Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
----------------
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year
ended December 31, 1997
COMMISSION FILE NUMBER: 0-27778
PREMIERE TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
59-3074176
GEORGIA
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION IDENTIFICATION NO.)
OF INCORPORATION OR
ORGANIZATION)
3399 PEACHTREE ROAD, N.E., THE LENOX BUILDING, SUITE 600 ATLANTA, GEORGIA 30326
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(404) 262-8400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 26, 1998
as reported by The Nasdaq Stock Market's National Market, was approximately
$1,503,320,197.
As of March 26, 1998 there were 45,255,594 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 1997 meeting of
shareholders are incorporated by reference in Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEX
PAGE
----
PART I
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 21
Item 3. Legal Proceedings................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders.............. 23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.................................................................. 24
Item 6. Selected Financial Data.......................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 26
Item 8. Financial Statements and Supplementary Data...................... 50
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 71
PART III
Item 10. Directors and Executive Officers of the Registrant............... 71
Item 11. Executive Compensation........................................... 71
Item 12. Security Ownership of Certain Beneficial Owners and Management... 71
Item 13. Certain Relationships and Related Transactions................... 71
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 72
Signatures................................................................ 79
Exhibits.................................................................. 80
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
When used in this Annual Report on Form 10-K, in documents incorporated
herein and elsewhere by management or Premiere Technologies, Inc. ("Premiere"
or the "Company") from time to time, the words "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements concerning the Company's business operations, economic performance
and financial condition, including in particular, the Company's business
strategy and means to implement the strategy, the Company's objectives, the
amount of future capital expenditures, the likelihood of the Company's success
in developing and introducing new products and expanding its business, and the
timing of the introduction of new and modified products or services. For those
statements, the Company claims the protection of the safe harbor for forward
looking statements contained in the Private Securities Litigation Reform Act
of 1995. These statements are based on a number of assumptions and estimates
which are inherently subject to significant risks and uncertainties, many of
which are beyond the control of the Company and reflect future business
decisions which are subject to change. A variety of factors could cause actual
results to differ materially from those anticipated in the Company's forward-
looking statements, including the following factors: (a) those set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Performance" and elsewhere herein; (b)
those set forth from time to time in the Company's press releases and reports
and other filings made with the Securities and Exchange Commission;
(c) expected cost savings from the merger (the "Merger") with Xpedite Systems,
Inc. ("Xpedite") and any other acquisitions may not be fully realized or
realized within the expected time frame; (d) revenues following the Merger and
other acquisitions may be lower than expected, operating costs or customer
loss and business disruption following the Merger and any other acquisitions
may be greater than expected; (e) competitive pressures among enhanced
communications services providers may increase significantly; (f) costs or
difficulties related to the integration of the businesses of Xpedite and
Premiere and other businesses, if any, that may be acquired by Premiere may be
greater than expected; (g) general economic or business conditions,
internationally, nationally or in the local jurisdiction in
which Premiere is doing business, may be less favorable than expected; (h)
legislative or regulatory changes may adversely affect the business in which
Premiere is engaged; (i) changes may occur in the securities markets; and (j)
the Company's ability to manage the Company's growth and to respond to rapid
technological change and risk of obsolescence of the Company's products,
services and technology. The Company cautions that such factors are not
exclusive. Consequently, all of the forward-looking statements made herein are
qualified by these cautionary statements and readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release
the results of any revisions of such forward-looking statements that may be
made to reflect events or circumstances after the date hereof, or thereof, as
the case may be, or to reflect the occurrence of unanticipated events.
PART I
ITEM 1. BUSINESS
OVERVIEW
Premiere Technologies, Inc. ("Premiere" or the "Company") is a leading
provider of enhanced communications services. The Company's services include
800-based services, voice messaging, enhanced document distribution (including
e-mail and fax), conference calling and, beginning in mid-1998, Internet-based
communication services. The Company's goal is to become a single source
provider of an integrated suite of enhanced communication services to
businesses and individuals. By becoming a single source provider of these
services, management believes it can eliminate for its customers the
complexity of managing the rapidly evolving enhanced communication services
environment. The Company's network-based computer telephony technology
integrates these services by providing customers the flexibility of access to
its services through a computer or a telephone. The Company believes that this
multiple access provides users ease and flexibility of use and allows users to
efficiently and economically manage their communications regardless of whether
they are at or away from their home base. Further, the Company's network-based
solution allows its customers to avoid the cost of purchasing and maintaining
potentially costly communications equipment. Although Premiere offers stand-
alone communications services, it targets business and individual users who
have multiple communications devices and a need to integrate them for greater
functionality and convenience.
On February 27, 1998, Premiere acquired Xpedite Systems, Inc. ("Xpedite") in
a merger accounted for as a pooling-of-interests. See "--Acquisitions."
Xpedite is a worldwide leader and innovator in the enhanced document
distribution business including fax, e-mail, telex, Internet and mailgram
services. Xpedite serves customers who require high-quality, cost-effective,
rapid, and confirmed communications. Xpedite has developed sophisticated
applications in a wide range of industries that enable customers to deliver
common or customized documents to hundreds or thousands of recipients around
the world via fax or electronic mail using Xpedite's proprietary, private,
world-wide document distribution network (the "Xpedite Network").
The following Description of Business includes product names, trade names,
service marks and trademarks of Premiere Technologies, Inc. and its
subsidiaries and other companies including, without limitation, Premiere
WorldLink, OrchestrateSM, Voice-TelTM, VoiceComTM and VoiceCom Access OneSM.
All references in the following Description of Business to the "Voice-Tel
Acquisitions" refers to the Company's acquisitions of Voice-Tel Enterprises,
Inc. ("VTE"), its affiliate Voice-Tel Network Limited Partnership ("VTN") and
substantially all of its franchisees (the "Franchisees") (VTE, VTN and such
Franchisees are collectively referred to as the "Voice-Tel Entities" or
"Voice- Tel"), which were completed during the second quarter of 1997.
All references in the following Description of Business to the "Xpedite
Merger" refer to the acquisition of Xpedite effective February 27, 1998
pursuant to the Agreement and Plan of Merger (the "Merger Agreement") among
the Company, Xpedite and Nets Acquisition Corp., a wholly-owned subsidiary of
the Company ("Acquisition Sub"). Pursuant to the Merger Agreement, Acquisition
Sub merged with and into Xpedite, which became a wholly-owned subsidiary of
the Company.
Premiere, 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.
INDUSTRY BACKGROUND
Managing the evolving enhanced communications environment has become more
complex as a result of increased service and device options, rapidly changing
technology standards and shortened product life cycles. The proliferation of
communications devices and multiple messaging platforms has dramatically
increased the average employee's accessibility and the number of messages and
means of communications he or she manages. Both businesses and individuals
face a demanding communications environment today in which they must utilize a
number of communications systems, convert information from one medium to
another and deal with multiple vendors for each of these services. A study by
the Institute for the Future, the Gallup Organization, Pitney-Bowes
1
and San Jose State University, based on responses from more than 1,000
employees of Fortune 1000 companies, found that workers send and receive an
average of 178 messages each day.
Today, many stand-alone communications services are provided through legacy
systems, including landline telephone systems, messaging devices and local
area networks ("LANs"), that reside in whole or in part at a customer's
location. The architecture of the customer premises equipment, or "CPE," that
comprises such systems is often closed in nature, which makes integration with
other systems and networks difficult and expensive. Increasingly, users are
demanding that their existing CPE be integrated with more open and intelligent
worldwide communications networks such as the Internet. The Company believes
that, due to the complexity of such integration and current telecommunications
trends, users will increasingly outsource their enhanced communications
requirements to third parties such as Premiere. Premiere believes that
customers will prefer the Company's network-based solution for enhanced
communications to traditional CPE-based product solutions because the
Company's solution reduces customer costs of equipment ownership and exposure
to technology obsolescence. Additionally, future outsourcing partners could
increasingly include other telecommunication carriers, both long distance and
local exchange carriers. Many of these organizations are seeking to address
customer churn created by increased competition by broadening the services
they offer to customers and thereby improve customer loyalty and retention.
The Company already provides services to a number of such carriers under
outsourcing arrangements. Management believes that its single source, network-
based solution to enhanced communication services uniquely positions the
Company to capitalize on these trends.
THE PREMIERE SOLUTION
Premiere's goal is to become a single source provider and integrator of
enhanced communication services. The core of the Premiere solution is its
"intelligent network" which integrates stand-alone communications services
using technology developed by the Company's research and development team. The
intelligent network consists of (i) a state-of-the-art proprietary platform
that integrates digital switching technology with enhanced communications
features and (ii) a private telecommunications network which transmits voice
and data utilizing frame relay switching protocol. The Company's modular and
scaleable intelligent network incorporates an open-system design, which allows
the Company to easily expand capacity and provides the Company with the
flexibility to develop and customize its service offerings. Premiere offers
bundled services in a variety of packages and tailors these packages to meet
the requirements of its customers. Premiere's private data network, with
approximately 219 locations where the Company has voice messaging equipment,
is accessible via local access in metropolitan and other geographic areas
which include approximately 90% of the United States, Canadian and Australian
populations and approximately 50% of the New Zealand population. Premiere
anticipates that its private data network will be accessible via local access
by a significant portion of the United Kingdom population in 1998. The Company
plans to invest in excess of $50 million in capital expenditures over the next
12 months as part of its effort to integrate its proprietary platform with its
private data network. Once integration is completed, the Company believes that
its intelligent network will allow the Company to offer its customers many of
its enhanced communications services through either local or 800 access via
telephone or computer.
