --------- --------
Net Loss...................................... $ (33,491) $ (84,254) $(18,428)
========= ========= ========
Basic Net Loss Per Share...................... $ (0.72) $ (1.90) $ (0.57)
========= ========= ========
Diluted Net Loss Per Share.................... $ (0.72) $ (1.90) $ (0.57)
========= ========= ========
Weighted Average Shares Outstanding--Basic and
Diluted...................................... 46,411 44,325 32,443
========= ========= ========
Accompanying notes are integral to these consolidated financial statements.
63
PTEK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
Unrealized Gain
On Marketable
Common Additional Note Securities, Cumulative Total
Stock Paid-In Receivable, Treasury Accumulated Available For Translation Shareholders'
Issued Capital Shareholder Stock Deficit Sale Adjustment Equity
------ ---------- ----------- -------- ----------- --------------- ----------- -------------
BALANCE, December 31,
1996................... $316 $147,029 $ -- $ -- $ (42,812) $ -- $ -- $104,533
Comprehensive Loss:
Net loss............... -- -- -- -- (18,428) -- -- (18,428)
--------
Comprehensive loss...... (18,428)
--------
Payment of debt in
common stock (Voice-Tel
Acquisitions) 5 11,577 -- -- -- -- -- 11,582
Issuance of common
stock:
Voice-Tel acquisitions.. 2 789 -- -- -- -- -- 791
Exercise of stock
options................ 18 4,692 -- -- -- -- -- 4,710
Income tax benefit from
exercise of stock
options................ -- 15,262 -- -- -- -- -- 15,262
Issuance of shareholder
note receivable........ -- -- (973) -- -- -- -- (973)
Recapitalization of S-
corporation accumulated
earnings............... -- 735 -- -- (735) -- --
Other equity
transactions, primarily
S-corporation
Distributions -- -- -- -- (9,716) -- -- (9,716)
---- -------- ------- ------- --------- ------ ------ --------
BALANCE, December 31,
1997................... $341 $180,084 $ (973) $ -- $ (71,691) $ -- $ -- $107,761
Comprehensive Loss:
Net loss............... -- -- -- -- (84,254) -- -- (84,254)
Translation
adjustments........... -- -- -- -- -- -- 1,269 1,269
--------
Comprehensive Loss:..... (82,985)
--------
Treasury stock
purchase............... -- -- -- (9,133) -- -- -- (9,133)
Issuance of common
stock:
Xpedite acquisition..... 110 345,009 -- -- -- -- -- 345,119
ATS acquisition......... 7 23,527 -- -- -- -- -- 23,534
Exercise of stock
options................ 11 7,318 -- -- -- -- -- 7,329
Income tax benefit from
exercise of stock
options................ -- 6,168 -- -- -- -- -- 6,168
---- -------- ------- ------- --------- ------ ------ --------
BALANCE, December 31,
1998................... $469 $562,106 $ (973) $(9,133) $(155,945) $ -- $1,269 $397,793
Comprehensive Income
(Loss):
Net loss............... -- -- -- -- (33,491) -- -- (33,491)
Translation
adjustments........... -- -- -- -- -- -- (742) (742)
Unrealized gain on
marketable
securities............ -- -- -- -- -- 50,774 -- 50,774
--------
Comprehensive Income
(Loss)................. 16,541
--------
Issuance of common
stock:
Intellivoice
acquisition............ 6 4,437 -- -- -- -- -- 4,443
Exercise of stock
options................ 5 1,059 -- -- -- -- -- 1,064
Employee stock purchase
plan................... 1 480 -- -- -- -- -- 481
Income tax benefit from
exercise of stock
options................ -- 1,972 -- -- -- -- -- 1,972
Issuance of shareholder
note receivable........ -- -- (74) -- -- -- -- (74)
---- -------- ------- ------- --------- ------ ------ --------
BALANCE, December 31,
1999................... $481 $570,054 $(1,047) $(9,133) $(189,436) 50,774 527 $422,220
==== ======== ======= ======= ========= ====== ====== ========
64
PTEK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
--------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................... $ (33,491) $(84,254) $ (18,428)
Adjustments to reconcile net loss to net cash
provided by
Operating activities (excluding effects of
acquisitions):
Depreciation................................. 69,944 46,252 19,482
Amortization................................. 98,912 65,588 1,785
Gain on sale of marketable securities,
available for sale.......................... (152,094) -- --
Loss on disposal of property and equipment... 597 13 --
Deferred income taxes........................ 31,520 (26,467) (462)
Restructuring, merger costs and other special
charges..................................... 7,980 24,050 54,047
Acquired research and development............ -- 15,500 --
Accrued settlement costs..................... -- 1,500 1,500
Payments for restructuring, merger costs and
other special charges....................... (8,927) (14,954) (26,616)
Payments for accrued settlement costs........ -- (1,291) --
Changes in assets and liabilities:
Accounts receivable, net.................... (7,251) 4,281 (6,467)
Prepaid expenses and other.................. (9,627) 6,067 (433)
Accounts payable and accrued expenses....... 12,364 (14,037) 2,751
--------- -------- ---------
Total adjustments.......................... 43,418 106,502 45,587
--------- -------- ---------
Net cash provided by operating activities.. 9,927 22,248 27,159
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.......................... (44,205) (61,335) (33,387)
Proceeds from disposal of property and
equipment.................................... -- 569 --
Redemption (purchase) of marketable
securities, net.............................. 175,060 133,796 (86,669)
Acquisitions.................................. (20,949) (43,644) (16,198)
Strategic investments......................... (10,089) (8,259) (23,801)
Other......................................... 7,399 165 --
--------- -------- ---------
Net cash provided by (used in) investing
activities................................ 107,216 21,292 (160,055)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under borrowing
arrangements, net............................ (121,914) (29,848) (29,469)
Purchase of common stock...................... -- (9,133) --
Proceeds from convertible subordinated notes.. -- -- 172,500
Debt issue costs.............................. -- (1,285) (6,028)
Shareholder distributions, primarily S-
corporation distributions.................... -- -- (9,360)
Exercise of stock options, net of tax
withholding payments......................... 1,064 (5,530) 13,823
Issuance of shareholder note receivable....... (74) -- (973)
Other......................................... -- (319) (1,763)
--------- -------- ---------
Net cash (used in) provided by financing
activities................................ (120,924) (46,115) 138,730
--------- -------- ---------
Effect of exchange rate changes on cash........ (79) 31 --
--------- -------- ---------
NET (DECREASE) INCREASE IN CASH AND
EQUIVALENTS................................... (3,860) (2,544) 5,834
CASH AND EQUIVALENTS, beginning of period...... 19,226 21,770 15,936
--------- -------- ---------
CASH AND EQUIVALENTS, end of period............ $ 15,366 $ 19,226 $ 21,770
========= ======== =========
Accompanying notes are integral to these consolidated financial statements.
65
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND ITS BUSINESS
PTEK Holdings, Inc., a Georgia corporation, and its subsidiaries
(collectively, the "Company") began operations in 1991 and the Company
completed its initial public offering in March 1996. The Company provides an
array of innovative solutions which are designed to simplify the communications
needs of businesses and individuals. The Company's services include voice and
electronic messaging, electronic document distribution, conferencing, calling
card services and Internet-based communications services. Through a series of
acquisitions from September 1996 through September 1999, the Company has
assembled a suite of communications services, an international private data
network and points of presence in regions covering North America, Asia/Pacific
and Europe. The Company has also invested in Internet companies that have
developed their own innovative product offerings. Through these acquisitions
and investments, the Company has become an "opervesting"--operating and
investing--business model. In this business model, the Company operates
decentralized operating business units and makes equity investments in Internet
companies. The Company's acquisitions and segments are more fully described in
Note 7--"Acquisitions" and Note 20--"Segment Reporting". The Company's
investments are described in Note 4--"Marketable Equity Securities, Available
for Sale" and Note 5--"Investments in Associated Companies at Cost".
2. SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of Consolidation
The financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Cash and Equivalents
Cash and equivalents include cash on hand and highly liquid investments with
a maturity at date of purchase of three months or less.
Marketable Securities, Available for Sale
The Company follows Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 mandates that a
determination be made of the appropriate classification for equity securities
with a readily determinable fair value and all debt securities at the time of
purchase and a reevaluation of such designation as of each balance sheet date.
At December 31, 1999 and 1998, investments consisted of common stock
investments, municipal obligations and mutual funds. Management considers all
such investments as "available for sale". Common stock investments are carried
at fair value based on quoted market prices. Debt instruments are carried at
amortized cost. Unrealized holding gains and losses, net of the related income
tax effect are excluded from earnings and are reported as a separate component
of shareholders' equity until realized. Realized gains and losses are included
in earnings and are derived using the specific identification method for
determining the cost of the securities sold.
66
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments in Associated Companies, at Cost
The Company has made investments in various companies that are engaged in
emerging technologies related to the internet and telecommunications. Each of
these investments represent a less than twenty percent ownership interest in
which the Company does not exercise significant influence and as there is no
quoted market price for these companies they are carried at cost, as permitted
under APB Opinion No. 18 "The Equity Method of Accounting for Investments in
Common Stock."
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided under
the straight-line method over the estimated useful lives of the assets,
commencing when the assets are placed in service. The estimated useful lives
are ten years for furniture and fixtures, seven years for office equipment and
one to ten years for computer and telecommunications equipment. The cost of
installed equipment includes expenditures for installation. Assets recorded
under capital leases and leasehold improvements are depreciated over the
shorter of their useful lives or the term of the related lease. The Company has
capitalized costs related to the development of proprietary software utilized
to provide enhanced communications services. All costs in the software
development process that are classified as research and development are
expensed as incurred until technological feasibility has been established. Once
technological feasibility has been established, such costs are considered for
capitalization. The Company's policy is to amortize these costs by the greater
of (a) the ratio that current gross revenues for a service offering bear to the
total of current and anticipated future gross revenues for that service
offering or (b) the straight-line method over the remaining estimated life of
the service offering.
Goodwill
Goodwill represents excess of the cost of businesses acquired over fair value
of net identifiable assets at the date of acquisition and has historically been
amortized using the straight line method over various lives up to 40 years. In
the fourth quarter of 1998 the Company shortened the life of all remaining
goodwill to seven years to better reflect rapidly changing technology and
increased competition in the enhanced telecommunications marketplace.
Valuation of Long-Lived Assets
Management periodically evaluates carrying values of long-lived assets,
including property and equipment, marketable securities, available for sale,
investments in affiliated companies, at cost, strategic alliance contract,
goodwill and other intangible assets, to determine whether events and
circumstances indicate that these assets have been impaired. An asset is
considered impaired when undiscounted cash flows to be realized from such asset
are less than its carrying value. In that event, a loss is determined based on
the amount the carrying value exceeds the fair market value of such asset.
Stock-Based Compensation Plans
As permitted under the provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation," the Company has elected to apply Accounting Principles
Board ("APB") Opinion No. 25--"Accounting for Stock Issued to Employees."
Accordingly, no compensation expense is recorded for stock based awards issued
at market value at the date such awards are granted. The Company makes pro
forma disclosures of net loss and net loss per share as if the market value
method was followed. See Note 12--"Stock-Based Compensation Plans."
67
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The Company recognizes revenues when services are provided. Revenues consist
of fixed monthly fees, usage fees generally based on per minute rates and
service initiation fees as well as license fees earned from companies which
have license arrangements for the use of the Company's computer telephony
platform. Deferred revenue consists of billings made to customers in advance of
the time services are rendered.
Income Taxes
Deferred income taxes are recorded using enacted tax laws and rates for the
years in which income taxes are expected to be paid. Deferred income taxes are
provided when there is a temporary difference between the recognition of items
in income for financial reporting and income tax purposes.
Net Loss Per Share
The Company follows SFAS No. 128, "Earnings per Share." That statement
requires the disclosure of basic earnings per share and diluted earnings per
share. Basic earnings per share is computed by dividing net income (loss)
available to common shareholders by the weighted-average number of common
shares outstanding during the period and does not include any other potentially
dilutive securities. Diluted net income (loss) per share gives effect to all
potentially dilutive securities. The Company's convertible subordinated notes
and stock options are potentially dilutive securities. In 1999, 1998 and 1997,
both potentially dilutive securities were antidilutive and therefore are not
included in diluted net loss per share.
Concentration of Credit Risk
Revenues through the Amway distribution channel in the Voicecom segment of
the Company represented approximately $34.3 million, $41.9 million and $49.9
million of the Company's consolidated revenues for 1999, 1998 and 1997,
respectively.
Foreign Currency Translation
The assets and liabilities of subsidiaries domiciled outside the United
States are translated at rates of exchange existing at the balance sheet date.
Revenues and expenses are translated at average rates of exchange prevailing
during the year. The resulting translation adjustments are recorded as a
separate component of shareholders' equity.
Treasury Stock
Treasury stock transactions are recorded at cost. When treasury shares are
reissued, the company uses a first-in, first-out method and the excess of
purchase cost over reissuance price, if any, is recorded in additional paid-in-
capital.
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 and unrealized gain on available-for-sale
marketable securities represent the Company's components of other comprehensive
income in 1999. In 1998, foreign currency translation was the only component of
comprehensive income. For the years ended December 31, 1999 and 1998, total
comprehensive loss was approximately $16.5 million and $(83.0) million,
respectively. For the year ended December 31, 1997, total comprehensive income
(loss) approximates net income (loss).
68
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New Accounting Pronouncements
In June 1998, 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 criteria for the use of hedge accounting. The Company's
required adoption date is January 1, 2001. SFAS No. 133 is not to be applied
retroactively to financial statements of prior periods. The Company expects no
material impact to its financial position upon adoption of SFAS No. 133.
Reclassifications
Certain prior year amounts in the Company's consolidated financial statements
have been reclassified to conform to the 1999 presentation.
3. RESTRUCTURING, MERGER COSTS AND OTHER SPECIAL CHARGES
Between the second quarter of 1997 and the fourth quarter of 1998, the
Company made several acquisitions, including the acquisitions of Voice-Tel,
VoiceCom Systems, Inc. and Xpedite. In connection with these acquisitions,
management formulated separate plans to exit activities of those acquired
companies or to exit activities of existing Company operations. The Company
also incurred substantial transaction costs in connection with these
acquisitions. Accordingly, the Company expensed the costs associated with these
management plans and the associated transaction costs. In the second quarter of
1997, the Company recorded costs of $40.0 million in connection with its
acquisition of Voice-Tel, which was accounted for as a pooling-of-interests and
which became part of the Emerging Enterprise Solutions ("EES") operating unit.
In the third quarter of 1997, the Company recorded costs of $14.1 million in
connection with its acquisition of VoiceCom Systems, Inc., which was accounted
for as a pooling-of-interests and whose operations became part of the Corporate
Enterprise Solutions ("CES") operating unit. In the first quarter of 1998, the
Company recorded costs of $4.5 million associated with management's plan to
close existing activities of both the Voice-Tel and VoiceCom Systems, Inc.
acquisitions that were duplicative of those of Xpedite and were not part of any
exit plans associated with those previous acquisitions. Also in the first
quarter of 1998, the Company expensed costs to exit certain activities existing
in its Enhanced Calling Card operations that became part of the EES operating
unit. During the fourth quarter of 1998, the Company recorded a $17.8 million
write-off as part of management's quarterly assessment of the carrying value of
its strategic investments. Certain investments were deemed permanently impaired
and accordingly written down to fair value. Also, during the fourth quarter of
1998, management recorded an $11.4 million charge in connection with its
reorganization of the Company into two operating units, EES and CES. As part of
this reorganization into two business units, management abandoned its earlier
plans to integrate the services and products acquired in the acquisitions of
Voice-Tel, VoiceCom Systems, Inc. and Xpedite onto a single unified service
platform and decided not to exit certain duplicative services and products.
Accordingly, management amended or ceased certain exit plans that were
originally established during these prior acquisitions resulting in the
reduction of $9.7 million of existing restructuring reserves. A detailed
discussion of the components of the costs for each of these plans is set forth
below.
During the third quarter of 1999, management decentralized the Company
further into six segments consisting of Voicecom (formerly in the EES and CES
groups), Xpedite (formerly in the CES group), Premiere Conferencing (formerly
in the CES group), Retail Calling Card Services (formerly in the EES group),
PTEKVentures and Corporate. As part of this reorganization, management
continued its movement away from integrating its service offerings onto a
single unified service platform by further decentralizing the organization from
two customer based operating units, EES and CES, into smaller product based or
functional cost-based segments. The primary focus of this plan was to eliminate
a significant portion of the Corporate overhead in the previous management
organization. In connection with this reorganization, management recorded a
charge of $8.2 million.
69
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Voice-Tel Acquisition
In the second quarter of 1997, the Company recorded restructuring, merger
costs and other special charges of approximately $40.0 million in connection
with its pooling-of-interests with Voice-Tel. These charges result from
management's plan to restructure the operations of the Voice-Tel businesses
under a consolidated business group model and discontinue its franchise
operations. Such amounts consist of $9.5 million of severance and exit costs,
$3.1 million of contractual obligations, $17.2 million of transaction
obligations, $3.1 million of asset impairments and $7 million of other costs,
primarily to exit facilities and certain activities.
Severance and exit costs are attributable to the termination of 234
employees primarily associated with the former owners and administrative
functions of the Voice-Tel franchise organization that management is
reorganizing under a corporate structure. Severance and exit costs are cash
outlays. In 1997 and 1998, the Company paid severance and exit costs of $4.5
million and $2.0 million, respectively. Employees terminated under this plan
in 1997 and 1998 were 129 and 57, respectively. Total estimated annual savings
from these terminations in 1997 and 1998 was approximately $14.2 million.
Severance and exit costs attributable to 48 employees was recognized in the
fourth quarter of 1998, which is discussed below under "--Reorganization of
Company into EES and CES Business Units."
Contractual obligations are primarily lease termination costs associated
with the closure of equipment site locations in the Voice-Tel voice messaging
network. Contractual obligations are cash outlays. In 1997 and 1998, the
Company paid contractual obligation costs of $0.4 million and $0.2 million,
respectively. In the fourth quarter of 1998, management revised their plan
regarding the equipment site closures by reducing the number of sites to be
closed, as discussed below under "--Reorganization of Company into EES and CES
Business Units."
Management initially planned to move the Voice-Tel voice messaging network
to the unified messaging platform that the Company was developing. This
transition to the new unified messaging platform was intended to allow for the
elimination of 100 voice mail equipment sites.
This portion of the VoiceTel restructuring plan changed during 1998 for
three reasons. First, development of the unified messaging platform was
delayed due to system customization issues, which delayed the closing of
equipment sites. Second, the voice mail equipment manufacturer developed a
Year 2000 software solution and agreed to support the Company's equipment,
which eliminated the need to replace the existing equipment. Third, the
Company decided to reorganize into two strategic business units, CES and EES,
which would focus on large corporations and smaller enterprises, respectively.
Since CES and EES each contained distinct portions of the legacy platforms
acquired, management decided to use those legacy platforms rather than
complete the unified messaging platform. Therefore, as part of this
reorganization, the management for the two new business units determined that
their customers would be better served, and the Company would optimize
operating profits, by continuing to use the existing voice mail equipment and
maintaining substantially all of the equipment sites.
Transaction obligations are primarily cash outlays for professional services
rendered surrounding the activities of acquiring Voice-Tel and are comprised
of investment banker fees, legal fees, accounting and tax fees and other
consulting services. The Company paid transaction obligations in 1997 and 1998
of $13.1 million and $3.5 million, respectively. Management does not
anticipate additional transaction obligation cash outlays beyond 1998.
Asset valuation allowances relate primarily to administrative site equipment
and leasehold improvements associated with the closure of various
administrative sites in the former franchise organization. Non-cash asset
write-downs against this valuation allowance in 1997 and 1998 were $0.4
million and $1.4 million, respectively. Management revised their plan in the
fourth quarter of 1998 regarding the plan to close the Cleveland headquarters
of Voice-Tel by postponing closure of that site until 1999. Accordingly,
management reversed the
70
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
valuation allowance of $1.3 million associated with this office. Management
does not expect any additional write-downs of equipment beyond 1998 associated
with this plan. The annual reduction in depreciation expense as a result of
such disposals is approximately $0.9 million.
Other costs, primarily to exit facilities and certain activities are
primarily related to office closure clean up costs, costs to terminate
contractual arrangements between franchisors and franchisees in the franchise
network, outplacement service costs associated with termination of employees,
costs to consolidate the financial statements of the acquired franchisor and
the related franchisees, and professional fees associated with predecessor
franchise tax and pension matters. All such costs are cash outlays. The Company
paid other costs in 1997 and 1998 of $6.1 million and $0.9 million,
respectively. Management does not anticipate additional costs beyond 1998 under
this plan.
In the fourth quarter of 1998, management revised this plan, as discussed
below under "--Reorganization of Company into EES and CES Business Units." All
cash outlays for this plan were funded from cash flows from operating
activities and cash and marketable securities investments on hand.
VoiceCom Systems, Inc. Acquisition
In the third quarter of 1997, the Company recorded restructuring, merger cost
and other special charges of approximately $14.1 million in connection with its
pooling-of-interests with VoiceCom Systems, Inc. These charges resulted from
management's plan to restructure the operations of VoiceCom Systems, Inc. by
reducing its workforce and exiting certain facilities. Such amounts consist of
severance and exit costs of $2.4 million, contractual obligations of $2.3
million, transaction obligations of $2.9 million, asset impairments of $3.1
million and other exit costs, primarily to exit facilities and certain
activities of $3.4 million.
Severance and exit costs are attributable to the termination of 84 employees.
Severance and exit costs are cash outlays. In 1997 and 1998, The Company paid
severance and exit costs of $1.2 million and $1.2 million, respectively, on the
termination of the 84 employees. Total estimated annualized savings from these
terminations is approximately $3.0 million.
Contractual obligations consist primarily of lease termination costs to exit
certain facilities. In 1997 and 1998, The Company paid contractual obligations
associated with these lease terminations of $0.1 million and $1.2 million,
respectively. During the fourth quarter of 1998, management completed all lease
terminations of certain facilities at lower than expected costs and accordingly
reversed any remaining accrued obligations associated with these contracts.
Management's revised plans are discussed below under "--Reorganization of
Company into EES and CES Business Units."
Transaction obligations are primarily cash outlays for professional services
rendered surrounding the activities of acquiring VoiceCom Systems, Inc. and are
comprised of investment banker fees, legal fees, accounting and tax fees and
other consulting services. The Company paid transaction obligations in 1997 and
1998 of $2.0 million and $0.7 million, respectively. Management does not
anticipate additional transaction obligation cash outlays beyond 1998.
Asset valuation allowances relate primarily to certain administrative assets
associated with facility closures, all of which were held for disposal. In 1997
and 1998, non-cash write-offs of administrative assets were $2.1 million and
$1.0 million, respectively. Management does not expect additional write-downs
of equipment beyond 1998 associated with this plan. The annual reduction in
depreciation expense as a result of the disposals is approximately $0.6
million.
71
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other costs, primarily to exit facilities and certain activities is related
to office closure clean up costs and outplacement service costs associated with
termination of employees. All such costs are cash outlays. The Company paid
other costs in 1997 and 1998 of $0.5 million and $2.9 million, respectively.
In the fourth quarter of 1998, management revised this plan, as discussed
below under "--Reorganization of Company into EES and CES Business Units."
Management does not anticipate additional costs beyond 1998 under this existing
plan. All cash outlays for this plan were funded from cash flows from operating
activities and cash and marketable securities investments on hand.
Xpedite Acquisition
In the first quarter of 1998, the Company recorded restructuring, merger and
other special charges of approximately $4.5 million in connection with
management's plan to close existing activities of both the Voice-Tel and
VoiceCom operations that were duplicative of those of Xpedite and were not part
of any exit plans associated with those previous acquisitions. Such amounts
consist of severance and exit costs of $1.8 million, contractual obligations of
$0.4 million, transaction obligations of $0.8 million, asset impairments of
$0.7 million and other exit costs of $0.8 million.
Severance and exit costs consist of the termination of 122 employees
associated with administrative, operations and sales functions of Voice-Tel and
VoiceCom Systems, Inc. operations that are duplicative of existing Xpedite
operations. The Company paid severance and exit costs of $1.5 million in 1998.
Management terminated 122 employees with annualized salary savings of
approximately $6.0 million. Management does not expect any terminations
associated with this plan beyond 1998.
Contractual obligations were associated with lease termination costs of 65
former Voice-Tel and VoiceCom Systems, Inc. sales locations. Management
discontinued this plan of action in the fourth quarter of 1998 as part of the
reorganization of the Company into the EES and CES business units and,
therefore, no lease termination costs were incurred.
Transaction obligations associated with the merger were related to consulting
fees associated with the termination of the 122 employees. The Company paid
$0.7 million of such fees in 1998. Management does not anticipate additional
costs beyond 1998.
Other exit costs were primarily costs to close former Voice-Tel and VoiceCom
Systems, Inc. facilities that were duplicative to existing Xpedite facilities
and not included in either the Voice-Tel or VoiceCom Systems, Inc.
restructuring plans.
Asset impairments of $0.7 million were attributable to certain switching
equipment related to Voice-Tel that were duplicative of existing equipment at
Xpedite. The Company disposed of this duplicative equipment in 1998.
All cash outlays associated with the above plan were funded from cash flows
from operating activities and cash and marketable securities investments on
hand.
Management Assessment of Carrying Value of Strategic Investments
In the fourth quarter of 1998, the Company recorded a non cash charge of
$17.8 million as part of management's quarterly assessment of the carrying
value of its strategic investments. The Company recorded a $13.9 million charge
to write-down the value of its strategic alliance intangible asset with MCI
WorldCom. This charge was required based upon management's evaluation of
revenue levels expected from this alliance. The Company reevaluated the
carrying value and remaining life of the MCI WorldCom strategic alliance in
light of
72
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the expiration of certain minimum revenue requirements under the strategic
alliance agreement and the level of revenues expected to be achieved from the
alliance following the merger of WorldCom and MCI in the third quarter of 1998.
Accordingly, the Company recorded a write-down in the carrying value of this
investment based on estimated future cash flows discounted at a rate of 12%. In
addition, the Company recorded a charge of $3.9 million to reduce the carrying
value of its investment in certain equity securities to fair market value. This
charge was necessitated based upon management's assessment that the decline in
the value of these securities was not temporary.
Reorganization of Company into EES and CES Business Units
During the fourth quarter of 1998, management reorganized the Company into
two operating units, EES and CES. CES would provide services to corporations
with large professional staff with communications needs and EES would provide
communications services to small office/home office, multi-level marketing
organizations and retail buyers. CES and EES would use the legacy platforms of
the merged companies that made them up. CES was comprised of Xpedite, ATS and
VoiceCom Systems, Inc., which all had large corporate customers. EES would be
comprised of the original calling card business of the Company and the voice-
messaging business of Voice-Tel. As part of this reorganization into two
business units, management abandoned its earlier plans to integrate the
services and products acquired in the acquisitions of Voice-Tel, VoiceCom
Systems, Inc. and Xpedite onto a single unified service platform and decided
not to exit certain duplicative services and products. This was driven, in
part, by the inability of a third party to assist the Company in providing a
platform that would provide functionality acceptable to the Company's
customers, and, in part, due to the lack of cross-selling product offerings
from other acquired businesses. Accordingly, management amended or ceased
certain exit plans that were originally established in connection with the
prior acquisitions discussed above. The reduction of $9.6 million in the fourth
quarter of 1998 is comprised of the following expense reversals related to
remaining reserves with respect to the following charges: $7.4 million related
to the Voice-Tel acquisition, $1.1 million related to the VoiceCom Systems,
Inc. acquisition and $1.1 million related to the Xpedite acquisition. In total,
$9.6 million of reserve was reversed, which related to the aggregate of $58.4
million of charges. Offsetting the $9.6 million of reserve reversals in the
fourth quarter of 1998 was a fourth quarter charge of $11.4 million that
reflected management's revision of the initial restructuring plans established
in connection with each acquisition.
The major portion of the Voice-Tel restructuring plan that was abandoned was
the reduction in the number of voice messaging equipment sites from 244 to 144.
The impact of the reversal of this reserve was to increase 1998 pretax income
by $2.5 million. This portion of the plan was abandoned due primarily to delays
in developing a unified messaging platform and a new focus on customers on
existing legacy platforms as part of the EES and CES reorganization.
As a result of the corporate reorganization into two business units, CES and
EES, the Company revised its plan to close its Cleveland site, which was
initiated as part of the Voice-Tel restructuring plan. This closure plan was
behind schedule under the original plan due to the Company's initiatives to
close the VoiceCom corporate headquarters into Cleveland first as an overall
step to closing the VoiceCom Systems, Inc. and Voice-Tel headquarters into the
Company's Atlanta headquarters. Accordingly, new CES and EES management
postponed the closure into the first six months of 1999. The Company reversed
$1.5 million of reserve under this portion of the Voice-Tel restructuring plan,
and established $2.9 million under the new plan. The difference between the two
charges is additional severance from increased headcount at the time of the
revised plan.
The fourth quarter 1998 net reduction of $3.4 million in asset valuation
allowances is attributable to a reversal of $1.3 million from the Voice-Tel
acquisition and a new valuation allowance of $4.7 million under the
reorganization of the Company into two business units, EES and CES. The asset
valuation allowances not used
73
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as part of the Voice-Tel acquisition related to the Cleveland administrative
office site that management decided in the fourth quarter of 1998 to postpone
closing until 1999.
Also in the fourth quarter of 1998, the Company reversed $0.6 million of
accruals related to transaction costs that were anticipated but ultimately were
not incurred.
The new valuation allowances of $4.7 million related to certain switching
equipment associated with the Company's enhanced calling services. This
switching equipment was determined to be no longer operational due to the
reduced volume of business associated with the enhanced calling services
product and is anticipated to be disposed of within twelve months of
management's decision. These two switches were purchased by the Company in the
second quarter of 1998 but were never placed into service. They remained idle
due to the bankruptcy of two license customers that had significant volumes of
business with the Company. During the third quarter of 1998 management looked
for alternative uses for this equipment including the use in potential prepaid
calling card business and international calling card programs. During the
fourth quarter of 1998, management reorganized the Company into two business
units, CES and EES. The new management of these units decided at that time that
forecasted volume for the type of business used for these switches over the
switches useful lives would not justify the additional capacity that these
switches brought to the Company's network. Either potential buyers would be
sought or the switches would be used for spare parts on like switches in the
Company's network. Therefore the Company charged a valuation reserve in the
fourth quarter of 1998 to reduce the asset carrying value to its estimated
scrap value.
The fourth quarter 1998 net increase of $1.5 million in severance and exit
costs is attributable to a reversal of $3.0 million from the Voice-Tel
acquisition, $0.3 million related to the Xpedite acquisition and a $4.8 million
charge related to the charge taken under the reorganization of the Company into
two business units, EES and CES. The severance and exit costs not used as part
of the Voice-Tel acquisition relate to management's revision of the plan to
exit certain Voice-Tel regional administrative functions and the Voice-Tel
corporate headquarters in the fourth quarter of 1998. Under the plan to
reorganize into business units, EES and CES, additional headcount reduction and
extended timing of the closures were implemented. Under this revised plan, 48
employees were identified, which was an increase of 20 employees from the
original estimate. The annual cost savings from the revised plan is
approximately $2.5 million. Management expects completion of these exit
activities to take 12 months subsequent to the fourth quarter of 1998. The
severance and exit costs not used as part of the first quarter charge relate to
management's revision of the plan to exit a certain operational site. Under the
revised plan, management intends to exit this site within 12 months subsequent
to the fourth quarter of 1998. The annual costs savings from the termination of
19 employees and from this site closure is anticipated to be approximately $1.0
million. The establishment of additional severance and exit costs from various
other reserve reversals is a result of management's decision in the fourth
quarter of 1998 to terminate 11 managers associated with the acquisitions of
Voice-Tel, VoiceCom Systems, Inc. and Xpedite. The estimated annual cost
savings from these terminations is approximately $2.5 million. The severance
associated with these managers is expected to be paid over one to three years.
The fourth quarter 1998 net reduction of $3.5 million in contractual
obligations is attributable to a reversal of $2.5 million from the Voice-Tel
acquisition, $1.0 million related to the VoiceCom Systems, Inc. acquisition,
$0.4 million related to the Xpedite acquisition and a new charge of $0.4
million taken under the reorganization of the Company into two business units,
EES and CES. The contractual obligations not used as part of the Voice-Tel
acquisition relate to management's decision not to exit certain equipment sites
and the revision of management's plan to exit the Voice-Tel corporate
headquarters. The contractual obligations not used as part of the VoiceCom
Systems, Inc. acquisition were attributable to management's ability to sublease
the former headquarters of VoiceCom Systems, Inc. to a third party for the
final year of the lease obligation. The charge taken in the fourth quarter is
associated with management's plan to exit the Voice-Tel corporate headquarters
74
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and a certain Xpedite operational site. Management expects these revised plans
to require a cash outlay within the next 12 months.
The fourth quarter 1998 net reduction of $0.9 million in transaction
obligations is attributable to a reversal of $0.6 million from the Voice-Tel
acquisition, $0.1 million related to the VoiceCom Systems, Inc. acquisition and
$0.2 million from the Xpedite acquisition. The reversals related to the Voice-
Tel, VoiceCom Systems, Inc. and Xpedite acquisition are related to actual
payments being less than anticipated by management's original estimate.
The fourth quarter 1998 net increase of $1.1 million in other costs,
primarily to exit facilities and certain activities, is attributable to a
reversal of approximately $28,000 related to the Voice-Tel acquisition, $0.3
million related to the first quarter charge and $1.4 million related to the
charge taken as part of the reorganization of the Company into two business
units, EES and CES of various other reserve reversals. The reversals related to
both the Voice-Tel and first quarter charge are related to actual payments
being less than anticipated by management's original estimate. The charge of
$1.4 million is attributable to increased estimates of exit costs associated
with management's revised plan to terminate approximately 11 managers
associated with previous acquisitions, the exit of the Voice-Tel corporate
headquarters and the exit of various Voice-Tel regional administrative
functions. Management estimates that all such costs will be cash outlays, which
will be paid over the next 12 months.
Decentralization of Company
In the third quarter of 1999, the Company recorded restructuring, merger
costs and other special charges of approximately $8.2 million in connection
with its reorganization from the two EES and CES operating units into six
decentralized segments. The $8.2 million charge is comprised of $7.3 million of
severance and exit costs, $0.7 million of lease termination costs and $0.2
million of facility exit costs.
Severance and exit costs are attributable to the termination of 203
employees, of which 114 employees were associated with the Voicecom segment, 28
employees associated with the Corporate segment and 61 employees associated
with the Xpedite segment. All 203 employees have been terminated. The 114
employees in the Voicecom segment were primarily related to the direct sales
force and executive management of the former EES operating unit. The 28
employees at Corporate were primarily related to executive financial and
administrative functions at the Corporate headquarters. The 61 employees at the
Xpedite segment were primarily associated with the operations of a closed
domestic facility and personnel in the Asia/Pacific and European regions.
Severance and exit costs are cash outlays. The Company anticipates annualized
savings of approximately $13.1 million from the termination of these 203
employees. The Company has paid $3.4 million of severance and exit costs under
this plan in 1999. Management expects to pay $3.9 million in severance and exit
costs in 2000 under this plan related primarily to 11 former executives from
the Corporate business unit. Funding for these costs is primarily through the
operating cash flows of Voicecom and Xpedite segments.