THE PREMIERE STRATEGY
Premiere's goal is to become the world's leading provider of enhanced
communications services. In order to achieve this goal, management is striving
to become a single source provider and integrator of enhanced communication
services which utilize proprietary network-based technology. Strategies
employed to achieve this goal is as follows:
Increase Service Offerings and Cross-Media Functionality. The Company
believes that changes in technology continually create new business
opportunities for providers of enhanced communications services. The Company
continually strives to make its interfaces more user friendly and its services
functionally equivalent regardless of the customer's chosen access device or
message transport medium. For example, the Company has introduced such
features as text-to-speech e-mail delivery, a unified messaging interface
utilizing the World Wide Web ("Web") and an integrated Web-based contact
database manager.
2
Leverage Network Facilities. At present, a significant amount of the
Company's services are accessible only by 800 toll free service. In connection
with the Voice-Tel Acquisitions, the Company acquired an international private
data network. Once this network is fully integrated with the Company's
proprietary platforms, the Company plans to use the private data network and
local messaging systems to provide users local access to certain of its
enhanced services. Management believes local access will make its services
more attractive to a broader market. In addition, through transitioning more
of its subscribers to local access, Premiere expects to realize a reduction in
transmission costs.
The Company continually seeks new ways to further leverage its network
infrastructure. One such initiative involves studying alternatives to become a
competitive local exchange carrier ("CLEC"). Management believes that by
virtue of the number of local lines currently utilized in its voice messaging
business the Company could become one of the largest CLECs in the United
States upon obtaining requisite regulatory approvals for CLEC status. Further,
management believes that the local access services it could provide as a CLEC
could complement its existing enhanced communications services offering.
Expand Customer Base and Distribution Channels. The Company believes that an
increasing number of businesses will transition their communications systems
from CPE-based products to network-based services. Premiere believes that a
substantial opportunity exists to meet the outsourcing needs of these
companies as well as other telecommunications carriers, both long distance and
local exchange carriers which are increasingly seeking to address churn in
their customer bases by offering value-added products such as those offered by
the Company. Management believes the Company provides a cost-efficient means
for carriers to offer such products to their customers. In addition, the
Company intends to use its direct sales force and national accounts program as
part of its effort to expand its customer base by cross-selling its services
to current customers which use only one of the Company's services on a stand
alone basis. Premiere also plans to continue to pursue wholesale and licensing
relationships in order to reach additional customers that the Company believes
are likely to be extensive users of its services.
Pursue Strategic Alliances, Investments and Acquisitions. Historically, the
Company has engaged in acquisitions in order to obtain new technology and
products, build its infrastructure and increase its sales force and customer
base. During 1997, the Company completed the acquisition of the Voice-Tel
Entities and VoiceCom Holdings, Inc. In February 1998, the Company completed
the acquisition of Xpedite. See "--Acquisitions." In addition to acquisitions,
the Company has and will continue to enter into strategic alliances with and
make investments in organizations engaged in complementary businesses and
emerging technologies aligned with the Company's strategies.
Expand International Presence. Premiere intends to expand internationally
through strategic partnerships, third-party distribution agreements, direct
sales efforts and relationships with existing customers that have
international operations. Management intends to leverage Xpedite's existing
operational presence in 13 countries to accelerate its international
expansion. Premiere opened a data and switching center in London in early 1998
and has begun development of a similar center in Toronto. Targeting the
Pacific Rim, Premiere expects to begin installation of a data and switching
center in that region during 1998. Additionally, the Company expects to
increase the international scope of its private data network by installing
POPs in additional overseas locations, specifically targeting the United
Kingdom for local messaging in the near future. These international centers
will allow Premiere to add 12 additional countries to the voice mail system in
1998 and will broaden the Company's product offerings internationally and will
allow the Company to pursue its strategy in certain markets for enhanced
communications services which are currently experiencing less competition and
are growing at rates faster than the U.S.
PREMIERE SERVICES
The Company is a leading single source provider of enhanced communications
services, which include:
. Voice Messaging;
. Enhanced Document Distribution;
. Conference Calling;
. 800-based Services; and
. Internet-based Communications Services.
3
Generally, Premiere customers may subscribe to one or more of these services
and select certain desired features and functionality. Premiere's bundled
service offerings are marketed directly under many names including Premiere
WorldLink, Voice-Tel, VoiceCom and VoiceCom Access One. Enhanced document
distribution services are marketed under the Xpedite name. Premiere
continually strives to develop new services and enhance the functionality of
current services through its internal research and development staff and joint
development efforts with leading hardware and software vendors.
Voice Messaging Services. Premiere's private data network allows subscribers
of enhanced voice messaging services access to one of the largest "voice
intranets" in the world. The Company's intelligent data network offers voice
mail subscribers functionality similar to e-mail and the ability to easily
communicate inside the voice intranet with a touch of a button. Subscribers to
the Company's voice intranet can record messages and send to hundreds of
recipients by entering their mailbox number; answer messages simply by
pressing the number "2" on their telephone keypad; and copy and route received
messages to anyone else on the network. The Company's voice messaging services
are as follows:
VOICE MESSAGING SERVICES
FEATURE DESCRIPTION
------- -----------
Voice Mail....................... Subscribers are provided with traditional
voice mail features allowing them to
customize their mailbox greetings and to
receive, save and delete voice mail
messages.
Enhanced Voice Messaging......... Subscribers receive a locally accessed
voice mail box that provides network
messaging to any mailbox on the Company's
worldwide private data network. The robust
messaging platform provides enhanced
features distribution lists, return receipt
and confidential and urgent tagging.
Enhanced Document Distribution Services. Premiere's enhanced document
distribution services provide customers with a lower cost, more reliable and
more time efficient information delivery method than most other document
distribution alternatives. These services, offered through Xpedite, are
described below.
ENHANCED DOCUMENT DISTRIBUTION SERVICES
FEATURE DESCRIPTION
------- -----------
Fax Broadcast.................... Customers rapidly distribute a document to
multiple recipients by a single
transmission through Xpedite's System to a
list of multiple fax addresses.
PC Xpedite....................... Xpedite's proprietary "PC Xpedite" software
enables a customer to transmit a document
to Xpedite for distribution across the
Xpedite Network and enables a customer to
maintain lists of fax addresses by computer
access to the Xpedite System.
Gateway Messaging................ Customers can send information from the
customer's computer through Xpedite's
system to a recipient's fax or telex
machine, or to a recipient via the Internet
or X.400 electronic mail networks. This
service allows a customer to send a large
volume of individual communications (i.e. a
single document to a single recipient or
from a single sender), each of which is in
the same format but contains different
information such as confirmations of
reservations and delivery of invoices.
Fax on Demand.................... Callers can select information using a
touch tone phone and have such information
sent directly to a fax machine.
Enhanced Fax Merging............. Senders may personalize information which
can be inserted into original text at any
point in a standard multi-address document.
Toll-Free Fax Response........... Senders may receive responses by fax to a
toll-free 800 number.
4
In addition, Premiere offers Xpedite's discounted international services.
These services allow a customer to use an automatic dialing device attached to
the customer's fax machine (at a cost of less than $100) to direct
international faxes to the Xpedite Network for delivery to the recipient at a
discount of approximately 15% to 25% of standard international toll calls.
Xpedite's initial discounted international service was a "store-and-forward"
service, in which the fax is transmitted by the sender and stored in Xpedite's
system for subsequent delivery. In response to demand in the market for a
discounted international fax service that would enable the sender to obtain
immediate confirmation that the fax had been delivered, Xpedite launched its
"real-time" service in the second half of 1996. With real-time service, the
customer uses the same automatic dialing device as is used in the store-and-
forward service, but rather than store the fax for subsequent delivery,
Xpedite connects the sender's fax machine directly to the recipient's fax
machine, thereby delivering the fax immediately.
Conference Calling. Through its acquisition of VoiceCom Holdings, Inc.
("VoiceCom") in the third quarter of 1997, Premiere also offers full service
conference calling. Conference calling is currently resold under the VoiceCom
name and is provided by a third-party service bureau under an outsourcing
arrangement. Although revenues from full service conference calling were not
significant in 1997, management believes this service is an integral part of
its single source product integration strategy. Accordingly, management
intends to focus on growth in this area of its business in the future,
including pursuing acquisitions, strategic alliances and investments, as well
as internal sales.
800-based Services. 800-based services are communications services which (i)
route incoming calls to predefined locations and (ii) allow users to make
outbound calls while away from their home or office. The Company's 800-based
services are offered on a direct and a wholesale basis. The following table
describes available products and features.
800-BASED SERVICES
FEATURE DESCRIPTION
------- -----------
Calling Card Long Distance....... Subscribers can place worldwide long
distance calls at attractive rates.
Call Connect/Call Screening...... Inbound calls are routed to a predetermined
phone number programmed by subscriber.
Platform records announcement of inbound
caller and plays announcement for
subscriber. Subscriber can accept call or
send to voice mail. If programmed phone
number is subscriber's pager, he or she can
call platform and connect with inbound
caller upon receiving page.
Message Notification............. Subscribers can instruct platform to notify
them upon receipt of messages by page or
call to a predesignated number. Special
pager codes identify type of message
(voice, fax or e-mail) received.
Personal 800 Numbers............. Subscribers receive personal 800 number
serving as single point of access for
callers to select various messaging options
or attempt to locate subscriber through
Call Connect feature.
E-mail........................... Subscribers are provided with an e-mail
address. Messages can be read over
telephone using proprietary text-to-speech
functionality or sent to fax machine. In
the near future, subscribers will be able
to respond to e-mail by telephone choosing
from a various standard responses.
Fax Mail......................... Subscribers can receive and store fax
transmissions and later instruct platform
to forward faxes to a specified location.
Callers may also attach a voice
introduction.
5
FEATURE DESCRIPTION
------- -----------
Conference Calling......... Subscribers can initiate conference calls by
commands delivered through a telephone key pad.
Information Services....... Subscribers can access news, weather, sports and
financial and other information updates.