Lease termination costs are attributable to lease termination costs
associated with the abandonment of a facility under the Retail Calling Card
Services segment. Lease termination costs are cash outlays. The Company
incurred $0.7 million in costs in 1999 in terminating this lease. Management
does not anticipate any further costs in terminating this lease in 2000.
Funding for the termination of this lease was primarily through the sale of
marketable securities in the fourth quarter of 1999.
Other costs were attributable to site clean up and exit team travel costs to
exit one facility in the Xpedite segment. The Company incurred $0.1 million of
costs which are cash outlays in the fourth quarter to close this facility.
Management anticipates the remaining $0.1 million to occur in the first six
months of 2000. Funding for the closure of this facility was through operating
cash flows from the Xpedite segment.
75
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accrued costs for restructuring, merger costs and other special charges at
December 31, 1997, 1998 and 1999 are as follows (in thousands):
Accrued Reversal Accrued Reversal Accrued
Costs at 1998 of Costs at 1999 of Costs at
December 31, Charge To Costs Accrued December 31, Charge To Costs Accrued December 31,
Voice-Tel Acquisition 1997 Operations Incurred Costs 1998 Operations Incurred Costs 1999
- --------------------- ------------ ---------- -------- -------- ------------ ---------- -------- -------- ------------
Valuation allowance--
property and
Equipment............. $ 2,713 $ -- $1,435 $(1,278) $-- $-- $-- $-- $--
Accrued restructuring,
merger costs and other
special charges
Severance and exit
costs................ 4,988 -- 2,012 (2,977) (1) -- -- -- (1)
Contractual
obligations.......... 2,684 -- 163 (2,521) -- -- -- -- --
Transaction
obligations.......... 4,114 -- 3,497 (617) -- -- -- -- --
Other................. 936 -- 908 (28) -- -- -- -- --
------- ------ ------ ------- ---- ---- ---- ---- ----
Accrued restructuring,
merger costs and other
special charges....... 12,722 -- 6,580 (6,143) (1) -- -- -- (1)
------- ------ ------ ------- ---- ---- ---- ---- ----
Total restructuring,
merger costs and other
special charges
activity.............. $15,435 $ -- $8,015 $(7,421) $ (1) $-- $-- $-- $ (1)
======= ====== ====== ======= ==== ==== ==== ==== ====
Accrued Reversal Accrued Reversal Accrued
Costs at 1998 of Costs at 1999 of Costs at
VoiceCom Systems, Inc. December 31, Charge To Costs Accrued December 31, Charge To Costs Accrued December 31,
Acquisition 1997 Operations Incurred Costs 1998 Operations Incurred Costs 1999
- ---------------------- ------------ ---------- -------- -------- ------------ ---------- -------- -------- ------------
Valuation allowance--
property and
Equipment............. $ 1,000 $ -- $1,007 $ 7 $-- $-- $-- $-- $--
------- ------ ------ ------- ---- ---- ---- ---- ----
Accrued restructuring,
merger costs and other
special charges
Severance and exit
costs................ 1,213 -- 1,213 -- -- -- -- -- --
Contractual
obligations.......... 2,208 -- 1,210 (998) -- -- -- -- --
Transaction
obligations.......... 826 -- 731 (95) -- -- -- -- --
Other................. 2,852 -- 2,852 -- -- -- -- -- --
------- ------ ------ ------- ---- ---- ---- ---- ----
Accrued restructuring,
merger costs and other
special charges....... 7,099 -- 6,006 (1,093) -- -- -- -- --
------- ------ ------ ------- ---- ---- ---- ---- ----
Total restructuring,
merger costs and other
special charges
activity.............. $ 8,099 $ -- $7,013 $(1,086) $-- $-- $-- $-- $--
======= ====== ====== ======= ==== ==== ==== ==== ====
Accrued Reversal Accrued Reversal Accrued
Costs at 1998 of Costs at 1999 of Costs at
December 31, Charge To Costs Accrued December 31, Charge To Costs Accrued December 31,
Xpedite Acquisition 1997 Operations Incurred Costs 1998 Operations Incurred Costs 1999
- ------------------- ------------ ---------- -------- -------- ------------ ---------- -------- -------- ------------
Valuation allowance--
property and
Equipment............. $ -- $ 707 $ 707 $ -- $-- $-- $-- $-- $--
------- ------ ------ ------- ---- ---- ---- ---- ----
Accrued restructuring,
merger costs and other
special charges
Severance and exit
costs................ -- 1,778 1,485 (293) -- -- -- -- --
Contractual
obligations.......... -- 390 -- (390) -- -- -- -- --
Transaction
obligations.......... -- 833 681 (152) -- -- -- -- --
Other................. -- 827 539 (288) -- -- -- -- --
------- ------ ------ ------- ---- ---- ---- ---- ----
Accrued restructuring,
merger costs and other
special charges....... -- 3,828 2,705 (1,123) -- -- -- -- --
------- ------ ------ ------- ---- ---- ---- ---- ----
Total restructuring,
merger costs and other
special charges
activity.............. $ -- $4,535 $3,412 $(1,123) $-- $-- $-- $-- $--
======= ====== ====== ======= ==== ==== ==== ==== ====
76
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accrued Reversal Accrued Reversal Accrued
Management Assessment Costs at 1998 of Costs at 1999 of Costs at
of Carrying Value of December 31, Charge To Costs Accrued December 31, Charge To Costs Accrued December 31,
Strategic Investments 1997 Operations Incurred Costs 1998 Operations Incurred Costs 1999
- --------------------- ------------ ---------- -------- -------- ------------ ---------- -------- -------- ------------
Asset impairment in
Strategic
Investments.......... $-- $17,777 $17,777 $-- $ -- $ -- $ -- $ -- $ --
---- ------- ------- ---- ------- ------ ------ ----- ------
Accrued restructuring,
merger costs and
other special charges
Severance and exit
costs............... -- -- -- -- -- -- -- -- --
Contractual
obligations......... -- -- -- -- -- -- -- -- --
Transaction
obligations......... -- -- -- -- -- -- -- -- --
Other................ -- -- -- -- -- -- -- -- --
---- ------- ------- ---- ------- ------ ------ ----- ------
Accrued
restructuring,
merger costs and
other special
charges............. -- -- -- -- -- -- -- -- --
---- ------- ------- ---- ------- ------ ------ ----- ------
Total restructuring,
merger costs and
other special charges
activity............. $-- $17,777 $17,777 $-- $ -- $ -- $ -- $ -- $ --
==== ======= ======= ==== ======= ====== ====== ===== ======
Reorganization of Accrued Reversal Accrued Reversal Accrued
Company into EES Costs at 1998 of Costs at 1999 of Costs at
and CES Business December 31, Charge To Costs Accrued December 31, Charge To Costs Accrued December 31,
Groups 1997 Operations Incurred Costs 1998 Operations Incurred Costs 1999
- ----------------- ------------ ---------- -------- -------- ------------ ---------- -------- -------- ------------
Valuation allowance--
property and
Equipment............ $-- $ 4,722 $ -- $-- $ 4,722 $ -- $4,722 $ -- $ --
---- ------- ------- ---- ------- ------ ------ ----- ------
Accrued restructuring,
merger costs and
other special charges
Severance and exit
costs............... -- 4,837 -- -- 4,837 -- 3,106 -- 1,731
Contractual
obligations......... -- 417 -- -- 417 -- 298 (119) --
Transaction
obligations......... -- -- -- -- -- -- -- -- --
Other................ -- 1,392 -- -- 1,392 -- 1,263 (129) --
---- ------- ------- ---- ------- ------ ------ ----- ------
Accrued
restructuring,
merger costs and
other special
charges............. -- 6,646 -- -- 6,646 -- 4,667 (248) 1,731
---- ------- ------- ---- ------- ------ ------ ----- ------
Total restructuring,
merger costs and
other special charges
activity............. $-- $11,368 $ -- $-- $11,368 $ -- $9,389 $(248) $1,731
==== ======= ======= ==== ======= ====== ====== ===== ======
Accrued Reversal Accrued Reversal Accrued
Costs at 1998 of Costs at 1999 of Costs at
Decentralization of December 31, Charge To Costs Accrued December 31, Charge To Costs Accrued December 31,
Company 1997 Operations Incurred Costs 1998 Operations Incurred Costs 1999
- ------------------- ------------ ---------- -------- -------- ------------ ---------- -------- -------- ------------
Valuation allowance--
property and
Equipment............ $-- $ -- $ -- $-- $ -- $ -- $ -- $ -- $ --
---- ------- ------- ---- ------- ------ ------ ----- ------
Accrued restructuring,
merger costs and
other special charges
Severance and exit
costs............... -- -- -- -- -- 7,320 3,434 -- 3,886
Contractual
obligations......... -- -- -- -- -- 708 708 -- --
Transaction
obligations......... -- -- -- -- -- -- -- -- --
Other................ -- -- -- -- -- 200 118 -- 82
---- ------- ------- ---- ------- ------ ------ ----- ------
Accrued
restructuring,
merger costs and
other special
charges............. -- -- -- -- -- 8,228 4,260 -- 3,968
---- ------- ------- ---- ------- ------ ------ ----- ------
Total restructuring,
merger costs and
other special charges
activity............. $-- $ -- $ -- $-- $ -- $8,228 $4,260 $ -- $3,968
==== ======= ======= ==== ======= ====== ====== ===== ======
77
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accrued Reversal Accrued Reversal Accrued
Costs at 1998 of Costs at 1999 of Costs at
December 31, Charge To Costs Accrued December 31, Charge To Costs Accrued December 31,
Consolidated 1997 Operations Incurred Costs 1998 Operations Incurred Costs 1999
- ------------ ------------ ---------- -------- -------- ------------ ---------- -------- -------- ------------
Valuation allowance--
property and
Equipment............ $ 3,713 $23,206 $20,926 $(1,271) $ 4,722 $ -- $ 4,722 $ -- $ --
------- ------- ------- ------- ------- ------ ------- ----- ------
Accrued restructuring,
merger costs
and other special
charges
Severance and exit
costs............... 6,201 6,615 4,710 (3,270) 4,836 7,320 6,540 -- 5,616
Contractual
obligations......... 4,892 807 1,373 (3,909) 417 708 1,006 (119) --
Transaction
obligations......... 4,940 833 4,909 (864) -- -- -- -- --
Other................ 3,788 2,219 4,299 (316) 1,392 200 1,381 (129) 82
------- ------- ------- ------- ------- ------ ------- ----- ------
Accrued
restructuring,
merger costs and
other special
charges............. 19,821 10,474 15,291 (8,359) 6,645 8,228 8,927 (248) 5,698
------- ------- ------- ------- ------- ------ ------- ----- ------
Total restructuring,
merger costs and
other special charges
activity............. $23,534 $33,680 $36,217 $(9,630) $11,367 $8,228 $13,649 $(248) $5,698
======= ======= ======= ======= ======= ===== ======
Reversal of Charge.... $(9,630) $ (248)
------- ------
Restructuring merger
costs and other
special charges...... $24,050 $7,980
======= ======
4. MARKETABLE SECURITIES, AVAILABLE FOR SALE
Marketable securities, available for sale at December 31, 1999 and 1998, are
principally common stock investments carried at fair value and based on quoted
market prices, municipal obligations carried at amortized cost and mutual
funds carried at amortized cost. Common stock investments carried at fair
value include minority equity interests in Healtheon/WebMD and S1 Corporation,
both of which were held in the Company's wholly-owned investing subsidiary
PTEKVentures.com, Inc. as of October 31, 1999. Healtheon/WebMD is an internet-
based service provider to the healthcare industry. S1 Corporation develops
integrated, brandable internet applications that enable financial services
companies to create their own financial portals on the internet.
The cost, gross unrealized gains, fair value, proceeds from sale and
realized gains and losses are as follows for the years ended December 31, 1999
and 1998 (in thousands):
Gross Proceeds
Unrealized Fair From Gross Realized
1998 Cost Gains Value Sale Gains/(Losses)
- ---- -------- ---------- ------- -------- --------------
Municipal obligations...... $ 8,025 $ -- $ 8,025 $133,796 $ --
Mutual funds............... 12,744 -- 12,744 -- --
Equity securities.......... 614 -- 614 -- (3,900)
-------- ------- ------- -------- --------
$ 21,383 $ -- $21,383 $133,796 $ (3,900)
======== ======= ======= ======== ========
1999
- ----
Healtheon/WebMD............ $ 1,079 $49,242 $50,321 $154,427 $152,094
S1 Corporation............. 2,240 33,197 35,437 -- --
Mutual Funds............... 141 -- 141 20,633 --
Other equity securities.... 716 -- 716 -- --
-------- ------- ------- -------- --------
$ 4,176 $82,439 $86,615 $175,060 $152,094
======== ======= ======= ======== ========
78
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1998, the Company recorded a write-down of approximately $3.9 million in
its investment in DigiTEC 2000. This loss resulted from management's assessment
that the decline in fair market value below cost was not temporary. See Note 3
"Restructuring, Merger Costs and Other Special Charges" for a related
discussion.
In the fourth quarter of 1999, the Company sold approximately 3.5 million
shares of its investment in Healtheon/WebMD with proceeds less commissions and
fees of approximately $154.4 million. The proceeds from this sale were used
primarily to pay off outstanding borrowings on its revolving credit facility.
See Note 10 "Indebtedness" for further discussion.
The deferred tax liability on unrealized gains is approximately $31.7 million
at December 31, 1999.
5. INVESTMENTS IN AFFILIATED COMPANIES, AT COST
The Company has made investments in various companies that are engaged in
emerging technologies related to the Internet and telecommunications. These
investments are held in the Company's wholly-owned subsidiary PTEKVentures.com,
Inc. Each of these investments represent a less than twenty percent ownership
interest in which the Company does not exercise significant influence and, as
there is no quoted market price for these companies, they are carried at cost,
as permitted under APB Opinion No. 18 "The Equity Method of Accounting for
Investments in Common Stock." At December 31, 1999 and 1998, the principal
components of investments in associated companies, at cost are as follows (in
thousands):
Investment 1999 1998
---------- ------- -------
WebMD..................................................... $ -- $ 4,200
Vertical One.............................................. -- 200
USA.NET................................................... 5,520 6,000
Webforia.................................................. 4,000 1,000
Derivion.................................................. 5,000 --
Intellivoice.............................................. -- 2,000
Xpedite France S.A........................................ -- 1,768
Other investments......................................... 100 101
------- -------
$14,620 $15,269
======= =======
During the fourth quarter of 1999, privately held WebMD merged with a
publicly traded company called Healtheon Corp., which resulted in the formation
of Healtheon/WebMD a publicly traded company. Also, during the fourth quarter
of 1999, privately held Vertical One merged with a publicly traded company
called Securities First Technologies Corporation which resulted in the
formation of S1 Corporation. As a result of the mergers, the Company's
investments in these two companies now have a readily determinable market
price. Accordingly, the Company has classified these investments as current
assets in marketable securities, available for sale.
During the second quarter of 1999, the Company acquired the remaining
ownership interest in Xpedite France S.A. See Note 4--"Acquisitions" for
further discussion.
During the third quarter of 1999, the Company acquired the remaining
ownership interest in Intellivoice. See Note 7-- "Acquisitions" for further
discussion.
A description of PTEKVentures' investments in non-public companies, at cost,
held at December 31, 1999 are as follows:
Derivion is an application service provider offering turnkey electronic bill
presentment and payment services to companies driven by recurring billing, such
as those in telecommunications, utility, insurance, and financial services.
Webforia develops solutions for managing and sharing Internet content as it is
found. USA.NET is an advanced electronic messaging company dedicated to
creating the post office of the future.
79
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. STRATEGIC ALLIANCE CONTRACT
In November 1996, the Company entered into a strategic allliance agreement
with WorldCom, Inc. (predecessor to MCI WorldCom), the second largest long-
distance carrier in the United States. 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 this agreement, the Company issued to MCI
WorldCom 2,050,000 shares of common stock valued at approximately $25.2 million
(based on the average closing price of the Company's shares for the five days
through the effective date of the transaction, adjusted in consideration of the
restrictions placed upon the shares), and paid MCI WorldCom approximately $4.7
million in cash.
In the fourth quarter of 1998, the Company recorded a non cash charge of
$13.9 million to write-down the value of its strategic alliance intangible
asset with MCI WorldCom. This charge was required based upon management's
evaluation of revenue levels expected from this alliance. The Company
reevaluated the carrying value and remaining life of the MCI WorldCom strategic
alliance in light of the expiration of certain minimum revenue requirements
under the strategic alliance agreement and the level of revenues expected to be
achieved from the alliance following the merger of WorldCom and MCI in the
third quarter of 1998. Accordingly, The Company recorded a write-down in the
carrying value of this investment based on estimated future cash flows
discounted at a rate of 12%. In addition, the Company accelerated amortization
of this asset effective in the fourth quarter of 1998 by shortening its
estimated useful life to 3 years as compared with a remaining life of 23 years
prior to the write-down. See Note 3--"Restructuring, Merger Costs and Other
Special Charges" for related discussions.
7. ACQUISITIONS
Intellivoice Communications Inc. Acquisition
In August 1999, the Company acquired all remaining ownership interests it did
not already own in Intellivoice Communications, Inc. ("Intellivoice"), a
company engaged in developing Internet-enabled communications products. The
Company issued approximately 573,000 shares of its common stock and paid cash
consideration of approximately $870,000 in connection with this acquisition.
This transaction has been accounted for as a purchase. Excess purchase price
over fair value of net assets acquired of approximately $10.1 million has been
recorded as developed technology and is being amortized on a straight-line
basis over three years. The developed technology relates to work associated
with Web-based communications services.
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 the Company's 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, the Company acquired Xpedite Systems, Inc. ("Xpedite"),
a worldwide leader in the enhanced document distribution business including
fax, e-mail, telex and mailgram services. The Company issued approximately 11.0
million shares of its common stock in connection with this acquisition. This
80
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
transaction has been accounted for as a purchase. The purchase price 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 discount rates used to value these assets were 20% for the
customer lists, 15% for the developed technology and 25% for the acquired
research and development. The assembled workforce was valued using a cost
approach, which estimates the cost to replace the asset. Acquired research and
development costs 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
acquisition.
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 Company completed the job monitor
project during 1999 for approximately $350,000. 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 began in 1999 and a discount rate
of 25% was used.
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 1999, the Company purchased all remaining
ownership interests it did not already own in an affiliated electronic document
distribution company located in France for approximately $19 million in cash
and liabilities assumed. The Company held an approximate 18% ownership interest
in the affiliate prior to this transaction which has been accounted for as a
purchase. Excess purchase price over fair value of net assets acquired of
approximately $18 million has been recorded as goodwill and is being amortized
on a straight-line basis over seven years. See Note 5-- "Investments in
Associated Companies, at Cost" for a related discussion.
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 $20.1 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.
81
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
VoiceCom Systems, Inc. Acquisition
During the third quarter of 1997, the Company acquired VoiceCom Systems,
Inc., a provider of 800-based enhanced calling and voice messaging services,
through the issuance of approximately 446,000 shares of its common stock. This
transaction was accounted for as a pooling-of-interests, and the Company's
financial statements present for all periods the operations of VoiceCom
Systems, Inc.
Voice-Tel Acquisitions
In June 1997, the Company completed the Voice-Tel acquisitions. The Company
issued approximately 7.4 million shares of its common stock, paid approximately
$16.2 million in cash and assumed approximately $21.3 million in indebtedness,
net of cash acquired to complete the Voice-Tel acquisitions.
Most of the transactions were structured as tax-free mergers or share
exchanges and were accounted for under the pooling-of-interests method of
accounting. Accordingly, the financial statements of the Company present for
all periods the operations of the Voice-Tel Acquisitions that were accounted
for as pooling-of-interests.
The Company purchased 15 of the franchisees and the limited partner interest
in VTNLP for an aggregate of approximately $15.5 million in cash and
approximately 94,000 shares of its common stock. The excess of the purchase
price over the fair value of the net assets acquired is recorded as an
intangible asset.
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1999 and 1998 assume acquisitions completed during
1999 and 1998 which were accounted for as purchases occurred as of January 1,
1998, (in thousands, except per share data).
1999 1998
-------- ---------
Revenues............................................... $466,209 $ 515,543
Net loss............................................... $(37,443) $(111,350)
Basic net loss per share............................... $ (0.80) $ (2.32)
Diluted net loss per shares............................ $ (0.80) $ (2.32)
8. PROPERTY AND EQUIPMENT
Property and equipment at December 31 is as follows (in thousands):
1999 1998
-------- --------
Computer and telecommunications equipment................. $237,325 $181,618
Furniture and fixtures.................................... 13,227 11,700
Office equipment.......................................... 9,304 13,542
Leasehold improvements.................................... 26,285 23,064
Construction in progress.................................. 40 11,712
-------- --------
286,181 241,636
Less accumulated depreciation............................. 167,456 110,309
-------- --------
Property and equipment, net............................... $118,725 $131,327
======== ========
82
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Assets under capital leases included in property and equipment at December 31
are as follows (in thousands):
1999 1998
------ ------
Telecommunications equipment.................................. $7,000 $7,000
Computer equipment............................................ 308 --
Less accumulated depreciation................................. 6,528 4,973
------ ------
Property and equipment, net................................... $ 780 $2,027
====== ======
Management continually reevaluates the Company's assets with respect to
estimated remaining useful lives and whether current events and circumstances
indicate an impairment condition exists. In the second quarter of 1997, in
connection with the Voice-Tel acquisition, management assesed the remaining
useful life of certain voice-mail equipment used in the Voice-Tel network. Due
to plans to replace this equipment with newer versions because of Year 2000
compatibility issues, management set a timeline of nine months to dispose. As
these assets could not immediately be taken out of service, management
shortened the estimated useful lives from an average of 2.5 years to nine
months. Accordingly, depreciation was accelerated to reflect this change. In
the third quarter of 1997, in connection with the VoiceCom Systems, Inc.
acquisition, management made plans to dispose of a certain calling card
platform within nine months of the acquisition. As this platform could not
immediately be taken out of service, management shortended the estimated useful
life from five years to nine months. Accordingly, depreciation was accelerated
to reflect this change. Effective in the fourth quarter of 1998, management
accelerated depreciation of certain assets by shortening their estimated useful
lives. These assets consist of computers and telecommunications equipment
associated with certain legacy calling card and voice-mail technology systems
which management intends to remove from service in the foreseeable future. The
carrying value of such assets approximated $38.1 million at December 31, 1998.
Effective in the fourth quarter of 1998, these assets were amortized over
periods ranging from nine months to one year, the anticipated remaining service
period. The remaining estimated useful lives of these assets prior to this
change ranged from two to five years.
9. INTANGIBLE ASSETS
Intangible assets consist of the following amounts for December 31, 1999 and
1998 (in thousands):
1999 1998
-------- --------
Goodwill.................................................. $481,532 $468,720
Customer lists............................................ 57,579 50,058
Developed technology...................................... 47,113 34,300
Assembled work force...................................... 7,500 7,500
-------- --------
593,724 560,578
Less accumulated amortization............................. 157,746 68,393
-------- --------
$435,978 $492,185
======== ========
83
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of intangible assets acquired in the Xpedite acquisitions and the
estimated useful lives over which such assets are being amortized is as
follows:
Appraised Estimated Useful
Value Life (years)
--------- ----------------
Goodwill.......................................... $384,701 7
Customer lists.................................... 35,700 5
Developed technology.............................. 34,300 4
Assembled workforce............................... 7,500 3
--------
$462,201
========
Effective in the fourth quarter of 1998, management accelerated the
amortization of all goodwill and intangible assets from its purchase
acquisitions. 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 7 years as compared with 10 to 40 years prior to the
change. Remaining intangible assets are being amortized over lives ranging from
3 to 5 years as compared with 5 years prior to the change. These changes in
estimated useful lives of goodwill and other intangible assets increased
amortization expense by approximately $18.3 million in the fourth quarter of
1998.
10. INDEBTEDNESS
Long-term debt at December 31 is as follows (in thousands):
1999 1998
------ --------
Revolving loan.............................................. $ -- $118,082
Notes payable to banks...................................... 5,534 5,122
Notes payable to shareholders and individuals............... 102 481
------ --------
5,636 123,685
Less current portion........................................ 1,814 119,494
------ --------
$3,822 $ 4,191
====== ========
On December 15, 1999, the Company repaid all outstanding borrowings on its
revolving loan facility and the Company terminated the revolving loan facility
at that time. Substantially all of the proceeds of approximately $155 million
from the sale of approximately 3.5 million shares of the Company's investment
in Healtheon/WebMD were used in order to pay off all outstanding borrowings on
the revolving loan facility. See Note 4--"Marketable Securities, Available for
Sale" for related discussions. The Company maintains a margin loan account with
a certain investment bank where it can borrow up to 45% and 50% of the
Company's holdings in Healtheon/WebMD and S-1 Corporation, respectively.
Interest rates on borrowings under this margin loan arrangement are based on
the broker call rate. At December 31, 1999, the Company had no borrowings
outstanding on the margin loan arrangement.
Notes payable to shareholders and individuals consist principally of
indebtedness assumed by the Company in connection with the Voice-Tel and
VoiceCom Systems, Inc. acquisitions. Interest on borrowings under such notes
range from 5% to 16%. A majority of these obligations were repaid in 1997 in
connection with the acquisitions. The Company issued approximately 484,000
shares to redeem approximately $11.6 million of such indebtedness in connection
with the acquisitions.
84
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Maturities of long-term debt are as follows (in thousands):
2000.................................................................. $1,814
2001.................................................................. 3,805
2002.................................................................. 17
2003.................................................................. --
2004.................................................................. --
------
$5,636
======
11. CONVERTIBLE SUBORDINATED NOTES
In July 1997, the Company issued convertible subordinated notes ("Convertible
Notes") of $172,500,000 which mature in 2004 and bear interest at 5 3/4%. The
Convertible Notes are convertible at the option of the holder into common stock
at a conversion price of $33 per share, through the date of maturity, subject
to adjustment in certain events. The Convertible Notes are redeemable by the
Company beginning in July 2000 at a price of 103% of the conversion price
declining to 100% at maturity with accrued interest. Debt issuance costs
consisting of investment banking, legal and other fees of approximately
$6,028,000 incurred in connection with the Convertible Notes are being
amortized on a straight-line basis over the life of the notes and are included
in other assets in the accompanying balance sheets. Included in interest is
approximately $808,200, $785,000 and $897,000 of debt issuance cost
amortization for December 31, 1999, 1998 and 1997, respectively.
12. FINANCIAL INSTRUMENTS
The estimated fair value of certain financial instruments at December 31,
1999 and 1998 are as follows:
1999 1998
----------------- ----------------
Carrying Fair Carrying Fair
(Dollar amounts in thousands) Amount Value Amount Value
----------------------------- -------- -------- -------- -------
Cash and short-term investments......... $ 15,366 $ 15,366 $ 19,226 $19,226
Marketable securities, available for
sale................................... 86,615 86,615 20,769 20,769
Revolving loan.......................... -- -- 118,082 118,082
Convertible subordinated notes (see Note
11).................................... 172,500 100,913 172,500 96,169
Notes payable, long-term debt and
capital leases (see Notes 10 and 17)... 7,125 7,125 9,091 9,091
The carrying amount of cash and short-term investments, marketable
securities, accounts receivable and payable, revolving loan and accrued
liabilities approximates fair value due to their short maturities. The fair
value of convertible subordinated notes is estimated based on market quotes.
The carrying value of notes payable, long-term debt and capital lease
obligations does not vary materially from fair value at December 31, 1999 and
1998.
13. SHAREHOLDERS' EQUITY
During 1998, the Company executed a stock repurchase program under which it
repurchased approximately 1.1 million shares of its common stock for
approximately $9.1 million. These shares were held in treasury at December 31,
1999.
During 1999, 1998 and 1997, stock options were exercised under the Company's
stock option plans. None of the options exercised qualified as incentive stock
options, as defined in Section 422 of the Internal Revenue Code (the "Code").
Approximately $1,972,000, $6,168,000 and $15,262,000 were recorded as increases
in
85
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
additional paid-in capital reflecting tax benefits to be realized by the
Company as a result of the exercise of such options during the years ended
December 31, 1999, 1998 and 1997, respectively.
The Company made distributions to shareholders of approximately $9.7 million
in 1997. These distributions were made to shareholders of Voice-Tel and
VoiceCom Systems, Inc. in periods prior to their acquisition by the Company.
Such distributions consisted principally of amounts paid to shareholders of S-
Corporations in connection with their responsibility to pay income tax on the
proportionate share of taxable income they were required to include in their
individual income tax return. Upon acquisition by the Company, these S-
Corporations became subject to income tax. Accumulated earnings of S-
Corporations at the date of acquisition have been reclassified as additional
paid-in capital representing the recapitalization of these entities.
14. STOCK-BASED COMPENSATION PLANS
The Company has three stock-based compensation plans, 1994 Stock Option
Plan, 1995 Stock Plan and 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 a committee 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 ("SARs") 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 nonqualified
options not entitled to such deferral.
Sharp declines in the market price of the Company's common stock 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 the Company's common stock on
such date. While the vesting schedules remained 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 an 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. 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 the Company's common stock on such date. Again,
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.
86
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
Second Amended and Restated 1995 Stock Plan (the "1995 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
provided for the grant of incentive stock options. Under the 1998 Plan,
8,000,000 shares of Common Stock are reserved for the grant of nonqualified
stock options and other incentive awards to employees and consultants of the
Company.
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 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 control of the Company.
Effective June 1, 1999, the Company adopted an Associate Stock Purchase Plan
to provide all employees who regularly work at least 20 hours each week and at
least five months each calendar year and who have two months of consecutive
service an opportunity to purchase shares of its common stock through payroll
deductions. The purchase price of the stock is equal to 85% of the fair market
value of the common stock on either the first or last day of each six month
subscription period, whichever is lower. Purchases under the plan are limited
to 20% of an associate's base salary and a maximum of a calendar year aggregate
fair market value of $25,000. In connection with this plan, 1,000,000 shares of
common stock are reserved for future issuance. In 1999, common stock value of
approximately $481,000, or approximately 91,000 shares, were issued to
employees under this plan.
87
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As permitted under the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", the Company has
elected to apply Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, no compensation expense has been
recognized for awards issued under the Company's stock based compensation
plans since the exercise price of such awards is generally the market price of
the underlying common stock at date of grant. Had compensation cost been
determined under the market value method using Black-Scholes valuation
principles, net loss and net loss per share would have been reduced to the
following pro forma amounts:
1999 1998
-------- ---------
(in thousands,
except per
share data)
Net loss
As reported................................................ $(33,491) $ (84,254)
Pro forma.................................................. $(52,979) $(110,476)
Net loss per share
As reported
Basic.................................................... $ (0.72) $ (1.90)
Diluted.................................................. $ (0.72) $ (1.90)
Pro forma.................................................
Basic.................................................... $ (1.14) $ (2.50)
Diluted.................................................. $ (1.14) $ (2.50)
Significant assumptions used in the Black-Scholes option pricing model
computations are as follows:
1999 1998
---------- ----------
Risk-free interest rate................................. 4.73%-6.34% 4.33%-5.68%
Dividend yield.......................................... 0% 0%
Volatility factor....................................... 83 1.05
Weighed average expected life........................... 4.67 years 4.65 years
The pro forma amounts reflect options granted since January 1, 1996. Pro
forma compensation cost may not be representative of that expected in future
years. A summary of the status of the Company's stock plans is as follows:
Weighted Average
Fixed Options Shares Exercise Price
------------- ---------- ----------------
Options outstanding at December 31, 1996........... 7,406,332 $ 4.27
Granted........................................... 3,484,092 23.38
Exercised......................................... (2,221,244) 2.06
Forfeited......................................... (1,256,432) 8.81
---------- ------
Options outstanding at December 31, 1997........... 7,412,748 $13.29
Granted........................................... 9,062,589 16.44
Exercised......................................... (1,112,361) 7.06
Forfeited......................................... (1,413,120) 16.06
---------- ------
Options outstanding at December 31, 1998........... 13,949,856 $ 5.79
Granted........................................... 2,886,414 6.94
Exercised......................................... (519,904) 2.08
Forfeited......................................... (1,945,690) 5.99
---------- ------
Options outstanding at December 31, 1999........... 14,370,676 $ 6.13
========== ======
88
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding at
December 31, 1999:
Weighted Weighted Average Weighted Average
Range of Average Exercise Exercise
Exercise Options Remaining Price of Options Options Price of Options
Prices Outstanding Life Outstanding Exercisable Exercisable
-------- ----------- --------- ---------------- ----------- ----------------
$0--$4.99 2,138,969 3.60 $ 1.44 2,130,049 $ 1.44
$5.00--
$9.99 11,194,379 6.23 6.05 5,993,370 5.97
$10.00--
$14.99 495,401 5.16 10.37 335,005 10.43
$15.00--
$30.00 541,927 4.11 22.62 530,404 22.68
---------- ---- ------ --------- ------
14,370,676 5.73 $ 6.13 8,988,828 $ 6.05
========== ==== ====== ========= ======
15. EMPLOYEE BENEFIT PLANS
The Company sponsors three defined contribution retirement plans covering
substantially all full-time employees. These plans allow employees to defer a
portion of their compensation and associated income taxes pursuant to Section
401(k) of the Internal Revenue Code. The Company may make discretionary
contributions for the benefit of employees under each of these plans. The
Company made contributions of $1.6 million and $0.4 million in 1999 and 1998,
respectively. There were no contributions made by the Company to defined
contribution plans in 1997.
16. RELATED-PARTY TRANSACTIONS
The Company has in the past entered into agreements and arrangements with
certain officers, directors and principal shareholders of the Company involving
loans of funds, grants of options and warrants and the acquisition of a
business. Certain of these transactions may be on terms more favorable to
officers, directors and principal shareholders than they could acquire in a
transaction with an unaffiliated party. The Company has a policy that requires
all material transactions between the Company and its officers, directors or
other affiliates (i) be approved by a majority of the disinterested members of
the board of directors of the Company and (ii) be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.
During 1997, an officer of the Company exercised an option to purchase
100,000 shares of the Company's common stock at an exercise price of $.27 a
share. The Company loaned the officer $973,000 to pay taxes associated with the
exercise of the options. The loan is evidenced by a recourse promissory note
which bears interest at 6% and is secured by the common stock purchased by the
officer.
During 1999 and 1998, the Company leased the use of an airplane on an hourly
basis from a limited liability company that is owned 99% by the Company's chief
executive officer and 1% by the Company. In connection with this lease
arrangement, the Company advanced approximately $109,000 and $270,000 in 1999
and 1998, respectively to the limited liability company to pay the expenses of
maintaining and operating the airplane. The amount due from the limited
liability company is recorded as an account receivable at December 31, 1999.
During the second quarter of 1999, the Company made restricted stock grants
to certain executives of a limited number of Company-owned shares held in
certain investments in affiliates, at cost. These Company-owned shares included
168,000 shares of WebMD Series E Common Stock and 6,461 shares of WebMD
Series F Preferred Stock, and 70,692 shares of USA.NET Series C Preferred
Stock. The vesting periods for these shares ranged from immediately upon grant
to three years, contingent on the executive being employed by the Company.