Interactive Voice Response. Various applications using custom voice prompts
and commands from a caller's telephone key pad to
retrieve, process or route certain information or
telephone calls. Typical application includes
financial institutions (NationsBank) in which
Premiere's platform is used to enhance call
processing for checking, savings and other account
information.
Other Services............. Subscribers can pay bills electronically, program
speed dial, access travel and concierge services
including lodging, airline, rental car, dining and
other events.
Internet-Based Communications Services. Premiere's primary Internet-based
service is Orchestrate, a Web-based interface to the Company's computer
telephony platform. Orchestrate integrates the Company's service offerings by
allowing subscribers to access the Company's services through a computer or
telephone. The Orchestrate product provides users with a contact manager to
manage their communications needs: universal messaging; web-based conference
calling; a virtual receptionist; and their own personal web page. Subscribers'
Web pages are created by the Premiere platform from input provided by
subscribers. Orchestrate operates using an Internet browser in connection with
any PC connected to the Internet and does not require subscribers to purchase
additional specialized hardware or software. The Company intends to begin
marketing Orchestrate to customers in the second quarter of 1998. The Company
believes that its competitors have not yet developed a publicly available
network-based product which incorporates all of the functionality of
Orchestrate.
In addition, the Company is developing Internet-based communications
services and features, including:
. Third-Party PIM Compatibility. Subscribers would be able to transfer
contact information from popular Personal Information Managers ("PIMs")
into Orchestrate. Currently, the Company is testing the integration of the
contact manager feature of Orchestrate with Microsoft Outlook and Lotus
Notes.
. Web-based Conference Calling. Similar to features available to a
conference call bridge operator, subscribers would be able to control
conference calls in session from their PCs. Features are expected to
include muting and addition and deletion of selected callers.
PREMIERE PLATFORM AND NETWORK
Premiere has designed its platform and network to provide its subscribers
with efficient and reliable service and to be easily expandable as network
usage increases. The modular and scaleable design of the platform and related
software allows expansion of network capacity without requiring replacement of
existing hardware or software or interrupting service. Premiere's open systems
design approach enables Premiere to utilize readily available third party
hardware and software in constructing its platform and facilitates the
integration of services and information provided by third parties into the
system. The platform delivers and distributes its services to users through
its voice and data switching centers and is currently being integrated with
the private frame relay
6
network and locally deployed voice messaging POPs acquired by the Company.
This delivery infrastructure incorporates both third party and proprietary
equipment as well as leased transmission facilities.
Computer Telephony Platform. The computer telephony platform consists of
digital telecommunications switches which interface with high speed
client/server networks of personal computers, database servers, application
servers and Web servers. High speed client/server networks of personal
computers (called "Telnodes") are controlled by PCs utilizing the Company's
proprietary software (called "Network Managers"). Servers on the network are
responsible for performing functions requested by the Telnodes and Network
Managers and are also responsible for storing and providing access to data.
Web servers connected to the network firewall interface with the Internet and
allow Premiere to offer access to certain of its services from any PC
connected to the Internet. The network architecture is designed to be modular
and scaleable. To increase the capacity of the platform, the Company adds
additional Network Managers, Telnodes and servers and, at certain points, must
add additional modules to the digital switch, but is not required to replace
existing Network Managers, Telnodes and servers. This modular systems approach
also allows Premiere, at the request of licensees and strategic partners, to
provide custom applications for subscribers. The client/server network
utilizes a fault tolerant network operating system, and the network
configuration provides for data on each server to be mirrored on a separate
server, thereby providing redundancy for improved system reliability. Premiere
maintains the ability to generate power in the event of a prolonged power
outage, or if its uninterruptible power supply fails.
The platform is controlled by proprietary application and database access
software that was developed by the Company and is designed to be versatile and
adaptable to meet the demands of strategic partners, licensees or individual
subscribers. Applications written for custom or specific functions can be
quickly developed and implemented across the network and offered to all of the
Company's subscribers. Premiere maintains an internal development program in
order to continually enhance its software.
Switching and Transmission Facilities. Incoming and outgoing communications
to the platform are transmitted via fiber optic trunk lines, which are
provided by interexchange long distance service providers pursuant to
contractual relationships with the Company. Premiere obtains transmission
services from multiple carriers, thus enhancing Premiere's ability to avoid
service interruptions caused by technical problems at a single carrier.
Because each carrier's trunk lines physically terminate at Premiere's
facility, Premiere can readily alter the routing of its transmission traffic
in the event of technical difficulties.
The Company opened an additional domestic switching facility in Dallas,
Texas in September 1996. This facility is designed to provide geographical
redundancy and increased capacity. The Dallas center is capable of handling
300 million transaction minutes per month, which is the same capacity as
Premiere's core hub in Atlanta, Georgia. In addition, the Company established
a data and switching center in London, England during 1996 and began
development of a similar center in Toronto, Canada during 1997. These
international centers are designed to reduce transmission costs associated
with system access from international locations and allow Premiere to more
effectively pursue opportunities with international customers and partners.
The Company intends to establish switching facilities in the New York/New
Jersey and South Florida geographic areas in 1998.
Private Data Network and Local Messaging POPs. Premiere's private data
network connects messaging customers in dispersed locations through a secure
private wide area network that is accessible via local access in metropolitan
and other geographic areas which include approximately 90% of the U.S.,
Canadian and Australian populations and approximately 50% of the New Zealand
population. Messages are captured and digitized at one of approximately 219
local POPs using a Centigram voice processing system. Users access these POPs
through local direct inward dial numbers that are purchased from the
appropriate LEC. Network interface boxes located at the POP then convert the
digitized data from DDCMP protocol (the data processing protocol standard of
Centigram's system) to the TCP/IP protocol. Once converted to TCP/IP format,
the message's path is determined by a router, which directs the data to one of
the 13 network hubs. These network hubs are co-located in sites utilized by
WorldCom, Inc. ("WorldCom"). The Company's Cascade frame relay switches,
placed in the network hubs, then route the message data over leased frame
relay connections to other hub sites or POPs within
7
a hub region for delivery to the end user. The Company plans to integrate its
private data network and local messaging POPs with its computer telephony
platforms in order to offer certain of its enhanced personal communications
services on a local access basis.
Billing. Depending on the services to which the customer subscribes,
Premiere bills the customer either by its real-time electronic billing and
information system ("EBIS") or through an invoice. The Company bills customers
at least monthly and in certain instances more frequently if the customer
exceeds certain preset spending limits.
Premiere's EBIS is designed to allow instant activation of subscribers'
accounts, monitor subscribers' activity in real time and, while operating in
the background without interrupting subscribers' service, interface with
multiple financial institutions and electronically bill subscribers' credit
cards or bank accounts. Customers also receive a monthly statement that
provides a detailed accounting of their calling activity. The EBIS is
configurable for the billing requirements of various financial institutions
and currently interfaces electronically with approximately 3,000 banks and
other financial institutions.
Invoices are created by extracting call record data from either the platform
or local voice messaging equipment. This data is collected, consolidated and
processed to produce a customer invoice that can then be billed to either a
business, corporate department or an individual.
SALES, MARKETING AND DISTRIBUTION
Premiere markets its services through multiple distribution channels that
encompass: (i) direct sales through the Company's own dedicated sales force;
(ii) direct marketing efforts where Premiere is responsible for lead
generation and sales; (iii) co-brand relationships in which Premiere offers
its services to the customers of other companies, such as financial
institutions, that are seeking to increase their revenue from and their
goodwill with their customer base by offering value-added services; (iv)
strategic relationships where Premiere may develop custom applications for its
platform and market its services jointly with its strategic partners; and (v)
licensing and wholesale arrangements where other companies market and sell
Premiere's services under their names without significant assistance from
Premiere. In all distribution channels, except licensing arrangements,
Premiere pays commissions to, in the case of employees and agents, or shares
revenues with the parties who assist Premiere in marketing its services. The
Premiere marketing staff is primarily responsible for providing marketing
support to the five channels described above at varying levels of involvement,
depending on the channel. The marketing staff is also responsible for
promoting the Premiere corporate image in the marketplace.
Direct Sales. The direct sales force is organized by the Company into a
regional reporting structure and a centrally managed national and
international accounts program. Regional sales managers and their direct sales
people have the ability to generate sales leads for all of Premiere's products
and services within their defined geographic territories. These sales people
target primarily single location small to medium-sized businesses in the case
of voice messaging, and larger businesses with respect to enhanced document
distribution. Other types of leads generated may be passed on to the
appropriate group or channel (e.g., national accounts program or wholesale
channel). 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. If appropriate,
these national accounts sales people form account teams that include regional
sales people when greater geographic coverage is needed or that include
wholesale channel representatives when necessary. Xpedite markets its services
through a full time direct sales force operating from 50 sales office in 13
countries and a significant network of third party distributors. See "--
Xpedite Systems."
Direct Marketing. Premiere markets its services directly under the Premiere
WorldLink, Voice-Tel, VoiceCom Access One and AFCOM names. Direct marketing
and sales efforts have traditionally focused on print advertising and direct
mailings targeted at mobile professionals or, with respect to AFCOM, direct
marketing done in conjunction with financial institutions located on military
bases.
8
Co-brand Relationships. Premiere has relationships with a number of other
companies, including First Union National Bank ("First Union") Discover Card
Services, Inc. ("Discover Card") and the Royal Bank of Scotland PLC, under
which Premiere provides its services to customers of those companies. Co-brand
customers generally offer their customers access to Premiere's services, and
Premiere pays subscriber and usage based fees to the other company with
respect to each subscriber who subscribes to a co-branded service. Premiere
believes that companies which enter into co-brand relationships with Premiere
are motivated by the ability to offer additional value to their customers,
reinforce brand equity through custom voice prompts that their customers hear
each time they access the service, communicate with their customers by
broadcasting voice, fax or e-mail messages, and derive additional revenue.