Excluding the shares subject to these restricted stock grants, the Company
owned an aggregate of 1,932,000 shares of WebMD Series E Common Stock and
74,305 shares of WebMD Series F Preferred Stock, which represent and were
exchanged for 4,804,384 shares of common stock of Healtheon/WebMD, and 812,960
89
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
shares of USA.NET Series C Preferred Stock. In connection with this action the
Company recorded a $13.9 million noncash gain resulting from the write-up to
fair market value of these investments and an $13.1 million non-cash expense
related to the partial vesting of these grants. The gain reflects the
difference between the Company's cost basis and fair market value at date of
grant of these investments. The Company will be required to record additional
non-cash charges of $1.3 million in 2000, $138,000 in 2001 and $154,000 in
2002, reflecting the remaining vesting period associated with these grants. The
Company loaned $4,892,355 with recourse to certain executives to pay taxes
associated with these grants. These loans bear interest at 6.75% and are
secured by the restricted stock granted. The notes come due in December 2000.
During 1999, an officer of the Company exercised an option to purchase 24,000
shares of the Company's common stock at an exercise price of $0.71 a share. The
Company loaned the officer $73,480 to pay taxes associated with the exercise of
the options. The loan is evidenced by a recourse promissory note which bears
interest at 6.5% and is secured by the common stock purchased by the officer.
The Company has a strategic co-marketing arrangement with Healtheon/WebMD in
which it owns an equity interest. The terms of the agreement provide for
Healtheon/WebMD to make an annual minimum commitment of $2.5 million a year for
four years to purchase the Company's Orchestrate(R) product. The Company in
turn is obligated to purchase portal rights from Healtheon/WebMD for $4 million
over four years to assist in marketing its Orchestrate(R) product. During 1999,
the Company recognized revenue of approximately $2.1 million under this
agreement. Healtheon/WebMD also subleased floor space in the Company's
headquarters for approximately $0.4 million in 1999 and 1998, respectively.
17. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases computer and telecommunications equipment, office space
and other equipment under noncancelable lease agreements. The leases generally
provide that the Company pay the taxes, insurance and maintenance expenses
related to the leased assets. Future minimum operating and capital lease
payments as of December 31, 1999 are as follows (in thousands):
Capital Operating
Leases Leases
------- ---------
2000...................................................... $675 $ 9,037
2001...................................................... 197 6,425
2002...................................................... 43 5,216
2003...................................................... 1 4,728
2004...................................................... -- 3,735
Thereafter................................................ -- 10,695
---- -------
Net minimum lease payments................................ 916 $39,836
=======
Less amount representing interest......................... 16
----
Present value of net minimum lease payments............... 900
Less current portion...................................... 675
----
Obligations under capital lease, net of current portion... $225
====
Rent expense under operating leases was approximately $16.8 million, $11.2
million and $7.5 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Future minimum payments for facilities rent are reduced by
scheduled sublease income of approximately $731,000, $501,000 and $700,000 for
the years
90
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ended December 31, 1999, 1998 and 1997, respectively. During 1997 additions of
computer and telecommunications equipment resulted in an increase in capital
lease obligations of approximately $829,000.
Supply Agreements
The Company obtains long-distance telecommunications services pursuant to
supply agreements with suppliers of long-distance telecommunications
transmission services. These contracts generally provide fixed transmission
prices for terms of three to five years, but are subject to early termination
in certain events. No assurance can be given that the Company will be able to
obtain long-distance services in the future at favorable prices or at all, and
the unavailability of long-distance service, or a material increase in the
price at which the Company is able to obtain long-distance service, would have
a material adverse effect on the Company's business, financial condition and
results of operations. Certain of these agreements provide for minimum purchase
requirements. The Company is currently a party to five long-distance
telecommunications services contracts that require the Company to purchase a
minimum amount of services each month. The total amount of the minimum purchase
requirements in 2000 were approximately $19.1 million, of which the Company has
incurred metered telecommunications costs in excess of these minimums.
Litigation and Claims
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 (including a subclass of former Voice-Tel
franchises and a subclass of former Xpedite shareholders) who purchased or
otherwise acquired the Company's common stock from as early as February 11,
1997 through June 10, 1998. 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, among other things, 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. We filed a motion to
dismiss the complaint on April 14, 1999. On December 14, 1999, the court issued
an order that dismissed the claims under Sections 10(b) and 20 of the Exchange
Act without prejudice, and dismissed the claims under Section 12(a)(1) of the
Securities Act with prejudice. The effect of this order was to dismiss from
this lawsuit all open-market purchase by the plaintiffs. The plaintiffs filed
an amended complaint on February 29, 2000, which the Company intends to move to
dismiss.
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, the Company's relationship with customers Amway
Corporation and DigiTEC 2000, Inc., and the Company's 800-based calling card
service. Plaintiffs allege causes of action against the Company for breach of
contract, against all defendants for negligent misrepresentation, violations of
Sections 11 and 12(a)(2) of the Securities Act of 1933, and against the
individual
91
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 of
1933, punitive damages, costs and attorneys' fees. The defendants' motion to
transfer venue to Georgia has been granted. The defendants' motion to dismiss
has been granted in part and denied in part. The Company intends to file an
answer.
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 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.
In March 1999, Aspect Telecommunications, Inc. ("Aspect"), the purported
current owner of certain patents, filed suit against the Company and Premiere
Communications, Inc. ("PCI") alleging that they had violated claims in these
patents and requesting damages and injunctive relief. In the fourth quarter of
1999, the Company and PCI entered into a settlement agreement with Aspect,
which settled and disposed of Aspect's claims in this litigation. This
settlement will not have a material adverse effect on the Company's business,
financial condition or results of operations.
On June 11, 1999, the Company filed a complaint against MCI WorldCom in the
Superior Court of Fulton County for the State of Georgia. The Company
subsequently filed an amended complaint on June 18, 1999. The amended complaint
alleges that MCI WorldCom breached the Strategic Alliance Agreement, dated
November 13, 1996, between the Company and MCI WorldCom by, inter alia,
awarding various contracts to vendors other than the Company and to which the
Company was entitled either exclusive or preferential consideration. In
addition to injunctive relief, the Company seeks damages of not less than
$10 million, per- and post-judgment interest, cost and expenses of litigation,
including attorneys' fees. On July 1, 1999 the court entered an order staying
all proceedings pending arbitration. In connection with that order, MCI
WorldCom agreed that it would not issue any requests for information, requests
for proposals or enter into any contracts with respect to the proposals
challenged by the Company.
A lawsuit was filed on November 1, 1999 by Donald H. Turner, a former officer
of the Company against the Company, Boland T. Jones and Jeffrey A. Allred in
the Superior Court of Fulton County, Georgia. Against the Company the plaintiff
alleges breach of contract and promissory estoppel relating to the termination
of his employment against, and against all defendants the plaintiff alleges
fraudulent inducement relating to his hiring by the Company. The plaintiff
seeks compensatory damages of $875,000, forgiveness of a $100,000 loan,
interest, attorneys' fees and punitive damages in an unspecific amount.
On September 3, 1999, Elizabeth Tendler filed a complaint in the Superior
Court of New Jersey Law Division: Union County, against 17 named defendants
including the Company and Xpedite, and various alleged
92
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
current and former officers, directors, agents and representatives of Xpedite.
Plaintiff alleges that the defendants engaged in wrongful activities in
connection with the management of the plaintiff's investments, including
investments in Xpedite. The allegations against Xpedite and the Company are
limited to plaintiff's investment in Xpedite. Plaintiff's claims against
Xpedite and the Company include breach of contract, breach of fiduciary duty,
unjust enrichment, conversion, fraud, interference with economic advantage,
liability for ultra vires acts, violation of the New Jersey Consumer Fraud Act
and violation of New Jersey RICO. Plaintiff seeks an accounting of the
corporate stock of Xpedite, compensatory damages of approximately $1.3 million,
accrued interest and/or dividends, a constructive trust on the proceeds of the
sale of any Xpedite or PTEK stock, shares of Xpedite and/or PTEK to satisfy
defendants' obligations to plaintiff, attorneys' fees and costs, punitive and
exemplary damages in an unspecified amount, and treble damages. On February 25,
2000, Xpedite filed its answer, as well as cross claims and third party claims.
The Company has not been served with the summons and complaint.
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.
18. INCOME TAXES
Income tax provision (benefit) for 1999, 1998 and 1997 is as follows (in
thousands):
1999 1998 1997
------- -------- ------
Current:
Federal.......................................... $11,599 $ -- $ --
State............................................ 2,411 1,200 1,000
International.................................... 2,304 4,090 490
------- -------- ------
16,314 5,290 1,490
------- -------- ------
Deferred:
Federal.......................................... 15,247 (20,707) (644)
State............................................ 4,897 (4,734) 97
International.................................... (1,160) (1,026) 85
------- -------- ------
18,984 (26,467) (462)
------- -------- ------
$35,298 $(21,177) $1,028
======= ======== ======
The difference between the statutory federal income tax rate and the
Company's effective income tax rate applied to income before income taxes for
1999, 1998 and 1997 is as follows (in thousands):
1999 1998 1997
------- -------- -------
Income taxes at federal statutory rate............. $ 632 $(36,901) $(5,916)
State taxes, net of federal benefit................ 1,688 (2,316) 845
Foreign taxes...................................... 307 -- --
Non-deductible merger costs........................ -- -- 8,390
Change in valuation allowance...................... 1,234 1,733 --
S-corporation earnings not subject to corporate
level taxes....................................... -- -- (3,117)
Non-taxable investment income...................... -- -- (1,265)
Establish deferred taxes for non-taxable
predecessor entities.............................. -- -- 1,207
Non-deductible expenses, primarily goodwill
amortization...................................... 31,437 16,307 884
------- -------- -------
Income taxes at the Company's effective rate....... $35,298 $(21,177) $ 1,028
======= ======== =======
93
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Differences between financial accounting and tax bases of assets and
liabilities giving rise to deferred tax assets and liabilities are as follows
at December 31 (in thousands):
1999 1998
-------- -------
Deferred tax assets:
Net operating loss carryforwards............................ $ 24,425 $53,030
In-process research and development......................... 3,728 3,680
Restructuring and other special charges..................... 2,222 5,425
Accrued liabilities......................................... 5,407 5,923
Depreciation and amortization............................... 5,748 --
-------- -------
41,530 68,058
Deferred tax liabilities:
Intangible assets........................................... (26,047) (34,291)
Depreciation and amortization............................... -- (1,373)
Unrealized gain on marketable equity securities............. (31,739) --
Other liabilities........................................... (8,966) (7,060)
-------- -------
(66,752) (42,724)
Valuation allowance......................................... (5,906) (6,536)
-------- -------
Deferred income taxes, net.................................. $(31,128) $18,798
======== =======
U.S. tax rules impose limitations on the use of net operating loss
carryforwards following certain changes in ownership. The Company's utilization
of tax benefits associated with loss carryforwards could be limited if such a
change were to occur. Management of the Company has recorded valuation
allowances for deferred tax assets based on their estimate regarding
realization of such assets.
Most Voice-Tel Franchises acquired in transactions accounted for as pooling-
of-interests had elected to be treated as S-Corporations or partnerships for
income tax and other purposes. Income taxes were not provided on income of
these entities for any year presented because S-Corporations and partnerships
are generally not subject to income tax. Rather, shareholders or partners of
such entities are taxed on their proportionate shares of these entities'
taxable income in their individual income tax returns.
At December 31, 1999, the Company had federal income tax net operating loss
carryforwards of approximately $12 million expiring in 2010 through 2018.
Deferred tax benefits of approximately $2.0 million and $6.2 million in 1999
and 1998, respectively are associated with nonqualified stock option exercises,
the benefit of which was credited directly to additional paid-in capital.
94
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. STATEMENT OF CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information (in thousands):
1999 1998 1997
------- -------- -------
Cash paid during the year for:
Interest............................................ $29,164 $ 15,415 $ 7,100
Income taxes........................................ $ 4,527 $ 3,554 $ 840
Cash paid for acquisitions accounted for as purchases
are as follows:
1999 1998 1997
------- -------- -------
Fair value of assets acquired....................... $37,633 $633,671 $19,833
Less liabilities assumed............................ 13,099 233,734 2,124
Less common stock issued to sellers................. 4,443 372,283 2,255
Cash paid for transaction costs and liabilities
assumed............................................ 858 15,990 --
------- -------- -------
Net cash paid....................................... $20,949 $ 43,644 $15,454
======= ======== =======
20. SEGMENT REPORTING
The Company's reportable segments are strategic business units that align the
Company into six decentralized areas of focus driven by product offering,
investment strategy and functional cost control. The Company realigned into
this decentralized operating and investing organization (opervesting) in the
third quarter of 1999 from the previous market segment focus of the EES and CES
business units. The new business segments are called Voicecom (formerly of both
EES and CES), Xpedite (formerly of CES), Premiere Conferencing (formerly of
CES), Retail Calling Card Services (formerly of EES), PTEKVentures and
Corporate. Voicecom focuses on local and 800-based voice messaging services,
Internet enabled communications with its Orchestrate(R) product, along with
interactive voice response services, and wholesale communications platform
outsourcing solutions. Its customer base ranges from small office/home office
to multilevel marketing organizations to Fortune 1000 corporate accounts.
Xpedite focuses on store and forward fax, real time fax services, electronic
messaging through the Internet with its MessageReach product and voice
messaging in the Asia/Pacific region primarily to Fortune 1000 corporate
accounts and governments. Premiere Conferencing focuses on attended and
unattended conferencing services primarily to Fortune 1000 customers. Retail
Calling Card Services is a business segment that the Company has decided to
exit. It consists of the legacy Premiere WorldLink calling card product which
was primarily marketed through direct advertising and co-branding relationships
to single retail users. Discontinued operations treatment of this business unit
was not obtainable as the Company will continue using the legacy platform for
its profitable wholesale line of business and its corporate calling card
bundled within its 800-based messaging offerings within the Voicecom operating
segment. PTEKVentures focuses on investments in companies in the Internet with
innovative service offerings that will enable these companies to become
industry leaders. Corporate focuses on being a holding company with minimal
headcount leaving the day to day operations of running the business at the
operating business units. 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.
95
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information concerning the operations in these reportable segments is as
follows (in millions):
Year Ended December 31, 1999
--------------------------------
1999 1998 1997
---------- --------- ---------
REVENUES:
Xpedite..................................... $ 242.0 $ 197.0 $ 3.9
Voicecom.................................... 125.7 152.9 166.7
Premiere Conferencing....................... 53.8 36.9 3.5
Retail Calling Card Services................ 37.2 58.0 55.3
Eliminations (1)............................ (.3) -- --
---------- --------- ---------
Totals...................................... $ 458.4 $ 444.8 $ 229.4
========== ========= =========
OPERATING PROFIT (LOSS):
Xpedite..................................... $ (30.4) $ (19.7) $ (0.1)
Voicecom.................................... (6.9) 23.7 49.1
Premiere Conferencing....................... (3.8) 1.8 0.7
Retail Calling Card Services................ (43.8) (27.3) (5.8)
Corporate................................... (45.3) (28.5) (5.1)
Eliminations (1)............................ (0.3) -- --
Restructuring, merger costs and other
special charges............................ (7.6) (24.1) (54.0)
Acquired research and development........... -- (15.5) --
Accrued settlement costs.................... -- (1.5) (1.5)
---------- --------- ---------
Totals...................................... $ (138.1) $ (91.1) $ (16.7)
========== ========= =========
EBITDA:
Xpedite..................................... $ 61.2 $ 54.1 $ (0.1)
Voicecom.................................... 16.8 51.0 67.7
Premiere Conferencing....................... 9.0 7.0 0.7
Retail Calling Card Services................ (5.8) (22.1) (3.1)
Corporate................................... (42.1) (28.2) (5.1)
Eliminations (1)............................ (0.3) -- --
---------- --------- ---------
Totals...................................... $ 38.8 $ 61.8 $ 60.1
========== ========= =========
IDENTIFIABLE ASSETS:
Xpedite..................................... $ 455.8 $ 485.2 $ 1.5
Voicecom.................................... 95.6 144.6 135.3
Premiere Conferencing....................... 76.2 73.7 --
Retail Calling Card Services................ 10.9 30.0 32.0
PTEKVentures................................ 100.2 -- --
Corporate................................... 31.8 62.9 212.3
---------- --------- ---------
Total...................................... $ 770.5 $ 796.4 $ 381.1
========== ========= =========
- --------
(1) Eliminations is primarily comprised of revenue eliminations from business
transacted between Xpedite and Premiere Conferencing.