Marketing and fulfillment materials are generally issued under the Premiere
WorldLink name, with the co-brand customers also placing their logo on the
materials.
Strategic Partners. The Company also markets its services by establishing
strategic relationships with companies such as American Express Travel Related
Services, Inc. ("American Express"), whose customers have an anticipated need
for enhanced communications services provided by Premiere. Strategic
relationships are intended to provide the Company's strategic partners with:
(i) an efficient means of communicating with their customers through
Premiere's voice mail, e-mail and fax mail features; (ii) increased visibility
to their customers through customized greetings and a private branded
communications card; (iii) the ability to provide customized services to their
customers over Premiere's platform; and (iv) an additional source of revenue.
These relationships provide the Company with the opportunity to develop
specialized services for the strategic partner's customers which, in certain
circumstances, the Company can later offer to other subscribers. In connection
with these strategic relationships, services are generally issued in the name
of Premiere's strategic partner and bear a logo and design of the strategic
partner's choosing. The fulfillment materials generally state that services
are provided by Premiere.
Licensing and Wholesale Relationships. Companies such as WorldCom,
NationsBanc Services, Inc. ("NationsBank"), UniDial, Incorporated ("UniDial")
and The Telephone Company of Central Florida, Inc. have chosen to outsource
part or all of their enhanced communications services to Premiere. Premiere
licenses use of its platform, voice messaging network and call center
technology to these companies. Such relationships enable these companies to:
(i) provide enhanced services to their customers; (ii) generate additional
revenue without developing or investing in their own infrastructure; and (iii)
reduce costs and improve operational efficiencies through the use of more
advanced technologies than are internally available. The platform's and
network's open architecture allows customization of services for the licensee
or wholesale customer. Premiere generally provides its licensee or wholesale
customers with access to customer and billing records for marketing and
billing purposes. Licensee and wholesale customers generally are responsible
for billing the end user and generally provide their own transmission
facilities for use with Premiere's services. Services are private labeled by
the licensee or wholesale customer with Premiere's contribution transparent to
the end user. Services are also generally provided under agreements with 24 to
48 month terms which require the payment of a minimum monthly fee if specified
minimum targets are not met.
ACQUISITIONS
Premiere has historically engaged in acquisitions in order to obtain new
technology, build its infrastructure and increase its sales force and customer
base. As part of this strategy, Premiere acquired Voice-Tel, VoiceCom and,
most recently, Xpedite.
Voice-Tel Acquisitions. On June 12, 1997, Premiere announced the completion
of the Voice-Tel Acquisitions. The Voice-Tel Entities provide interactive
digital voice messaging products on a service bureau basis through
approximately 219 POPs in the United States, Puerto Rico, Canada, Australia
and New Zealand. In connection with the Voice-Tel Acquisitions, Premiere
acquired Voice-Tel's digital private data network and POPs.
9
Premiere believes that the Voice-Tel Acquisitions broadened Premiere's
target market by allowing Premiere to offer local access to certain of its
enhanced communications services. In addition, the Voice-Tel Acquisitions
provided Premiere with a direct sales force of approximately 300 people in
four countries, an expanded subscriber base and the potential for cross-
selling opportunities. In connection with the Voice-Tel Acquisitions, Premiere
recorded a pre-tax charge in the second quarter of 1997 of approximately $45.4
million, consisting of transaction expenses and restructuring and related
costs attributable to the Voice-Tel Acquisitions.
VoiceCom Acquisition. During the third quarter of 1997, Premiere acquired
approximately 97.5% of the outstanding capital stock of VoiceCom in exchange
for approximately 446,000 shares of Premiere Common Stock. In addition,
Premiere converted existing VoiceCom options into options to acquire
approximately 76,000 shares of Premiere Common Stock. VoiceCom is a provider
of personal communications management services and telecommunications
outsourcing solutions to large corporations, government entities and mobile
professionals. Its service offerings include voice messaging, 800-based
services, including interactive voice response products, and full-service
conference calling. In connection with the acquisition of VoiceCom, Premiere
recorded a pre-tax charge in the third quarter of approximately $28.2 million,
consisting of transactions expenses and restructuring and related costs
attributable to the acquisition of VoiceCom.
VoiceCom, which is an operating subsidiary of Premiere as a result of the
acquisition, has a customer base that includes several Fortune 500 companies,
including, among others, Abbott Laboratories ("Abbott Labs"), Beverly
Enterprises, Inc. ("Beverly Enterprises") and ConAgra, Inc. ("ConAgra").
Xpedite. On February 27, 1998 (the "Effective Date"), Premiere, Xpedite and
Nets Acquisition Corp. ("Acquisition Sub") consummated the merger (the
"Xpedite Merger") of Xpedite with and into Acquisition Sub pursuant to which
Xpedite became a wholly-owned subsidiary of Premiere. The Xpedite Merger was
consummated in accordance with the Merger Agreement. Under the terms of the
Merger Agreement, the Xpedite Merger resulted in the issuance of approximately
11 million shares of Premiere Common Stock to the stockholders of Xpedite.
Xpedite stockholders received 1.165 shares of Premiere Common Stock for each
share of Xpedite common stock, par value $0.01 per share, outstanding on the
Effective Date. In addition Premiere converted existing Xpedite options and
warrants into options and warrants to acquire approximately 543,000 shares of
Premiere Common Stock. The Company anticipates that it will record
restructuring and other special charges before income taxes in the range of
$50 million in connection with the Xpedite acquisition. Such amount includes
charges recorded by Xpedite in the fourth quarter of 1997 expected by
management to be in the range of $20 million before income taxes. These
charges result principally from transaction fees which the Company is required
to expense under the pooling of interest method of accounting, including a
$9.5 million transaction "break-up fee" paid by Xpedite to a company which was
party to an unsuccessful attempt to acquire Xpedite. In addition, such costs
result from legal and professional fees and the write-down of impaired assets
and associated costs to exit certain duplicative facilities and business
activities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Restructuring and Other Special Charges."
RESEARCH AND DEVELOPMENT
Premiere's research and development and engineering personnel are
responsible for developing, testing and supporting proprietary software
applications, as well as creating and improving enhanced system features and
services. Premiere's research and development strategy is to focus its efforts
on enhancing its proprietary software and integrating its software with
readily available software and hardware when feasible. Premiere maintains an
internal software development program pursuant to which the Company introduces
major and minor enhancements of its software.
As of December 31, 1997, Premiere employed approximately 109 people in
engineering and research and development. Premiere's research and development
team continuously monitors and performs necessary improvements to the
operation of the computer telephony platform, the EBIS and other billing
systems and messaging systems and network connections to determine if software
or hardware modifications are necessary. Premiere's research and development
and engineering personnel also engage in joint development efforts with
Premiere's strategic partners and vendors.
10
CUSTOMER SERVICE AND TECHNICAL SUPPORT
Premiere believes that effective customer service is essential to attracting
and retaining subscribers. Premiere's customer service department is
responsible for educating and assisting subscribers in using Premiere's
services, for resolving billing related issues and, in consultation with
Premiere's technical support personnel, for resolving technical problems
subscribers may have in using Premiere's services. Premiere provides customer
service through either Atlanta-based call centers or regionally located
representatives. Regionally located representatives are primarily responsible
for supporting Voice-Tel voice messaging customers while Premiere's call
centers provide 24 hours per day, seven days per week coverage to assist
customers using all other services.
Premiere employs separate personnel who are responsible for technical
support functions. These employees are responsible for performing more
technically demanding support activities, such as voice messaging and certain
other types of account provisioning and administration, consulting with
Premiere's strategic partners and licensees regarding technical issues and
resolving technical issues brought to their attention by the customer service
department. As of December 31, 1997, Premiere employed approximately 213
people in customer service and technical support positions, the majority of
which were located in Atlanta.
XPEDITE SYSTEMS
In 1988, Xpedite was formed and began marketing enhanced document delivery
(including fax and messaging) services ("Enhanced Services"). From its
inception, Xpedite's focus was on the provision of value-added fax services
consisting primarily of "fax broadcast" and "gateway messaging" services in
the U.S. market. Xpedite strives to build value-added relationships with its
customers through a sales force of over 250 employees working from 50 sales
offices in 13 countries. Fax broadcast allows a single document to be faxed to
multiple recipients through a single transmission to the Xpedite Network,
while gateway messaging provides high volume transmission of individual
documents, each of which is in the same format, but contains customized
information. Xpedite's Enhanced Services provide customers with rapid, cost-
effective delivery of documents worldwide. Xpedite's second major product
offering utilizes the existing Xpedite Network to provide discounted
international messaging services ("Discounted International Services") which
provide real-time and delayed transmission of documents over the Xpedite
Network at significant savings to Xpedite's customers.
By expanding its sales organization and developing new applications for its
services, Xpedite has become the largest provider of Enhanced Services in the
United States and now offers these services throughout North America, Europe
and the Pacific Rim. Premiere believes that significant opportunities exist
for continued development of these services in international markets. One
strategy for international expansion involves marketing applications which are
established and widely used in the United States but which are only in the
early stages of adoption overseas. Xpedite's sales force continues to identify
new applications as well as to further customize and market established
applications. In addition, Xpedite's ability to leverage (i) its solution-
oriented sales force by developing new and cost-effective document
distribution solutions that stimulate market demand, and (ii) its network
infrastructure through growth in fax traffic resulting from existing
applications, new applications and new products, creates what Xpedite believes
is a platform for future worldwide growth. To further stimulate market demand,
Xpedite has, to date, passed a portion of these benefits to customers through
the form of price reductions.
Premiere's current strategy is for Xpedite to continue to expand from being
primarily a provider of Enhanced Services in North America to become a
provider of both Enhanced Services and Discounted International Services
worldwide and to continue to integrate multiple transmission approaches like
fax, Internet and e-mail in unique ways to meet its customers' needs. The key
elements of the Premiere's strategic plan for Xpedite are to:
(i) leverage Xpedite's proven experience in the Enhanced Services market
by continuing to develop new applications for the Enhanced Services and by
establishing a leadership position in new markets
11
through "exporting" proven Enhanced Services to geographic areas in which
Xpedite has not historically offered such services;
(ii) capitalize on the multi-billion dollar market for Discounted
International Services by aggressively marketing both its "store-and-
forward" and "real-time" services through its direct sales force, sales
agents, resellers and Nodal Partners (as defined herein), and by installing
the infrastructure required for the delivery of such services on a
worldwide basis;
(iii) continue to expand and develop its solution-oriented direct sales
force, which Xpedite believes is one of the key factors for its success;
(iv) develop and/or acquire additional technologies and applications to
expand Xpedite's messaging capabilities and leverage its sales force and
market presence;
(v) expand the Xpedite Network by adding new geographic points of
presence ("Nodes") and leased telecommunications lines in order to continue
to lower its fax delivery costs; and
(vi) increase market share, expand geographic coverage, leverage the
Xpedite Network and achieve economies of scale through strategic alliances
and other business relationships.
Customer Base. Applications for Xpedite's messaging services are utilized by
a broad array of customers including those in the publishing, public relations
and investor relations, commercial banking, manufacturing, travel,
electronics, legal and pharmaceutical industries. Xpedite's international
network and capacities have also attracted customers from additional
industries such as the global freight industry. Xpedite's customer base is
broadly diversified, with no single domestic industry group accounting for
greater than 15% of revenues. Xpedite believes that this diversification
limits its susceptibility to the cyclicality of any particular industry or a
general business downturn in any particular sector.
Sales and Marketing. Xpedite's services are marketed through a direct sales
force and third party distributors. Xpedite's full-time direct sales force has
increased from 41 people at the end of 1992 to 273 people as of December 31,
1997. These full-time sales personnel are deployed throughout Xpedite's 50
sales offices in 13 countries today with approximately 171 operating in North
America. Xpedite also utilizes a significant network of third party
distributors (sales agents and resellers) both in countries where it has a
direct sales presence and in locations where it does not currently have such a
presence.
The Xpedite Network. In order to offer high quality Enhanced Services and
Discounted International Services in a cost efficient manner, Xpedite
established the Xpedite Network. The Xpedite Network is able to serve the
electronic messaging needs of its customers through the use of proprietary
software and a document distribution system network of over 14,500 leased
telecommunications lines and its "Nodal Partners." "Nodal Partners" are
independent entities that have purchased an electronic document distribution
system from Xpedite and which sell Discounted International Services. A "Node"
is an element of the Xpedite Network located at a geographically distinct
"point of presence" that allows access to or egress from the Xpedite Network
via a local call.
The proprietary network software that has been developed by Xpedite allows
its Enhanced Services customers access to the Xpedite Network via several
communications options including fax machines, the Internet, mainframe or mini
computers, and Local Area Networks ("LANs"). Customers who use fax machines to
access the Xpedite Network for Enhanced Services or Discounted International
Services are connected to the Xpedite Network through an "autodialer," which
routes the document over a lower-cost telecommunications line leased by
Xpedite.
The low-cost structure of the Xpedite Network is achieved through the use of
leased telecommunications lines and Nodal Partners which allow Xpedite to
transmit a greater number of faxes through inexpensive local
12
calls rather than high priced long distance or international calls. The
Xpedite Network is intended to provide Xpedite's Enhanced Services and
Discounted International Services customers with a reliable alternative for
long distance and international document distribution at significant price
discounts and cost savings, particularly in overseas telecommunications
markets that are highly regulated and have limited competition. As it
increases fax messaging traffic over the Xpedite Network, Xpedite is able to
exploit economies of scale which result in lower costs per minute or per page
and then pass a portion of these cost savings on to customers, further
stimulating demand for Xpedite's services.
Xpedite charges for its fax services both on a per minute and a per page
basis, with the bulk of its sales occurring on a per minute basis. A
substantial portion of Xpedite's fax traffic terminates in cities where
Xpedite or its affiliates have Nodes. Xpedite estimates that approximately 40%
of its domestic fax deliveries in 1996 were routed over the Xpedite Network.
Xpedite purchases long-distance services from MCI, Cable & Wireless LDDS
(WorldCom) and a number of PTTs around the world, among others, to carry fax
traffic that is routed to destinations where Xpedite does not have Nodes. In
the future, Xpedite expects its total telecommunications costs per minute of
fax traffic to decrease as an increasing amount of traffic is routed over the
Xpedite Network.
XSL Acquisition. In connection with its international expansion, Xpedite has
also entered into relationships with each of XSL, Xpedite Germany and Xpedite
Systems SA, (collectively the "European Affiliates.") At the time of formation
of each of these entities, Xpedite entered into a System and Marketing
Agreement and a Put and Call Option Agreement (collectively, the "Put/Call
Agreements") with each European Affiliate and, in the case of the Put/Call
Agreements, each affiliate's shareholders. These agreements provided for the
sale by Xpedite to each European Affiliate of Xpedite's document distribution
system, along with a license to the software used to operate such system (for
which the European Affiliate pays royalties on a declining percentage basis),
joint marketing efforts, and put and call rights which, upon the achievement
of specified levels of financial performance by the relevant European
Affiliate and fulfillment of certain other conditions, would enable or require
Xpedite to purchase interests in the relevant European Affiliate.
In December 1997, XSL Acquisition Corp. purchased all the share capital of
XSL for a purchase price of approximately $85.5 million. Pursuant to the XSL
Purchase Agreement, the Put/Call Agreement with respect to XSL has been
terminated. In January 1998, Xpedite acquired, directly or indirectly,
approximately 76.7% of the issued share capital of Xpedite Germany and
indebtedness of Xpedite Germany to its former majority shareholder for an
aggregate purchase price of approximately $13.2 million. Together with the
19.9% of the issued share capital of Xpedite Germany previously owned by
Xpedite, Xpedite currently owns approximately 96.6% of the issued share
capital of Xpedite Germany. In addition, Xpedite exercised an option to
purchase the remaining 3.4% of the issued share capital of Xpedite Germany at
a purchase price of approximately $600,000. Pursuant to the Xpedite Germany
Purchase Agreements, the Put/Call Agreement with respect to Xpedite Germany
has been terminated.
Description of XSL's Business. XSL is a leading provider of Enhanced
Services in the United Kingdom. To capitalize on the market need for the
provision of Enhanced Services, XSL was formed as a start-up company in
January 1993 by certain members of XSL's management and the APAX Funds. Based
in York, England, XSL primarily provides to the U.K. market fax broadcast and
gateway messaging services similar to those provided by Xpedite via XSL's
network with points of presence in five cities located in three countries and
approximately 1,000 fax lines. XSL's customer base has historically been
concentrated in the U.K. financial sector where XSL has a significant market
share.
XSL currently provides a wide range of Enhanced Services. XSL's offering of
fax broadcast and gateway messaging services is substantially similar to those
offered by the Company with the exception that XSL does not offer certain
specialty fax broadcast services such as Xpedite's "Enhanced Fax Merging"
service. Gateway messaging services accounted for approximately 5% of XSL's
net revenues in 1996.
13
Approximately 68% of XSL's revenues for the year ended December 31, 1996
were generated by customers in the financial services industry. Accordingly, a
downturn in this industry could have a material adverse impact on XSL's
business.
Since January 1993, XSL and Xpedite have been party to a System and
Marketing Agreement (the "System and Marketing Agreement") whereby, among
other things, XSL agreed to purchase Xpedite's document distribution system
and license Xpedite's software (for which XSL pays royalties to Xpedite of
approximately 8% of XSL's net revenues until December 31, 1998 and 6%
thereafter). As a result, XSL's network architecture essentially mirrors
Xpedite's architecture. The main operations center and system resides in York,
England with remote delivery capability in Leeds, London, Milan, Zurich and
Geneva, all linked by XSL-leased private circuits. XSL's system is then
interconnected with the networks and systems of Xpedite, Xpedite Germany and
XSSA via private circuits owned by Xpedite, Xpedite Germany and XSSA.
Currently XSL has over 1,000 outbound telephone lines operational in the U.K.
and has a dual carrier strategy in the U.K. to provide enhanced fault
protection.
A substantial portion of XSL's fax traffic terminates in major capital
cities where XSL or its affiliates have Nodes. XSL purchases its
telecommunications services in the U.K. primarily from two carriers.
Direct sales by XSL's sales personnel accounted for more than 90% of XSL's
net revenues in 1996.
In addition to XSL's direct sales force, indirect sales are made through
sales agents and resellers. While indirect sales were not a significant
component of XSL's sales efforts in prior years, it is becoming an increasing
focus of XSL's sales program. Sales agents accounted for approximately 7% of
XSL's net revenues in 1996 with resellers representing the remaining 3%.
Another component of XSL's recent growth has been through two several
strategic acquisitions completed by XSL. In July 1995, XSL acquired Transmit
International Ltd. ("Transmit"), and in March 1996 it acquired Connaught
Commercial Services Ltd. ("Connaught"). Both businesses consisted entirely of
fax broadcast services. The customer bases from both of these acquisitions
have been migrated to XSL's network and both of the acquired businesses' U.K.
operations have been closed down.
In addition, XSL has entered into a number of agreements with U.K. companies
which are primarily systems integrators to provide computer to fax
capabilities utilizing the XSL network.