96
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of operating income (loss) and EBITDA to income (loss)
before income taxes is as follows (in millions):
1999 1998 1997
------- ------- ------
EBITDA.............................................. $ 38.8 $ 61.8 $ 60.1
Less depreciation and amortization.................. (168.9) (111.8) (21.3)
Less restructuring, merger and other special
charges............................................ (8.0) (24.1) (54.0)
Less acquired research and development.............. -- (15.5) --
Less accrued settlement costs....................... -- (1.5) (1.5)
------- ------- ------
Operating income.................................... $(138.1) $ (91.1) $(16.7)
------- ------- ------
Less interest expense, net.......................... (24.7) (14.7) (0.9)
Plus other income (expense), net.................... 164.6 0.4 0.2
------- ------- ------
Income (loss) before income taxes................... $ 1.8 $(105.4) $(17.4)
======= ======= ======
Information concerning revenues from groups of similar products and services
are as follows (in millions):
1999 1998 1997
------ ------ ------
Fax....................................................... $232.4 $193.8 $ --
Conferencing.............................................. 53.9 36.9 3.5
Voice Messaging........................................... 116.0 120.2 133.7
Interactive Voice Response................................ 10.0 7.4 4.8
Wholesale Calling Card Services........................... 6.6 28.5 32.1
Orchestrate Unified Messaging............................. 2.3 -- --
Retail Calling Card Services.............................. 37.2 58.0 55.3
------ ------ ------
Total.................................................... $458.4 $444.8 $229.4
====== ====== ======
Information concerning depreciation expense for each reportable segment is as
follows (in millions):
1999 1998 1997
----- ----- -----
Xpedite...................................................... $14.3 $16.6 $ --
Voicecom..................................................... 17.2 19.2 16.8
Premiere Conferencing........................................ 4.2 2.1 --
Retail Calling Card Services................................. 32.6 8.2 2.7
Corporate.................................................... 1.6 0.2 --
----- ----- -----
Total....................................................... $69.9 $46.3 $19.5
===== ===== =====
Information concerning capital expenditures for each reportable segment is as
follows (in millions)
1999 1998 1997
----- ----- -----
Xpedite...................................................... $12.4 $11.8 $ --
Voicecom..................................................... 16.6 25.7 22.0
Premiere Conferencing........................................ 9.7 7.3 --
Retail Calling Card Services................................. -- 11.2 11.4
Corporate.................................................... 5.5 5.3 --
----- ----- -----
Total....................................................... $44.2 $61.3 $33.4
===== ===== =====
97
PTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents financial information based on the Company's
geographic segments for the
years ended December 31, 1999, 1998 and 1997 (in millions):
Operating
Net Income Identifiable
Revenues (Loss) Assets
-------- --------- ------------
1999
North America................................... $333.5 $(149.7) $673.6
Asia Pacific.................................... 71.1 9.3 55.9
Europe.......................................... 53.8 2.3 41.0
------ ------- ------
Total.......................................... $458.4 $(138.1) $770.5
====== ======= ======
1998
North America................................... $351.9 $(110.5) $737.5
Asia Pacific.................................... 51.4 7.6 33.7
Europe.......................................... 47.3 12.3 25.2
Eliminations.................................... (5.8) (0.5) --
------ ------- ------
Total.......................................... $444.8 $ (91.1) $796.4
====== ======= ======
1997
North America................................... $225.4 $ (16.6) $378.1
Asia Pacific.................................... 3.9 (0.1) 1.5
------ ------- ------
Total.......................................... $229.3 $ (16.7) $379.6
====== ======= ======
21. SUBSEQUENT EVENTS
During the first quarter of 2000, the Company changed its name to PTEK
Holdings, Inc., announced it has completed its transition to a holding company
and adopted an "opervesting"' (operating and investing) business model
directed at growing its operating business units and network of leading
Internet-based companies. Under the new business model, management of PTEK's
operating units are charged with driving market leadership of its existing
services and fostering the rollout of new Internet-based service offerings.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There have been no disagreements with or change in the registrant's
independent accountant since the Company's inception.
98
PART III
Certain information required by Part III is omitted from this report in that
the Registrant will file a Definitive Proxy Statement pursuant to Regulation
14A ("Proxy Statement") not later than 120 days after the end of the fiscal
year covered by this report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
99
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements listed in the index set forth in Item 8 of this
report are filed as part of this report.
2. Financial Statement Schedules
Financial statement schedules required to be included in this report are
either shown in the financial statements and notes thereto, included in
Item 8 of this report or have been omitted because they are not applicable.
3. Exhibits
Exhibit
Number Description
------- -----------
2.1 Agreement and Plan of Merger, together with exhibits, dated as of
April 2, 1997 by and among Premiere Technologies, Inc., PTEK Merger
Corporation and Voice-Tel Enterprises, Inc. and the Stockholders of
Voice-Tel Enterprises, Inc. (incorporated by reference to Exhibit 2.1
to the Registrant's Current Report on Form 8-K dated April 2, 1997 and
filed April 4, 1997).
2.2 Agreement and Plan of Merger, together with exhibits, dated as of
April 2, 1997 by and among Premiere Technologies, Inc., PTEK Merger
Corporation II, VTN, Inc. and the Stockholders of VTN, Inc.
(incorporated by reference to Exhibit 2.2 to the Registrant's Current
Report on Form 8-K dated April 2, 1997 and filed April 4, 1997).
2.3 Purchase and Sale Agreement dated April 2, 1997 by and between
Premiere Technologies, Inc. and Merchandising Productions, Inc.
(incorporated by reference to Exhibit 2.3 to the Registrant's Current
Report on Form 8-K dated April 2, 1997 and filed April 4, 1997).
2.4 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Continuum, Inc. and Owners of Continuum, Inc.
(incorporated by reference to Exhibit 2.4 to the Registrant's Current
Report on Form 8-K dated April 30, 1997 and filed May 14, 1997).
2.5 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., DMG, Inc. and Owners of DMG, Inc. and Transfer
Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., VTG, Inc. and Owners of VTG, Inc. (incorporated by
reference to Exhibit 2.5 to the Registrant's Current Report on Form 8-
K dated April 30, 1997 and filed May 14, 1997).
2.6 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Penta Group, Inc. and Owners of Penta Group, Inc.
and Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Scepter Communications, Inc. and Owners of Scepter
Communications, Inc. (incorporated by reference to Exhibit 2.6 to the
Registrant's Current Report on Form 8-K dated April 30, 1997 and filed
May 14, 1997).
2.7 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Premiere Business Services, Inc. and Owners of
Premiere Business Services, Inc. (incorporated by reference to Exhibit
2.7 to the Registrant's Current Report on Form 8-K dated April 30,
1997 and filed May 14, 1997).
2.8 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Dunes Communications, Inc., Sands Communications,
Inc., Sands Comm, Inc., SandsComm, Inc., and Owner of Dunes
Communications, Inc., Sands Communications, Inc., Sands Comm, Inc.,
and SandsComm, Inc. (incorporated by reference to Exhibit 2.8 to the
Registrant's Current Report on Form 8-K dated April 30, 1997 and filed
May 14, 1997).
100
Exhibit
Number Description
------- -----------
2.9 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Shamlin, Inc. and Owner of Shamlin, Inc.
(incorporated by reference to Exhibit 2.9 to the Registrant's Current
Report on Form 8-K dated April 30, 1997 and filed May 14, 1997).
2.10 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., VT of Ohio, Inc. and Owners of VT of Ohio, Inc.;
Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Carter Voice, Inc. and Owners of Carter Voice,
Inc.; Transfer Agreement dated as of April 2, 1997 by and among
Premiere Technologies, Inc., Widdoes Enterprises, Inc. and Owners of
Widdoes Enterprises, Inc.; and Transfer Agreement dated as of April 2,
1997 by and among Premiere Technologies, Inc., Dowd Enterprises, Inc.
and Owners of Dowd Enterprises, Inc. (incorporated by reference to
Exhibit 2.10 to the Registrant's Current Report on Form 8-K dated
April 30, 1997 and filed May 14, 1997).
2.11 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., SDVT, Inc. and Owners of SDVT, Inc. (incorporated
by reference to Exhibit 2.11 to the Registrant's Current Report on
Form 8-K dated April 30, 1997 and filed May 14, 1997).
2.12 Amended and Restated Transfer Agreement dated as of April 2, 1997 by
and among Premiere Technologies, Inc., Car Zee, Inc. and Owners of Car
Zee, Inc. (incorporated by reference to Exhibit 2.12 to the
Registrant's Current Report on Form 8-K dated April 30, 1997 and filed
May 14, 1997).
2.13 Transfer Agreement dated as of March 31, 1997 by and among Premiere
Technologies, Inc. and Owners of the VTEC Franchisee: 1086236 Ontario,
Inc. (incorporated by reference to Exhibit 2.13 to the Registrant's
Current Report on Form 8-K dated April 30, 1997 and filed May 14,
1997).
2.14 Transfer Agreement dated as of March 31, 1997 by and among Premiere
Technologies, Inc. and Owners of the Eastern Franchisees: 1139133
Ontario Inc., 1116827 Ontario Inc., 1006089 Ontario Inc., and 1063940
Ontario Inc. (incorporated by reference to Exhibit 2.14 to the
Registrant's Current Report on Form 8-K dated April 30, 1997 and filed
May 14, 1997).
2.15 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Communications Concepts, Inc. and Owners of
Communications Concepts, Inc. (incorporated by reference to Exhibit
2.1 to the Registrant's Current Report on Form 8-K dated May 16, 1997
and filed June 2, 1997).
2.16 Transfer Agreement dated as of May 20, 1997 by and among Premiere
Technologies, Inc., DARP, Inc. and Owners of DARP, Inc. (incorporated
by reference to Exhibit 2.2 to the Registrant's Current Report on Form
8-K dated May 16, 1997 and filed June 2, 1997).
2.17 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Hi-Pak Systems, Inc. and Owners of Hi-Pak Systems,
Inc. (incorporated by reference to Exhibit 2.3 to the Registrant's
Current Report on Form 8-K dated May 16, 1997 and filed June 2. 1997).
2.18 Transfer Agreement dated as of May 29, 1997 by and among Premiere
Technologies, Inc., MMP Communications, Inc. and Owners of MW
Communications, Inc. (incorporated by reference to Exhibit 2.4 to the
Registrant's Current Report on Form 8-K dated May 16, 1997 and filed
June 2, 1997).
2.19 Transfer Agreement dated as of May 16, 1997 by and among Premiere
Technologies, Inc., Lar-Lin Enterprises, Inc., Lar-Lin Investments,
Inc. and Voice-Mail Solutions, Inc. and Owners of Lar-Lin Enterprises,
Inc., Lar-Lin Investments, Inc. and Voice-Mail Solutions, Inc.
(incorporated by reference to Exhibit 2.5 to the Registrant's Current
Report on Form 8-K dated May 16, 1997 and filed June 2, 1997).
101
Exhibit
Number Description
------- -----------
2.20 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Voice-Net Communications Systems, Inc. and Owners
of Voice-Net Communications Systems, Inc. and Transfer Agreement dated
as of April 2, 1997 by and among Premiere Technologies, Inc., VT of
Long Island Inc. and Owners of VT of Long Island Inc. (incorporated by
reference to Exhibit 2.6 to the Registrant's Current Report on Form 8-
K dated May 16, 1997 and filed June 2, 1997).
2.21 Transfer Agreement dated as of May 22, 1997 by and among Premiere
Technologies, Inc., Voice Systems of Greater Dayton, Inc. and Owner of
Voice Systems of Greater Dayton, Inc. and Transfer Agreement dated as
of May 22, 1997 by and among Premiere Technologies, Inc., Premiere
Acquisition Corporation, L'Harbot, Inc. and the Owners of L'Harbot,
Inc. (incorporated by reference to Exhibit 2.7 to the Registrant's
Current Report on Form 8-K dated May 16, 1997 and filed June 2, 1997).
2.22 Transfer Agreement dated as of May 30, 1997 by and among Premiere
Technologies, Inc., Audioinfo Inc. and Owners of Audioinfo Inc.
(incorporated by reference to Exhibit 2.8 to the Registrant's Current
Report on Form 8-K dated May 16, 1997 and filed June. 2, 1997).
2.23 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., D&K Communications Corporation and Owners of D&K
Communications Corporation (incorporated by reference to Exhibit 2.10
to the Registrant's Current Report on Form 8-K dated May 16, 1997 and
filed June 2, 1997).
2.24 Transfer Agreement dated as of May 19, 1997 by and among Premiere
Technologies, Inc., Voice-Tel of South Texas, Inc. and Owners of
VoiceTel of South Texas, Inc. (incorporated by reference to Exhibit
2.11 to the Registrant's Current Report on Form 8-K dated May 16, 1997
and filed June 2, 1997).
2.25 Transfer Agreement dated as of May 31, 1997 by and among Premiere
Technologies, Inc., Indiana Communicator, Inc. and Owner of Indiana
Communicator, Inc. (incorporated by reference to Exhibit 2.12 to the
Registrant's Current Report on Form 8-K dated May 16, 1997 and filed
June 2, 1997).
2.26 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Voice Messaging Development Corporation of
Michigan and the Owners of Voice Messaging Development Corporation of
Michigan (incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K/A dated May 16, 1997 and filed June 24,
1997).
2.27 Transfer Agreement dated as of June 13, 1997 by and among Premiere
Technologies, Inc., Voice Partners of Greater Mahoning Valley, Ltd.
and the Owners of Voice Partners of Greater Mahoning Valley, Ltd.
(incorporated by reference to Exhibit 2.2 to the Registrant's Current
Report on Form 8-K/A dated May 16, 1997 and filed June 24, 1997).
2.28 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., In-Touch Technologies, Inc. and the Owners of
InTouch Technologies, Inc. (incorporated by reference to Exhibit 2.3
to the Registrant's Current Report on Form 8-K/A dated May 16, 1997
and filed June 24, 1997).
2.29 Transfer Agreement dated as of March 31, 1997 by and among Premiere
Technologies, Inc. and Owners of the Western Franchisees: 3325882
Manitoba Inc., 601965 Alberta Ltd., 3266622 Manitoba Inc., 3337821
Manitoba Inc. and 3266631 Manitoba Inc. (incorporated by reference to
Exhibit 2.4 to the Registrant's Current Report on Form 8-K/A dated May
16, 1997 and filed June 24, 1997).
2.30 Uniform Terms and Conditions, Exhibit A to Transfer Agreements by and
among Premiere Technologies, Inc., Wave One Franchisees and Owners of
Wave One Franchisees (incorporated by reference to Exhibit A to
Exhibit 2.4 to the Registrant's Current Report on Form 8-K dated April
2, 1997 and filed April 4, 1997).
102
Exhibit
Number Description
------- -----------
2.31 Uniform Terms and Conditions, Exhibit A to Transfer Agreements by and
among Premiere Technologies, Inc., Wave Two Franchisees and owners of
Wave Two Franchisees (incorporated by reference to Exhibit 2.14 to the
Registrant's Current Report on dated May 16, 1997 and filed June 2,
1997).
2.32 Stock Purchase Agreement, together with exhibits, dated as of
September 12, 1997, by and among Premiere Technologies, Inc., VoiceCom
Holdings, Inc. and the Shareholders of VoiceCom Holdings, Inc.
(incorporated by reference to Exhibit 2.1 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended September 30,
1997).
2.33 Agreement and Plan of Merger, dated as of November 13, 1997, together
with exhibits, by and among Premiere Technologies, Inc., Nets
Acquisition Corp. and Xpedite Systems, Inc. (incorporated by reference
to Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated
November 13, 1997 and filed December 5, 1997, as amended by Form 8-K/A
filed December 23, 1997).
2.34 Agreement and Plan of Merger, dated April 22, 1998, by and among the
Company, American Teleconferencing Services, Ltd. ("ATS"), PTEK
Missouri Acquisition Corp. and the shareholders of ATS (incorporated
by reference to Exhibit 99.1 of the Company's Current Report on Form
8-K dated April 23, 1998, and filed with the Commission on April 28,
1998.)
3.1 Articles of Incorporation of Premiere Technologies, Inc., as amended,
(incorporated by reference to Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1998).
3.2 Articles of Amendment of Articles of Incorporation of Premiere
Technologies, Inc. (changing the name of the Registrant to PTEK
Holdings, Inc.).
3.3 Amended and Restated Bylaws of Premiere Technologies, Inc., as amended
(incorporated by reference to Exhibit 3.1 to the Registrant's Amended
Quarterly Report on Form 10-Q/A for the Quarter Ended March 31, 1999,
as filed on May 27, 1999).
4.1 See Exhibits 3.1-3.3 for provisions of the Articles of Incorporation
and Bylaws defining the rights of the holders of common stock of the
Registrant.
4.2 Specimen Stock Certificate (incorporated by reference to Exhibit 4.2
to the Registrant's Registration Statement on Form S-1 (No. 33-
80547)).
4.3 Indenture, dated as of June 15, 1997, between Premiere Technologies,
Inc. and IBJ Schroder Bank & Trust Company, as Trustee (incorporated
by reference to Exhibit 4.1 to the Registrant's Current Report on Form
8-K dated July 25, 1997 and filed August 5, 1997).
4.4 Form of Global Convertible Subordinated Note due 2004 (incorporated by
reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-
K dated July 25, 1997 and filed August 5, 1997).
4.5 Registration Rights Agreement, dated as of June 15, 1997, by and among
the Registrant, Robertson, Stephens & Company LLC, Alex. Brown & Sons
Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation
(incorporated by reference to Exhibit 4.3 to the Registrant's Current
Report on Form 8-K dated July 25, 1997 and filed August 5, 1997).
4.6 Shareholder Protection Rights Agreement, dated June 23, 1998, between
the Company and SunTrust Bank, Atlanta, as Rights Agent (incorporated
by reference to Exhibit 99.1 of the Company's Current Report on Form
8-K dated June 23, 1998, and filed with the Commission on June 26,
1998).
10.1 Shareholder Agreement dated as of January 18, 1994 among the
Registrant, NationsBanc Capital Corporation, Boland T. Jones, D.
Gregory Smith, Leonard A. DeNittis and Andrea L. Jones (incorporated
by reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1 (No. 33-80547)).
103
Exhibit
Number Description
------- -----------
10.2 Amended and Restated Executive Employment Agreement and Incentive
Option Agreement dated November 6, 1995 between the Registrant and
David Gregory Smith (incorporated by reference to Exhibit 10.15 to the
Registrant's Registration Statement on Form S-1 (No. 33-80547)).**
10.3 Amended and Restated Executive Employment Agreement dated November 6,
1995 between Premiere Communications, Inc. and David Gregory Smith
(incorporated by reference to Exhibit 10.16 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547)).**
10.4 Mutual Release dated December 5, 1997 by and among the Registrant,
Premiere Communications, Inc. and David Gregory Smith (incorporated by
reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.5 Amended and Restated Executive Employment and Incentive Option
Agreement dated November 6, 1995 between the Registrant and Boland T.