COMPETITION
Premiere's competitive strategy is to seek to gain a competitive advantage
by being among the first companies to offer a network-based integrated
enhanced communications solution, being an innovator in the integrated
enhanced communications services market and offering unique and innovative
services to its subscribers. The Company intends to seek to capitalize on
strategic relationships with WorldCom, American Express and others in order to
build its subscriber base and to maintain and increase subscriber loyalty. The
Company believes that the principal competitive factors affecting the market
for enhanced communications services are price, quality of service,
reliability of service, degree of service integration, ease of use, service
features and name recognition. The Company believes that it competes
effectively in these areas.
The market for the Company's services is intensely competitive, rapidly
evolving and subject to rapid technological change. The Company expects
competition to increase in the future. Many of the Company's current and
potential competitors have longer operating histories, greater name
recognition, larger customer bases and substantially greater financial,
personnel, marketing, engineering, technical and other resources than the
Company. Although the Company is aware of several companies that are marketing
enhanced calling cards, it is
14
not aware of any major competitor that is marketing an integrated personal
communications service identical to the service marketed by the Company. Many
of the Company's competitors have substantial resources and technical
expertise and could likely develop such a service if they chose to expend
sufficient resources. The Company believes that existing competitors are
likely to expand their service offerings and that new competitors are likely
to enter the personal communications market and to attempt to integrate such
services, resulting in greater competition for the Company. Such competition
could materially adversely affect the Company's business, financial condition
and results of operations.
The Company attempts to differentiate itself from its competitors in part by
offering an integrated suite of enhanced personal communications services that
are network-based. Other providers currently offer each of the individual
services and certain combinations of the services offered by the Company. The
Company's worldwide long distance services and features compete directly with
services provided by companies such as AT&T Corp. ("AT&T"), MCI Communications
Corp. ("MCI") and Sprint Corp. ("Sprint") as well as smaller interexchange
long distance providers. The Company's voice messaging services compete with
voice mail services provided by AT&T, certain regional Bell Operating
Companies ("RBOCs") and other service bureaus as well as by equipment
manufacturers, such as Octel Communications Corporation ("Octel"), Northern
Telecom, Inc. ("Northern Telecom"), Siemens Business Communications Systems,
Inc. ("Siemens"), Centigram Communications Corporation ("Centigram"), Boston
Technology, Inc. ("Boston Technology") and Digital Sound Corporation ("Digital
Sound"). The Company's enhanced travel, concierge, news and e-mail services
compete with services provided by America Online, Inc., Prodigy Services Co.
and numerous Internet service providers. The Company's paging services compete
with paging services offered by companies such as AT&T and MCI.
The Company's Orchestrate service, which the Company intends to begin
marketing during the second quarter of 1998, is expected to compete with
products offered by companies such as Octel, Microsoft Corp. ("Microsoft"),
Novell, Inc. ("Novell"), Lucent Technologies, Inc. ("Lucent") and numerous
smaller entities. For example, in 1997, Octel and Microsoft announced a
service, called "Unified Messenger," which places all voice mail, e-mail and
fax messages in a single mailbox accessible by computer or telephone. These
competing products incorporate some, but not all, of the bundled services
offered through Orchestrate. In addition, over the past few years, the number
of companies offering call center technology, including AT&T, MCI and Lucent,
has grown dramatically, primarily in response to major outsource initiatives
as well as significantly lower technology costs. The Company expects that
other parties will develop and implement information and telecommunications
service platforms similar to its platform, thereby increasing competition for
the Company's services.
Xpedite's services currently compete with services provided by each of AT&T,
MCI and Sprint, and many of the PTTs around the world. Neither Premiere nor
Xpedite can predict whether AT&T, MCI, Sprint, any Internet service provider
or PTT or any other competitor will expand its enhanced document distribution
services business, and there can be no assurance that these or other
competitors will not commence or expand their businesses. Moreover, Xpedite's
receiving queuing, routing and other systems logic and architecture are not
proprietary to Xpedite, and as a result, there can be no assurance that such
information will not be acquired or duplicated by Xpedite's existing and
potential competitors. Generally, Xpedite does not typically have long-term
contractual agreements with its customers, and there can be no assurance that
its customers will continue to transact business with Premiere in the future.
In addition, even if there is continued growth in the use of electronic
document distribution services, there can be no assurance that potential
customers will not elect to use their own equipment to fulfill their needs for
electronic document distribution services. There also can be no assurance that
customers will not elect to use alternatives to Xpedite's electronic document
distribution services, including the Internet, to carry such customers'
communications or that companies offering such alternatives will not develop
product features or pricing which are more attractive to customers than those
currently offered by Xpedite.
In addition, the Telecommunications Act of 1996, (the "1996 Act") allows the
RBOCs to immediately provide long distance telephone service between Local
Access and Transport Areas ("LATAs") located outside of their local service
territories, which will likely significantly increase competition for long
distance services. The 1996 Act also grants the Federal Communications
Commission (the "FCC") the authority to deregulate
15
certain aspects of the telecommunications industry, which in the future may,
if authorized by the FCC, facilitate the offering of an integrated suite of
personal communications services by regulated entities, including the RBOCs,
in competition with the Company. Such increased competition could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Telecommunications companies compete for consumers based on price, with
major long distance carriers conducting extensive advertising campaigns to
capture market share. There can be no assurance that a decrease in the rates
charged for communications services by the major long distance carriers or
other competitors, whether caused by general competitive pressures or the
entry of the RBOCs and other LECs into the long distance market, would not
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company expects that information and telecommunications services markets
will continue to attract new competitors and new technologies, possibly
including alternative technologies that are more sophisticated and cost
effective than the Company's technology. The Company does not have the right,
contractually or otherwise, to prevent its subscribers from changing to a
competing network, and the Company's subscribers may generally terminate their
service with the Company at will.
LEGISLATIVE MATTERS
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
consumers and businesses from unfair competition by incumbent LECs, including
the RBOCs. The 1996 Act allows RBOCs to provide long distance service outside
of their local service territories but bars them from immediately offering in
region, inter-LATA, long distance services until certain conditions are
satisfied. An RBOC must apply to the 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. While the FCC has yet to
grant any RBOC inter-LATA application, the Company is unable to determine how
the FCC will rule on any such applications in the future.
In response to a constitutional challenge filed by SBC Communications Inc.,
the United States District Court for the Northern District of Texas found the
1996 Act's restrictions on RBOC interLATA services to be an unconstitutional
bill of attainder, but stayed the effect of its decision pending further
appeal. If the interLATA restrictions are ultimately struck down, the Company
may experience increased competition from RBOCs in the long distance industry.
The 1996 Act provides a framework for the Company's operating subsidiaries
that provide long distance telecommunication services ("Operating
Subsidiaries") and other long distance carriers to compete with LECs by
reselling local telephone service, by interconnecting to LEC network
facilities at various points in the network, or by building new local service
facilities. In the future, the Operating Subsidiaries may decide to lease
unbundled network elements, which could also be used as a platform to provide
access to the Company's services, or to build local service facilities. The
Operating Subsidiaries' decision to enter the local services market in one or
more states depends on the economic viability of the options and on the
regulatory environment, which will likely vary by state.
GOVERNMENT REGULATION
The Operating Subsidiaries provide both telecommunications and information
services. Consequently, the Operating Subsidiaries are subject to extensive
federal and state regulation in the United States. Various international
authorities may also seek to regulate the services provided by the Operating
Subsidiaries.
Tariffs and Detariffing. The Operating Subsidiaries are classified by the
FCC as non-dominant carriers for their domestic interstate and international
common carrier telecommunications services. Common carriers that
16
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 the Operating
Subsidiaries, are subject to FCC review, they are presumed to be lawful upon
filing with the FCC. Currently, the Operating Subsidiaries either have applied
for and received, or are in the process of applying for and receiving, all
necessary authority from the FCC to provide domestic interstate and
international telecommunications services. However, at this time, only
Premiere Communications Inc. ("PCI") has been granted authority by the FCC to
provide domestic interstate and international telecommunications services.
In October 1996, the FCC issued an order detariffing long distance services
which prohibited non-dominant long distance carriers from filing tariffs for
domestic, interstate, long distance services in the future. The FCC's
scheduled detariffing rules were 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. The
Company and the Operating Subsidiaries are currently unable to predict what
impact the outcome of the FCC's detariffing proceeding will have on the
Company or the Operating Subsidiaries.
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, and
interconnection negotiation and arbitration procedures.
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. The Court's decisions substantially
limit the FCC's jurisdiction and expand the state regulators' jurisdiction to
set and enforce rules governing local competition. The Company is currently
considering entering the local exchange market as a so-called competitive
local exchange carrier ("CLEC"). If the Company becomes a CLEC, it will face
rules that are likely to vary substantially from state to state. A patchwork
of state regulations could make competitive entry by the Operating
Subsidiaries in some markets more difficult and expensive than in others and
could increase the costs of regulatory compliance associated with local entry.
The U.S. Solicitor General, on behalf of the FCC, has appealed the Court's
ruling to the U.S. Supreme Court. Due to the legal uncertainty over the
Interconnection Order, the Company and the Operating Subsidiaries are unable
to predict what impact the Court's decisions will have on the Operating
Subsidiaries' ability to offer competitive local service, and no assurance can
be given that the Court's decisions will not have a material adverse effect on
the Company's business, financial condition and results of operations.
Universal Service Reform. On May 8, 1997, the FCC released an order
establishing a significantly expanded federal telecommunications subsidy
regime. For example, the FCC established new subsidies for schools and
libraries with an annual cap of $2.25 billion and for rural health care
providers with an annual cap of $400 million. Providers of interstate
telecommunications service, such as the Operating Subsidiaries, as well as
certain other entities, must pay for the federal programs. The Operating
Subsidiaries' contributions to the federal subsidy funds will be based on
their share of total interstate (including certain international)
telecommunications services and on certain defined telecommunications end user
revenues. Several parties have appealed the May 8, 1997 order, and those
appeals have been consolidated in the U.S. Court of Appeals for the Fifth
Circuit. No assurance can be given that the FCC's universal service order will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
Access Charge Reform. On May 16, 1997, the FCC released an Access Charge
Reform Order, which revised rules governing the interstate switched access
charge rate structure. Switched access charges are assessed by the LECs on
long distance carriers and others for use of the local loop and local access
facilities to originate and terminate long distance calls. The new rules are
intended to eliminate implicit subsidies and to establish rate
17
structures that better reflect the manner in which costs are incurred. The new
rules substantially increase the costs that price cap LECs recover through
monthly, non-traffic sensitive access charges and substantially decrease the
costs that price cap LECs recover through traffic sensitive access charges.
The manner in which the FCC implements its approach to lowering access charge
levels will have an effect on the prices the Operating Subsidiaries pay for
originating and terminating interstate traffic. Portions of the Access Charge
Reform Order have been appealed. In light of the uncertainty regarding
ultimate disposition of the Access Charge Reform proceeding by the FCC and the
courts, the Company is unable to predict what impact the FCC's revised access
charge scheme will have on the Operating Subsidiaries' access charge cost
structure.
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 on July 1, 1997, and September 16, 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, on October 7, 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. The Operating Subsidiaries began paying this per-call amount
in 1997. This compensation amount will remain in effect until October 6, 1999,
when a market-based rate will become effective. Although the Operating
Subsidiaries expect to incur additional costs to receive "dial around" calls
that originate from payphones, the FCC has permitted long distance carriers,
such as the Operating Subsidiaries, to pass such costs through to their
customers.
In addition, the Court found unlawful both the methodology used to determine
the long distance carriers' payment obligations and the absence of any
compensation for some types of payphones and services. These issues have been
remanded to the FCC. Although the Operating Subsidiaries expect to incur
additional costs to receive "dial around" calls that originate from payphones,
the Company is unable to predict what impact the payphone rules will have on
the Operating Subsidiaries' costs for such calls until the FCC adopts revised
payphone compensation rates based on the Court's rulings.
State Regulation. Most state public service and public utility commissions
("PUCs") require carriers that wish to provide intrastate, common carrier
services to be authorized to provide such services. The Operating Subsidiaries
either have applied for and received, or are in the process of applying for
and receiving, all necessary authorizations to provide intrastate, long
distance services.
The Operating Subsidiaries are generally not subject to price regulation or
to rate of return regulation for their intrastate services. In most states,
however, the Operating Subsidiaries are required to file tariffs setting forth
the terms, conditions and prices for their intrastate services. In some state
jurisdictions, the tariff can list a range of rates for intrastate services.
The Operating Subsidiaries may be subject to additional regulatory burdens in
some states, such as compliance with quality of service requirements or
remittance of contributions to support state sponsored universal service. The
Operating Subsidiaries' 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 additional regulatory compliance is required in this regard.
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 recently completed a study, directed
by Congress, regarding the propriety of applying Regulation E to stored value
cards. The Department of Treasury recently promulgated proposed rules applying
record keeping, reporting and other requirements to a wide variety of entities
involved in electronic commerce. It is possible that Congress, the states or
various government agencies
18
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 provisons provide only limited
protection of the Company's proprietary rights and technology. The Company's
proprietary rights and technology include confidential information and trade
secrets which the Company attempts to protect through confidentiality and
nondisclosure provisions in its licensing, services, reseller and distribution
agreements. The Company typically attempts to protect its confidential
information and trade secrets through these contractual provisions for the
terms 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. In addition, Premiere has
three patent applications pending and nine trademark or service mark
registrations pending. Premiere has two registered service marks. Voice-Tel
has been issued two U.S. patents and has one U.S. patent application pending.
Voice-Tel also has five registered U.S. trademarks or service marks and
approximately 40 foreign trademark or service mark registrations or pending
applications. VoiceCom has two registered U.S. trademarks and one registered
foreign trademark. Despite the Company's efforts to protect its proprietary
rights and technology, through intellectual property laws and contractual
provisions, 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 more
important to establishing and maintaining a competitive advantage in the
industry.
Many patents, copyrights and trademarks have been issued in the general
areas of information and telecommunications services and computer telephony.
The Company believes that in the ordinary course of its business third parties
will claim that the Company's current or future products or services infringe
the patent, copyright or trademark rights of such third parties. The Company
is aware of other companies that use the terms "WorldLink" or "Premiere" in
describing their products and services, including telecommunications products
and services. Certain of those companies hold registered trademarks which
incorporate the names "WorldLink" or "Premiere." The Company has received
correspondence from a provider of prepaid calling cards which claims that the
Company's use of the term "WorldLink" infringes upon its trademark rights. In
addition, the Company has received correspondence from a major bank, which is
among the holders of registered trademarks incorporating the term "WorldLink,"
inquiring as to the nature of the Company's use of the term "WorldLink" as
part of its mark "Premiere WorldLink." Based on, among other things, the types
of businesses in which the other companies are engaged and the low likelihood
of confusion, the Company believes these claims to be without merit.
In October 1996, VTE received a letter from a third party claiming that
certain aspects of VTE's products and services may be infringing upon one or
more of the third party's patents. The Company has reviewed the patent claims
of the third party and does not believe that the Company's products or
services infringe on the claims of the third party. No patent infringement
claims against the Company have been filed by the third party at this time.
Should the third party file patent infringement claims against the Company,
the Company believes that it would have meritorious defenses to any such
claims. However, due to the inherent uncertainties of litigation, the Company
is unable to predict the outcome of any potential litigation with the third
party, and any adverse outcome could have a material adverse effect on the
Company's business, results of operations or financial condition. Even if the
Company were to ultimately prevail, the Company's business could be adversely
affected by the diversion of management attention and litigation costs.
Because of this risk, the Company
19
withheld in escrow approximately 123,000 shares of Common Stock from the
purchase price of VTE and VTN. This escrow arrangement terminates in April
2000. There can be no assurance that such escrow will be sufficient to fully
cover the Company's exposure in the event of litigation or an adverse outcome
to the potential infringement claims.
In February 1997, the Company entered into a long-term nonexclusive license
agreement with AudioFAX IP LLC ("AudioFax") settling a patent infringement
suit filed by AudioFAX in June 1996. In the third quarter of 1996, the Company
took a one-time charge for the estimated legal fees and other costs that the
Company expected to incur to resolve this matter. In September 1997, VoiceCom
also entered into a long-term non-exclusive license agreement with AudioFAX.
In July 1996, Xpedite received a letter from counsel for AudioFAX, which
informed Xpedite that AudioFAX is the owner of certain U.S. and Canadian
patents relevant to the fax processing business, and inquired as to Xpedite's
interest in licensing these patents. The Company is currently negotiating with
AudioFAX with respect to entering into a long-term, non-exclusive license for
use of these patents by Xpedite. In the event Premiere is unable to enter into
a license agreement with AudioFAX, the Company cannot predict the outcome of
this matter, including but not limited to whether or not AudioFAX will
commence a lawsuit against Xpedite. There can be no assurance that the
resolution of such matter will not have a material adverse effect on
Premiere's business, financial condition and results of operations.
In May 1997, Premiere received a letter from a manufacturer and marketer of
certain telecommunications equipment asserting that Premiere is offering
certain "calling card and related enhanced services," "single number service"
and "call connecting services" covered by three patents held by that company
and inviting Premiere to obtain a license. Premiere has preliminarily reviewed
the subject patents and, based on that review, presently believes that its
products and services currently being marketed do not infringe these patents.
Premiere intends, however, to conduct a further review of these two patents in
order to determine whether it would be helpful to its future products and
services to license the patents. If Premiere ultimately determines that it is
infringing these patents, or any one of them, it could seek to license the
technology or discontinue using it and employ an alternate technology. There
can be no assurance that Premiere would be able to license the technology on
commercially reasonable terms or that it could easily and inexpensively
migrate to a new call reorigination technology. Premiere's call reorigination
service is only one service that it offers, and management does not believe
that this service is critical to the marketing of Premiere's overall suite of
services. Consequently, Premiere does not believe that its inability to
license the technology or migrate to a new technology would have a material
adverse effect on its business, financial condition and results of operations.
No claim has been asserted beyond this letter, but no assurance can be given
that the third party will not commence an infringement action against
Premiere. If a patent infringement claim is brought against Premiere, there
can be no assurance that Premiere would prevail and any adverse outcome could
have a material adverse effect on Premiere's business, financial condition and
results of operations.
In May 1997, the Company received a letter from counsel for a provider of
goods and services in the telecommunications field objecting to the Company's
use of the phrase "personal assistant" based on that company's federally
registered "personal assistant" service mark. On June 18, 1997, counsel for
the Company responded to the objections, noting that the Company did not
intend to use, nor would it use in the future, the words "personal assistant"
as a trademark or service mark, but instead would merely use these words to
describe the nature of its product. The Company has not heard anything further
from the potential claimant and believes that the matter has been resolved.
In July 1997, the Company received a letter from counsel for a French
publishing company objecting to the Company's use of the "Premiere" trademark.
Based on, among other things, the type of business in which the French company
is engaged and the unlikelihood that the Company will engage in competitive
activities using the Premiere mark in France, the Company believes that no
action will be brought. Due to the inherent uncertainties of litigation,
however, the Company is unable to predict the outcome of any potential
litigation with
20
the French company, and any adverse outcome could have a material effect on
the Company's business, financial condition and results of operations. Even if
the Company were to prevail in such a challenge, the Company's business could
be adversely affected by the diversion of management attention and litigation
costs.