Jones (incorporated by reference to Exhibit 10.17 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547)).**
10.6 Amended and Restated Executive Employment Agreement dated November 6,
1995 between Premiere Communications, Inc. and Boland T. Jones
(incorporated by reference to Exhibit 10.18 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547)).**
10.7 Executive Employment and Incentive Option Agreement dated November 1,
1995 between the Registrant and Patrick G. Jones (incorporated by
reference to Exhibit 10.19 to the Registrant's Registration Statement
on Form S-1 (No. 33-80547)).**
10.8 Executive Employment Agreement dated November 1, 1995 between Premiere
Communications, Inc. and Patrick G. Jones (incorporated by reference
to Exhibit 10.20 to the Registrant's Registration Statement on Form S-
1 (No. 33-80547)).**
10.9 Executive Employment and Incentive Option Agreement, effective as of
July 24, 1997, by and between the Company and Jeffrey A. Allred
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1998).**
10.10 Executive Employment and Incentive Option Agreement effective as of
July 6, 1998, by and between the Company and William Porter Payne
(incorporated by reference to Exhibit 10.12 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998).**
10.11 Memorandum of Understanding dated as of July 6, 1998, by and between
the Company and William Porter Payne (incorporated by reference to
Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998).**
10.12 Restricted Stock Award Agreement between the Registrant and Boland T.
Jones dated May 5, 1999.**
10.13 Restricted Stock Award Agreement between the Registrant and Jeffrey A.
Allred dated May 5, 1999.**
10.14 Restricted Stock Award Agreement between the Registrant and Patrick G.
Jones dated May 5, 1999.**
10.15 Recourse Promissory Note dated December 20, 1999 payable to the
Registrant by Boland T. Jones.**
10.16 Recourse Promissory Note dated December 20, 1999 payable to the
Registrant by Jeffrey A. Allred.**
104
Exhibit
Number Description
------- -----------
10.17 Premiere Communications, Inc. 401(k) Profit Sharing Plan (incorporated
by reference to Exhibit 10.30 to the Registrant's Registration
Statement on Form S-1 (No. 33-80547)).**
10.18 Form of Director Indemnification Agreement between the Registrant and
Non-employee Directors (incorporated by reference to Exhibit 10.31 to
the Registrant's Registration Statement on Form S-1 (No. 33-
80547)).**
10.19 Park Place Office Lease dated May 31, 1993 between Premiere
Communications, Inc. and Mara-Met Venture, as amended by First
Amendment dated December 15, 1995 (incorporated by reference to
Exhibit 10.34 to the Registrant's Registration Statement on Form S-1
(No. 33-80547)).
10.20 Second and Third Amendment to 55 Park Place Office Lease dated
November 5, 1996 between Premiere Communications, Inc. and Mara-Met
Venture (incorporated by reference to Exhibit 10.49 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996).
10.21 Office Lease Agreement dated May 12, 1996 between Premiere
Communications, Inc. and Beverly Hills Center LLC, as amended by the
First Amendment dated August 1, 1996 (incorporated by reference to
Exhibit 10.50 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.22 Second Amendment of Lease dated July 1, 1997, between Premiere
Communications, Inc. and Beverly Hills Center LLC (incorporated by
reference to Exhibit 10.18 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.23 Agreement of Lease between Corporate Property Investors and Premiere
Communications, Inc., dated as of March 3, 1997, as amended by
Modification of Lease dated August 4, 1997, as amended, by Second
Modification of Lease, dated October 30, 1997 (incorporated by
reference to Exhibit 10.19 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.24 Sublease Agreement dated as of December 16, 1997, by and between
Premiere Communications, Inc. and Endeavor Technologies, Inc.
(incorporated by reference to Exhibit 10.20 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.25 Form of Officer Indemnification Agreement between the Registrant and
each of the executive officers (incorporated by reference to Exhibit
10.36 to the Registrant's Registration Statement on Form S-1 (No. 33-
80547)).**
10.26 Telecommunications Services Agreement dated December 1, 1995 between
Premiere Communications, Inc. and WorldCom Network Services, Inc.
d/b/a WilTel (incorporated by reference to Exhibit 10.40 to the
Registrant's Registration Statement on Form S-1 (No. 33-80547)).
10.27 Amended and Restated Program Enrollment Terms dated September 30, 1997
by and between Premiere Communications, Inc. and WorldCom Network
Services, Inc., d/b/a WilTel, as amended by Amendment No. I dated
November 1, 1997 (incorporated by reference to Exhibit 10.26 to
Registrant's Annual Report on Form 10-K for the year ended December
31, 1997).*
10.28 Service Agreement dated September 30, 1997, by and between VoiceCom
Systems, Inc. and AT&T Corp. (incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended September 30, 1997).*
10.29 Strategic Alliance Agreement dated November 13, 1996 by and between
the Registrant and WorldCom, Inc. (incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated
November 13, 1996).*
10.30 Investment Agreement dated November 13, 1996 by and between the
Registrant and WorldCom, Inc. (incorporated by reference to Exhibit
10.2 to the Registrant's Current Report on Form 8-K dated November 13,
1996).
105
Exhibit
Number Description
------- -----------
10.31 Service and Reseller Agreement dated September 28, 1990 by and between
Amway Corporation and Voice-Tel Enterprises, Inc. (incorporated by
reference to Exhibit 2.33 to the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1997).*
10.32 Amendment to Service and Reseller Agreement dated as of May 13, 1999
by and between Amway Corporation and Voice-Tel Enterprises, Inc.
(incorporated by reference to Exhibit 10.28 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1999).*
10.33 Form of Stock Purchase Warrant Agreement (incorporated by reference to
Exhibit 4.3 to the Registrant's Registration Statement on Form S-8
(No. 333-11281)).**
10.34 Form of Warrant Transaction Statement (incorporated by reference to
Exhibit 4.4 to the Registrant's Registration Statement on Form S-8
(No. 333-11281)).
10.35 Form of Director Stock Purchase Warrant (incorporated by reference to
Exhibit 4.3 to the Registrant's Registration Statement on Form S-8
(No. 333-17593)).**
10.36 Purchase Agreement, dated June 25, 1997, by and among Premiere
Technologies, Inc., Robertson, Stephens & Company LLC, Alex. Brown &
Sons Incorporated and Donaldson, Lufkin & Jenrette Securities
Corporation (incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated July 25, 1997 and filed
August 5, 1997).
10.37 1991 Non-Qualified and Incentive Stock Option Plan of Voice-Tel
Enterprises, Inc. (assumed by the Registrant) (incorporated by
reference to Exhibit 4.2 to the Registrant's Registration Statement on
Form S-8 (No. 333-29787)).
10.38 1991 Non-Qualified and Incentive Stock Option Plan of VTN, Inc.
(assumed by the Registrant) (incorporated by reference to Exhibit 4.3
to the Registrant's Registration Statement on Form S-8 (No. 333-
29787)).
10.39 Form of Stock Option Agreement by and between the Registrant and
certain current or former employees of Voice-Tel Enterprises, Inc.
(incorporated by reference to Exhibit 4.4 to the Registrant's
Registration Statement on Form S-8 (No. 333-29787)).
10.40 Premiere Technologies, Inc. Second Amended and Restated 1995 Stock
Plan (incorporated by reference to Exhibit A to the Registrant's
Definitive Proxy Statement distributed in connection with the
Registrant's June 11, 1997 annual meeting of shareholders, filed April
30, 1997).**
10.41 First Amendment to Premiere Technologies, Inc. Second Amended and
Restated 1995 Stock Plan (incorporated by reference to Exhibit 10.43
to Registrant's Annual Report on Form 10-K for the year ended December
31, 1997).**
10.42 VoiceCom Holdings, Inc. 1995 Stock Option Plan (assumed by the
Registrant) (incorporated by reference to Exhibit 10.44 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.43 VoiceCom Holdings, Inc. Amended and Restated 1985 Stock Option Plan
(assumed by the Registrant) (incorporated by reference to Exhibit
10.45 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.44 Premiere Technologies, Inc., Amended and Restated 1998 Stock Plan
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1999.).
106
Exhibit
Number Description
------- -----------
10.45 Amendment No. 1 to the Premiere Technologies, Inc. Amended and
Restated 1998 Stock Plan.
10.46 Xpedite Systems, Inc. 1992 Incentive Stock Option Plan (assumed by the
Registrant) (incorporated by, reference to Xpedite's Registration
Statement on Form S-1 (No. 33-73258)).
10.47 Xpedite Systems, Inc. 1993 Incentive Stock Option Plan (assumed by the
Registrant) (incorporated by reference to Xpedite's Registration
Statement on Form S-I (No. 33-73258)).
10.48 Xpedite Systems, Inc. 1996 Incentive Stock Option Plan (assumed by the
Registrant) (incorporated by reference to Xpedite's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.49 Xpedite Systems, Inc. Non-Employee Directors' Warrant Plan (assumed by
the Registrant) (incorporated by reference to Exhibit 10.31 to
Xpedite's Annual Report on Form 10-K for the year ended December 31,
1996).
10.50 Xpedite Systems, Inc. Officer's Contingent Stock Option Plan (assumed
by the Registrant) (incorporated by reference to Exhibit 10.30 to
Xpedite's Annual Report on Form 10-K for the year ended December 31,
1996).
10.51 Associate Stock Purchase Plan (incorporated by reference to Appendix A
to the Registrant's Definitive Proxy Statement distributed in
connection with the Registrant's June 22, 1999 annual meeting, filed
on May 19, 1999).
10.52 Intellivoice Communications, Inc. 1995 Incentive Stock Plan (assumed
by the Registrant).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule for the year ended December 31, 1999.
- --------
* Confidential treatment has been granted. The copy on file as an
exhibit omits the information subject to the confidentiality request.
Such omitted information has been filed separately with the
Commission.
** Management contracts and compensatory plans and arrangements required
to be filed as exhibits pursuant to Item 14(c) of this report.
(b) The Registrant did not file any Current Reports on Form 8-K during the
fourth quarter of 1998.
107
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Ptek holdings, Inc.
/s/ Boland T. Jones
By: _________________________________
Boland T. Jones, Chairman of the
Board
and Chief Executive Officer
Date: March 30, 2000
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Boland T. Jones Chairman of the Board and March 30, 2000
_________________________________ Chief Executive Officer
Boland T. Jones (principal executive
officer) and Director
/s/ Patrick G. Jones Executive Vice President March 30, 2000
_________________________________ Chief Financial Officer
Patrick G. Jones (principal financial and
accounting officer) and
Chief Legal Officer
/s/ George W. Baker, Sr. Director March 30, 2000
_________________________________
George W. Baker, Sr.
/s/ Raymond H. Pirtle, Jr. Director March 30, 2000
_________________________________
Raymond H. Pirtle, Jr.
/s/ Roy B. Anderson, Jr. Director March 30, 2000
_________________________________
Roy B. Andersen, Jr.
/s/ William P. Payne Vice Chairman and Director March 30, 2000
_________________________________
William P. Payne
/s/ Jeffrey A. Allred President and Chief March 30, 2000
_________________________________ Operating Officer and
Jeffrey A. Allred Director
/s/ Jackie M. Ward Director March 30, 2000
_________________________________
Jackie M. Ward
/s/ Jeffrey T. Arnold Director March 30, 2000
_________________________________
Jeffrey T. Arnold
108
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
2.1 Agreement and Plan of Merger, together with exhibits, dated as of
April 2, 1997 by and among Premiere Technologies, Inc., PTEK Merger
Corporation and Voice-Tel Enterprises, Inc. and the Stockholders of
Voice-Tel Enterprises, Inc. (incorporated by reference to Exhibit 2.1
to the Registrant's Current Report on Form 8-K dated April 2, 1997 and
filed April 4, 1997).
2.2 Agreement and Plan of Merger, together with exhibits, dated as of
April 2, 1997 by and among Premiere Technologies, Inc., PTEK Merger
Corporation II, VTN, Inc. and the Stockholders of VTN, Inc.
(incorporated by reference to Exhibit 2.2 to the Registrant's Current
Report on Form 8-K dated April 2, 1997 and filed April 4, 1997).
2.3 Purchase and Sale Agreement dated April 2, 1997 by and between
Premiere Technologies, Inc. and Merchandising Productions, Inc.
(incorporated by reference to Exhibit 2.3 to the Registrant's Current
Report on Form 8-K dated April 2, 1997 and filed April 4, 1997).
2.4 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Continuum, Inc. and Owners of Continuum, Inc.
(incorporated by reference to Exhibit 2.4 to the Registrant's Current
Report on Form 8-K dated April 30, 1997 and filed May 14, 1997).
2.5 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., DMG, Inc. and Owners of DMG, Inc. and Transfer
Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., VTG, Inc. and Owners of VTG, Inc. (incorporated by
reference to Exhibit 2.5 to the Registrant's Current Report on Form 8-
K dated April 30, 1997 and filed May 14, 1997).
2.6 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Penta Group, Inc. and Owners of Penta Group, Inc.
and Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Scepter Communications, Inc. and Owners of Scepter
Communications, Inc. (incorporated by reference to Exhibit 2.6 to the
Registrant's Current Report on Form 8-K dated April 30, 1997 and filed
May 14, 1997).
2.7 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Premiere Business Services, Inc. and Owners of
Premiere Business Services, Inc. (incorporated by reference to Exhibit
2.7 to the Registrant's Current Report on Form 8-K dated April 30,
1997 and filed May 14, 1997).
2.8 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Dunes Communications, Inc., Sands Communications,
Inc., Sands Comm, Inc., SandsComm, Inc., and Owner of Dunes
Communications, Inc., Sands Communications, Inc., Sands Comm, Inc.,
and SandsComm, Inc. (incorporated by reference to Exhibit 2.8 to the
Registrant's Current Report on Form 8-K dated April 30, 1997 and filed
May 14, 1997).
2.9 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Shamlin, Inc. and Owner of Shamlin, Inc.
(incorporated by reference to Exhibit 2.9 to the Registrant's Current
Report on Form 8-K dated April 30, 1997 and filed May 14, 1997).
2.10 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., VT of Ohio, Inc. and Owners of VT of Ohio, Inc.;
Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Carter Voice, Inc. and Owners of Carter Voice,
Inc.; Transfer Agreement dated as of April 2, 1997 by and among
Premiere Technologies, Inc., Widdoes Enterprises, Inc. and Owners of
Widdoes Enterprises, Inc.; and Transfer Agreement dated as of April 2,
1997 by and among Premiere Technologies, Inc., Dowd Enterprises, Inc.
and Owners of Dowd Enterprises, Inc. (incorporated by reference to
Exhibit 2.10 to the Registrant's Current Report on Form 8-K dated
April 30, 1997 and filed May 14, 1997).
2.11 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., SDVT, Inc. and Owners of SDVT, Inc. (incorporated
by reference to Exhibit 2.11 to the Registrant's Current Report on
Form 8-K dated April 30, 1997 and filed May 14, 1997).
Exhibit
Number Description
------- -----------
2.12 Amended and Restated Transfer Agreement dated as of April 2, 1997 by
and among Premiere Technologies, Inc., Car Zee, Inc. and Owners of Car
Zee, Inc. (incorporated by reference to Exhibit 2.12 to the
Registrant's Current Report on Form 8-K dated April 30, 1997 and filed
May 14, 1997).
2.13 Transfer Agreement dated as of March 31, 1997 by and among Premiere
Technologies, Inc. and Owners of the VTEC Franchisee: 1086236 Ontario,
Inc. (incorporated by reference to Exhibit 2.13 to the Registrant's
Current Report on Form 8-K dated April 30, 1997 and filed May 14,
1997).
2.14 Transfer Agreement dated as of March 31, 1997 by and among Premiere
Technologies, Inc. and Owners of the Eastern Franchisees: 1139133
Ontario Inc., 1116827 Ontario Inc., 1006089 Ontario Inc., and 1063940
Ontario Inc. (incorporated by reference to Exhibit 2.14 to the
Registrant's Current Report on Form 8-K dated April 30, 1997 and filed
May 14, 1997).
2.15 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Communications Concepts, Inc. and Owners of
Communications Concepts, Inc. (incorporated by reference to Exhibit
2.1 to the Registrant's Current Report on Form 8-K dated May 16, 1997
and filed June 2, 1997).
2.16 Transfer Agreement dated as of May 20, 1997 by and among Premiere
Technologies, Inc., DARP, Inc. and Owners of DARP, Inc. (incorporated
by reference to Exhibit 2.2 to the Registrant's Current Report on Form
8-K dated May 16, 1997 and filed June 2, 1997).
2.17 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Hi-Pak Systems, Inc. and Owners of Hi-Pak Systems,
Inc. (incorporated by reference to Exhibit 2.3 to the Registrant's
Current Report on Form 8-K dated May 16, 1997 and filed June 2. 1997).
2.18 Transfer Agreement dated as of May 29, 1997 by and among Premiere
Technologies, Inc., MMP Communications, Inc. and Owners of MW
Communications, Inc. (incorporated by reference to Exhibit 2.4 to the
Registrant's Current Report on Form 8-K dated May 16, 1997 and filed
June 2, 1997).
2.19 Transfer Agreement dated as of May 16, 1997 by and among Premiere
Technologies, Inc., Lar-Lin Enterprises, Inc., Lar-Lin Investments,
Inc. and Voice-Mail Solutions, Inc. and Owners of Lar-Lin Enterprises,
Inc., Lar-Lin Investments, Inc. and Voice-Mail Solutions, Inc.
(incorporated by reference to Exhibit 2.5 to the Registrant's Current
Report on Form 8-K dated May 16, 1997 and filed June 2, 1997).
2.20 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Voice-Net Communications Systems, Inc. and Owners
of Voice-Net Communications Systems, Inc. and Transfer Agreement dated
as of April 2, 1997 by and among Premiere Technologies, Inc., VT of
Long Island Inc. and Owners of VT of Long Island Inc. (incorporated by
reference to Exhibit 2.6 to the Registrant's Current Report on Form 8-
K dated May 16, 1997 and filed June 2, 1997).
2.21 Transfer Agreement dated as of May 22, 1997 by and among Premiere
Technologies, Inc., Voice Systems of Greater Dayton, Inc. and Owner of
Voice Systems of Greater Dayton, Inc. and Transfer Agreement dated as
of May 22, 1997 by and among Premiere Technologies, Inc., Premiere
Acquisition Corporation, L'Harbot, Inc. and the Owners of L'Harbot,
Inc. (incorporated by reference to Exhibit 2.7 to the Registrant's
Current Report on Form 8-K dated May 16, 1997 and filed June 2, 1997).
2.22 Transfer Agreement dated as of May 30, 1997 by and among Premiere
Technologies, Inc., Audioinfo Inc. and Owners of Audioinfo Inc.
(incorporated by reference to Exhibit 2.8 to the Registrant's Current
Report on Form 8-K dated May 16, 1997 and filed June. 2, 1997).
Exhibit
Number Description
------- -----------
2.23 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., D&K Communications Corporation and Owners of D&K
Communications Corporation (incorporated by reference to Exhibit 2.10
to the Registrant's Current Report on Form 8-K dated May 16, 1997 and
filed June 2, 1997).
2.24 Transfer Agreement dated as of May 19, 1997 by and among Premiere
Technologies, Inc., Voice-Tel of South Texas, Inc. and Owners of
VoiceTel of South Texas, Inc. (incorporated by reference to Exhibit
2.11 to the Registrant's Current Report on Form 8-K dated May 16, 1997
and filed June 2, 1997).
2.25 Transfer Agreement dated as of May 31, 1997 by and among Premiere
Technologies, Inc., Indiana Communicator, Inc. and Owner of Indiana
Communicator, Inc. (incorporated by reference to Exhibit 2.12 to the
Registrant's Current Report on Form 8-K dated May 16, 1997 and filed
June 2, 1997).
2.26 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., Voice Messaging Development Corporation of
Michigan and the Owners of Voice Messaging Development Corporation of
Michigan (incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K/A dated May 16, 1997 and filed June 24,
1997).
2.27 Transfer Agreement dated as of June 13, 1997 by and among Premiere
Technologies, Inc., Voice Partners of Greater Mahoning Valley, Ltd.
and the Owners of Voice Partners of Greater Mahoning Valley, Ltd.
(incorporated by reference to Exhibit 2.2 to the Registrant's Current
Report on Form 8-K/A dated May 16, 1997 and filed June 24, 1997).
2.28 Transfer Agreement dated as of April 2, 1997 by and among Premiere
Technologies, Inc., In-Touch Technologies, Inc. and the Owners of
InTouch Technologies, Inc. (incorporated by reference to Exhibit 2.3
to the Registrant's Current Report on Form 8-K/A dated May 16, 1997
and filed June 24, 1997).
2.29 Transfer Agreement dated as of March 31, 1997 by and among Premiere
Technologies, Inc. and Owners of the Western Franchisees: 3325882
Manitoba Inc., 601965 Alberta Ltd., 3266622 Manitoba Inc., 3337821
Manitoba Inc. and 3266631 Manitoba Inc. (incorporated by reference to
Exhibit 2.4 to the Registrant's Current Report on Form 8-K/A dated May
16, 1997 and filed June 24, 1997).
2.30 Uniform Terms and Conditions, Exhibit A to Transfer Agreements by and
among Premiere Technologies, Inc., Wave One Franchisees and Owners of
Wave One Franchisees (incorporated by reference to Exhibit A to
Exhibit 2.4 to the Registrant's Current Report on Form 8-K dated April
2, 1997 and filed April 4, 1997).
2.31 Uniform Terms and Conditions, Exhibit A to Transfer Agreements by and
among Premiere Technologies, Inc., Wave Two Franchisees and owners of
Wave Two Franchisees (incorporated by reference to Exhibit 2.14 to the
Registrant's Current Report on dated May 16, 1997 and filed June 2,
1997).
2.32 Stock Purchase Agreement, together with exhibits, dated as of
September 12, 1997, by and among Premiere Technologies, Inc., VoiceCom
Holdings, Inc. and the Shareholders of VoiceCom Holdings, Inc.
(incorporated by reference to Exhibit 2.1 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended September 30,
1997).
2.33 Agreement and Plan of Merger, dated as of November 13, 1997, together
with exhibits, by and among Premiere Technologies, Inc., Nets
Acquisition Corp. and Xpedite Systems, Inc. (incorporated by reference
to Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated
November 13, 1997 and filed December 5, 1997, as amended by Form 8-K/A
filed December 23, 1997).
Exhibit
Number Description
------- -----------
2.34 Agreement and Plan of Merger, dated April 22, 1998, by and among the
Company, American Teleconferencing Services, Ltd. ("ATS"), PTEK
Missouri Acquisition Corp. and the shareholders of ATS (incorporated
by reference to Exhibit 99.1 of the Company's Current Report on Form
8-K dated April 23, 1998, and filed with the Commission on April 28,
1998.)
3.1 Articles of Incorporation of Premiere Technologies, Inc., as amended,
(incorporated by reference to Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1998).
3.2 Articles of Amendment of Articles of Incorporation of Premiere
Technologies, Inc. (changing the name of the Registrant to PTEK
Holdings, Inc.).
3.3 Amended and Restated Bylaws of Premiere Technologies, Inc., as amended
(incorporated by reference to Exhibit 3.1 to the Registrant's Amended
Quarterly Report on Form 10-Q/A for the Quarter Ended March 31, 1999,
as filed on May 27, 1999).
4.1 See Exhibits 3.1-3.3 for provisions of the Articles of Incorporation
and Bylaws defining the rights of the holders of common stock of the
Registrant.
4.2 Specimen Stock Certificate (incorporated by reference to Exhibit 4.2
to the Registrant's Registration Statement on Form S-1 (No. 33-
80547)).
4.3 Indenture, dated as of June 15, 1997, between Premiere Technologies,
Inc. and IBJ Schroder Bank & Trust Company, as Trustee (incorporated
by reference to Exhibit 4.1 to the Registrant's Current Report on Form
8-K dated July 25, 1997 and filed August 5, 1997).
4.4 Form of Global Convertible Subordinated Note due 2004 (incorporated by
reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-
K dated July 25, 1997 and filed August 5, 1997).
4.5 Registration Rights Agreement, dated as of June 15, 1997, by and among
the Registrant, Robertson, Stephens & Company LLC, Alex. Brown & Sons
Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation
(incorporated by reference to Exhibit 4.3 to the Registrant's Current
Report on Form 8-K dated July 25, 1997 and filed August 5, 1997).
4.6 Shareholder Protection Rights Agreement, dated June 23, 1998, between
the Company and SunTrust Bank, Atlanta, as Rights Agent (incorporated
by reference to Exhibit 99.1 of the Company's Current Report on Form
8-K dated June 23, 1998, and filed with the Commission on June 26,
1998).
10.1 Shareholder Agreement dated as of January 18, 1994 among the
Registrant, NationsBanc Capital Corporation, Boland T. Jones, D.
Gregory Smith, Leonard A. DeNittis and Andrea L. Jones (incorporated
by reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1 (No. 33-80547)).
10.2 Amended and Restated Executive Employment Agreement and Incentive
Option Agreement dated November 6, 1995 between the Registrant and
David Gregory Smith (incorporated by reference to Exhibit 10.15 to the
Registrant's Registration Statement on Form S-1 (No. 33-80547)).**
10.3 Amended and Restated Executive Employment Agreement dated November 6,
1995 between Premiere Communications, Inc. and David Gregory Smith
(incorporated by reference to Exhibit 10.16 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547)).**
10.4 Mutual Release dated December 5, 1997 by and among the Registrant,
Premiere Communications, Inc. and David Gregory Smith (incorporated by
reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.5 Amended and Restated Executive Employment and Incentive Option
Agreement dated November 6, 1995 between the Registrant and Boland T.
Jones (incorporated by reference to Exhibit 10.17 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547)).**
Exhibit
Number Description
------- -----------
10.6 Amended and Restated Executive Employment Agreement dated November 6,
1995 between Premiere Communications, Inc. and Boland T. Jones
(incorporated by reference to Exhibit 10.18 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547)).**
10.7 Executive Employment and Incentive Option Agreement dated November 1,
1995 between the Registrant and Patrick G. Jones (incorporated by
reference to Exhibit 10.19 to the Registrant's Registration Statement
on Form S-1 (No. 33-80547)).**
10.8 Executive Employment Agreement dated November 1, 1995 between Premiere
Communications, Inc. and Patrick G. Jones (incorporated by reference
to Exhibit 10.20 to the Registrant's Registration Statement on Form S-
1 (No. 33-80547)).**
10.9 Executive Employment and Incentive Option Agreement, effective as of
July 24, 1997, by and between the Company and Jeffrey A. Allred
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1998).**
10.10 Executive Employment and Incentive Option Agreement effective as of
July 6, 1998, by and between the Company and William Porter Payne
(incorporated by reference to Exhibit 10.12 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998).**
10.11 Memorandum of Understanding dated as of July 6, 1998, by and between
the Company and William Porter Payne (incorporated by reference to
Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998).**
10.12 Restricted Stock Award Agreement between the Registrant and Boland T.
Jones dated May 5, 1999.**
10.13 Restricted Stock Award Agreement between the Registrant and Jeffrey A.
Allred dated May 5, 1999.**
10.14 Restricted Stock Award Agreement between the Registrant and Patrick G.
Jones dated May 5, 1999.**
10.15 Recourse Promissory Note dated December 20, 1999 payable to the
Registrant by Boland T. Jones.**
10.16 Recourse Promissory Note dated December 20, 1999 payable to the
Registrant by Jeffrey A. Allred.**
10.17 Premiere Communications, Inc. 401(k) Profit Sharing Plan (incorporated
by reference to Exhibit 10.30 to the Registrant's Registration
Statement on Form S-1 (No. 33-80547)).**
10.18 Form of Director Indemnification Agreement between the Registrant and
Non-employee Directors (incorporated by reference to Exhibit 10.31 to
the Registrant's Registration Statement on Form S-1 (No. 33-
80547)).**
10.19 Park Place Office Lease dated May 31, 1993 between Premiere
Communications, Inc. and Mara-Met Venture, as amended by First
Amendment dated December 15, 1995 (incorporated by reference to
Exhibit 10.34 to the Registrant's Registration Statement on Form S-1
(No. 33-80547)).
10.20 Second and Third Amendment to 55 Park Place Office Lease dated
November 5, 1996 between Premiere Communications, Inc. and Mara-Met
Venture (incorporated by reference to Exhibit 10.49 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996).
10.21 Office Lease Agreement dated May 12, 1996 between Premiere
Communications, Inc. and Beverly Hills Center LLC, as amended by the
First Amendment dated August 1, 1996 (incorporated by reference to
Exhibit 10.50 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
Exhibit
Number Description
------- -----------
10.22 Second Amendment of Lease dated July 1, 1997, between Premiere
Communications, Inc. and Beverly Hills Center LLC (incorporated by
reference to Exhibit 10.18 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.23 Agreement of Lease between Corporate Property Investors and Premiere
Communications, Inc., dated as of March 3, 1997, as amended by
Modification of Lease dated August 4, 1997, as amended, by Second
Modification of Lease, dated October 30, 1997 (incorporated by
reference to Exhibit 10.19 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.24 Sublease Agreement dated as of December 16, 1997, by and between
Premiere Communications, Inc. and Endeavor Technologies, Inc.
(incorporated by reference to Exhibit 10.20 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.25 Form of Officer Indemnification Agreement between the Registrant and
each of the executive officers (incorporated by reference to Exhibit
10.36 to the Registrant's Registration Statement on Form S-1 (No. 33-
80547)).**
10.26 Telecommunications Services Agreement dated December 1, 1995 between
Premiere Communications, Inc. and WorldCom Network Services, Inc.
d/b/a WilTel (incorporated by reference to Exhibit 10.40 to the
Registrant's Registration Statement on Form S-1 (No. 33-80547)).
10.27 Amended and Restated Program Enrollment Terms dated September 30, 1997
by and between Premiere Communications, Inc. and WorldCom Network
Services, Inc., d/b/a WilTel, as amended by Amendment No. I dated
November 1, 1997 (incorporated by reference to Exhibit 10.26 to
Registrant's Annual Report on Form 10-K for the year ended December
31, 1997).*
10.28 Service Agreement dated September 30, 1997, by and between VoiceCom
Systems, Inc. and AT&T Corp. (incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended September 30, 1997).*
10.29 Strategic Alliance Agreement dated November 13, 1996 by and between
the Registrant and WorldCom, Inc. (incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated
November 13, 1996).*
10.30 Investment Agreement dated November 13, 1996 by and between the
Registrant and WorldCom, Inc. (incorporated by reference to Exhibit
10.2 to the Registrant's Current Report on Form 8-K dated November 13,
1996).
10.31 Service and Reseller Agreement dated September 28, 1990 by and between
Amway Corporation and Voice-Tel Enterprises, Inc. (incorporated by
reference to Exhibit 2.33 to the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1997).*
10.32 Amendment to Service and Reseller Agreement dated as of May 13, 1999
by and between Amway Corporation and Voice-Tel Enterprises, Inc.
(incorporated by reference to Exhibit 10.28 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1999).*
10.33 Form of Stock Purchase Warrant Agreement (incorporated by reference to
Exhibit 4.3 to the Registrant's Registration Statement on Form S-8
(No. 333-11281)).**
10.34 Form of Warrant Transaction Statement (incorporated by reference to
Exhibit 4.4 to the Registrant's Registration Statement on Form S-8
(No. 333-11281)).
10.35 Form of Director Stock Purchase Warrant (incorporated by reference to
Exhibit 4.3 to the Registrant's Registration Statement on Form S-8
(No. 333-17593)).**
10.36 Purchase Agreement, dated June 25, 1997, by and among Premiere
Technologies, Inc., Robertson, Stephens & Company LLC, Alex. Brown &
Sons Incorporated and Donaldson, Lufkin & Jenrette Securities
Corporation (incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated July 25, 1997 and filed
August 5, 1997).
Exhibit
Number Description
------- -----------
10.37 1991 Non-Qualified and Incentive Stock Option Plan of Voice-Tel
Enterprises, Inc. (assumed by the Registrant) (incorporated by
reference to Exhibit 4.2 to the Registrant's Registration Statement on
Form S-8 (No. 333-29787)).
10.38 1991 Non-Qualified and Incentive Stock Option Plan of VTN, Inc.
(assumed by the Registrant) (incorporated by reference to Exhibit 4.3
to the Registrant's Registration Statement on Form S-8 (No. 333-
29787)).
10.39 Form of Stock Option Agreement by and between the Registrant and
certain current or former employees of Voice-Tel Enterprises, Inc.
(incorporated by reference to Exhibit 4.4 to the Registrant's
Registration Statement on Form S-8 (No. 333-29787)).
10.40 Premiere Technologies, Inc. Second Amended and Restated 1995 Stock
Plan (incorporated by reference to Exhibit A to the Registrant's
Definitive Proxy Statement distributed in connection with the
Registrant's June 11, 1997 annual meeting of shareholders, filed April
30, 1997).**
10.41 First Amendment to Premiere Technologies, Inc. Second Amended and
Restated 1995 Stock Plan (incorporated by reference to Exhibit 10.43
to Registrant's Annual Report on Form 10-K for the year ended December
31, 1997).**
10.42 VoiceCom Holdings, Inc. 1995 Stock Option Plan (assumed by the
Registrant) (incorporated by reference to Exhibit 10.44 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.43 VoiceCom Holdings, Inc. Amended and Restated 1985 Stock Option Plan
(assumed by the Registrant) (incorporated by reference to Exhibit
10.45 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.44 Premiere Technologies, Inc., Amended and Restated 1998 Stock Plan
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1999.).
10.45 Amendment No. 1 to the Premiere Technologies, Inc. Amended and
Restated 1998 Stock Plan.
10.46 Xpedite Systems, Inc. 1992 Incentive Stock Option Plan (assumed by the
Registrant) (incorporated by, reference to Xpedite's Registration
Statement on Form S-1 (No. 33-73258)).
10.47 Xpedite Systems, Inc. 1993 Incentive Stock Option Plan (assumed by the
Registrant) (incorporated by reference to Xpedite's Registration
Statement on Form S-I (No. 33-73258)).
10.48 Xpedite Systems, Inc. 1996 Incentive Stock Option Plan (assumed by the
Registrant) (incorporated by reference to Xpedite's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.49 Xpedite Systems, Inc. Non-Employee Directors' Warrant Plan (assumed by
the Registrant) (incorporated by reference to Exhibit 10.31 to
Xpedite's Annual Report on Form 10-K for the year ended December 31,
1996).
10.50 Xpedite Systems, Inc. Officer's Contingent Stock Option Plan (assumed
by the Registrant) (incorporated by reference to Exhibit 10.30 to
Xpedite's Annual Report on Form 10-K for the year ended December 31,
1996).
10.51 Associate Stock Purchase Plan (incorporated by reference to Appendix A
to the Registrant's Definitive Proxy Statement distributed in
connection with the Registrant's June 22, 1999 annual meeting, filed
on May 19, 1999).
10.52 Intellivoice Communications, Inc. 1995 Incentive Stock Plan (assumed
by the Registrant).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule for the year ended December 31, 1999.
Exhibit Number Description
-------------- -----------
- --------
*Confidential treatment has been granted. The copy on file as an exhibit
omits the information subject to the confidentiality request. Such
omitted information has been filed separately with the Commission.
**Management contracts and compensatory plans and arrangements required to be
filed as exhibits pursuant to Item 14(c) of this report.