No assurance can be given that actions or claims alleging patent, copyright
or trademark infringement will not be brought against the Company with respect
to current or future products or services, or that, if such actions or claims
are brought, the Company will ultimately prevail. Any such claiming parties
may have significantly greater resources than the Company to pursue litigation
of such claims. Any such claims, whether with or without merit, could be time
consuming, result in costly litigation, cause delays in introducing new or
improved products and services, require the Company to enter into royalty or
licensing agreements, or cause the Company to discontinue use of the
challenged technology, tradename or service mark at potentially significant
expense to the Company associated with the marketing of a new name or the
development or purchase of replacement technology, all of which could have a
material adverse effect on the Company's business, financial condition and
results of operation.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 928 persons,
substantially all of whom were employed on a full-time basis. Of these
employees, 398 were engaged in sales and marketing; 109 in engineering and
research and development; 213 in customer service and technical support; and
208 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.
Xpedite employed approximately 763 persons as of December 31, 1997,
substantially all of whom were full-time employees, and none of whom was
covered by a collective bargaining arrangement. Of these employees, 427 were
engaged in sales and marketing; 208 in operations; 51 in research and
development; and 77 in general and administrative activities.
ITEM 2. PROPERTIES
Premiere's corporate headquarters occupy approximately 103,400 square feet
of office space in Atlanta, Georgia under a lease expiring August 31, 2007.
Voice-Tel's headquarters occupy approximately 30,000 square feet of office
space in Cleveland, Ohio under a lease expiring in October 1999. VoiceCom's
headquarters occupy approximately 26,400 square feet of office space in
Atlanta, Georgia under a lease expiring April 30, 2001. Xpedite's headquarters
facility is located in approximately 49,000 square feet of leased space in
Eatontown, New Jersey under a lease expiring on September 30, 1998 (excluding
a five-year renewal option exercisable by Xpedite).
Xpedite also maintains approximately 20,000 square feet of leased space for
the principal administrative, sales, and management information systems
offices and operations center of its international division in Glen Head, New
York. The lease covering approximately 75% of this space expires on December
30, 1999, and the lease covering the remaining space expires on September 30,
2001, subject, in each case, to extension or earlier termination in certain
circumstances. Xpedite also has a development facility located in
approximately 9,000 square feet of leased space in Ft. Lauderdale, Florida
which expires in December 2001. Xpedite also owns a 4,000 square foot office
building in London.
The Company also has data and switching centers in Atlanta, Georgia, Dallas,
Texas, London, England and has begun development of a similar center in
Toronto, Canada. The Company believes that its current 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
On January 21, 1997, Eric Bott, E.B. Elliott and Cost Recovery Systems, Inc.
("CRS") filed a complaint against the Company, PCI and the Company's
president, Boland T. Jones, in the Superior Court of Fulton County, Georgia
("Civil Action"). In December 1997, the Company, PCI and Mr. Jones entered
into a
21
settlement agreement with Mr. Bott which settled and disposed of Mr. Bott's
claims in connection with this litigation. The remaining plaintiffs are
seeking an accounting of commissions allegedly due to them, options to
purchase 72,000 shares of Premiere Common Stock or damages, and reasonable
attorneys' fees. The Company believes it has meritorious defenses to Mr.
Elliott's and CRS' remaining allegations, but due to the inherent
uncertainties of the litigation process, the Company is unable to predict the
outcome of this litigation. If the outcome of this litigation is adverse to
the Company, it could have a material adverse effect on the Company's
business, financial condition and results of operations. The settlement with
Mr. Bott will not have a material adverse effect on the Company's business
financial condition and results of operations.
On August 6, 1996, Communications Network Corporation ("CNC"), a licensing
customer of the Company, was placed into bankruptcy (the "Bankruptcy Case")
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code").
On August 23, 1996, CNC filed a motion to intervene in a separate lawsuit
brought by a CNC creditor in the United States District Court for the Southern
District of New York against certain guarantors of CNC's obligations and to
file a third-party action against numerous entities, including such CNC
creditor and Premiere Communications, Inc. ("PCI") for alleged negligent
misrepresentations of fact in connection with an alleged fraudulent scheme
designed to damage CNC (the "Intervention Suit"). The District Court has
denied CNC's request to intervene and has transferred the remainder of the
Intervention Suit to the Bankruptcy Judge presiding over the Bankruptcy Case.
Based upon the bankruptcy examiner's findings and the subsequently appointed
bankruptcy trustee's investigation of potential actions directed at PCI,
including an avoidable preference claim of an amount up to approximately
$950,000, the bankruptcy trustee (the "Trustee") and PCI reached a tentative
settlement of all issues between the parties, subject to Bankruptcy Court
approval. The terms of the proposed settlement have been incorporated into a
proposed plan of reorganization (the "Plan") filed by the Trustee, which is
also subject to Bankruptcy Court approval. Based upon hearings before the
Bankruptcy Court, the Trustee filed on November 18, 1997, a motion requesting
approval of the settlement to accompany the Plan. If only the settlement is
approved, PCI will obtain a release from the Trustee and the Trustee will
dismiss the Intervention Suit in consideration of PCI making a cash payment of
$1,200,000 to the Trustee. If the Plan is subsequently approved by the Court,
PCI will make an additional cash payment of up to $300,000 to the Trustee in
consideration of PCI obtaining certain allowed subordinated claims and the
Court granting an injunction in Premiere's favor against possible nuisance
suits relating to the CNC business. The Company has previously taken a reserve
for the settlement and Plan payments. If the outcome of this matter is adverse
to PCI, the settlement is not approved and the Trustee successfully pursues
possible litigation against the Company, it could have a material adverse
effect on the Company's business, operating results or financial condition.
On November 26, 1997, Wael Al-Khatib ("Al-Khatib"), the sole shareholder and
former president of CNC, and his company, Platinum Network, Corp. ("Platinum")
(Al-Khatib and Platinum are collectively referred to herein as "Plaintiffs"),
filed a complaint against PCI, WorldCom Network Services, Inc. f/k/a WilTel,
Inc., Bernard J. Ebbers, David F. Meyers, Robert Vetera, Joseph Cusick,
William Trower, Don Wilmouth, Digital Communications of America, Inc., Boland
Jones, Patrick Jones, and John Does I-XX in the Eastern District of New York,
United States District Court. Plaintiffs contend that, during 1996, PCI,
certain officers of PCI and the other defendants engaged in a fraudulent
scheme to restrain trade in the debit card market nationally and in the New
York debit card sub-market and made misrepresentations of fact in connection
with the alleged scheme. The Plaintiffs are seeking at least $250 million in
compensatory damages and $500 million in punitive damages from PCI and the
other defendants. Pursuant to the local rules of the District Court, PCI has
filed a letter stating the reasons it believes the lawsuit should be
dismissed. PCI has also filed a motion for sanctions under Rule 11 of the
Federal Rules of Civil Procedure. PCI believes that it has meritorious
defenses to the Plaintiffs' allegations and will vigorously defend the same.
Due to the inherent uncertainties of the judicial system, the Company is not
able to predict the outcome of this lawsuit. If this lawsuit is not resolved
in PCI's favor, it could have a material adverse effect on the Company's
business, operating results or financial condition.
On September 20, 1996, Peter Lucina ("Lucina") filed a complaint against the
Company, Donald B. Gasgarth ("Gasgarth") and Patrick G. Jones ("Jones") in the
United States District Court for the Eastern District of Illinois. As of
December 3, 1997, the Company, Gasgarth and Jones entered into a settlement
22
agreement with Lucina which settled and disposed of Lucina's claims in
connection with this litigation, and this settlement was approved by the Court
on December 15, 1997. This settlement will not have a material adverse effect
on the Company's business, financial condition and results of operations.
On July 8, 1997, various limited partners purporting to act on behalf of
Telentry Research Limited Partnership, Telentry Development Limited
Partnership, Telentry XL Limited Partnership, Telentry Research Limited
Partnership II and Telentry Development Limited Partnership II (collectively,
the "Telentry Partnerships") filed a complaint in the Superior Court of New
Jersey for Morris County against Xpedite and two other defendants. The
complaint alleges, inter alia, that Xpedite is in breach of its obligations to
make royalty payments under a series of license agreements between Xpedite and
the Telentry Partnerships. In this action, the plaintiff's seek, inter alia,
damages of $2,030,040 and an accounting of royalties. On September 29, 1997.
Xpedite filed a motion to dismiss the complaint. The court subsequently
elected to treat this motion as a motion for summary judgment. The motion has
been fully briefed by both parties, and oral argument is currently scheduled
for April 3, 1998. To date, no discovery has been taken in this action.
On February 23, 1998, Rudolf R. Nobis and Constance Nobis filed a complaint
in the Superior Court of Union County, New Jersey against 15 named defendants
including Xpedite Systems, Inc. ("Xpedite") and certain of its alleged current
and former officers, directors, agents and representatives. The lawsuit is
styled Rudolf R. Nobis and Constance Nobis v. Edward Angrisani, et al., Civil
Action File No. UNN-L-113698, Superior Court of New Jersey Law Division: Union
County. The plaintiffs allege that the 15 named defendants and certain
unidentified "John Doe defendants" engaged in wrongful activities in
connection with the management of the plaintiffs' investments with Equitable
Life Assurance Society of the United States and/or Equico Securities, Inc.
(collectively "Equitable"). More specifically, the complaint asserts
wrongdoing in connection with the plaintiffs' investment in securities of
Xpedite and in unrelated investments involving insurance-related products. The
defendants include Equitable and certain of its current or former
representatives. The allegations in the complaint against Xpedite are limited
to plaintiffs' investment in Xpedite. The plaintiffs have alleged that two of
the named defendants, allegedly acting as officers, directors, agents or
representatives of Xpedite, induced the plaintiffs to make certain investments
in Xpedite but that the plaintiffs failed to receive the benefits that they
were promised. The plaintiffs allege that Xpedite knew or should have known of
alleged wrongdoing on the part of other defendants. The plaintiffs' claims
against Xpedite include breach of contract, breach of fiduciary duty, unjust
enrichment, conversion, fraud, conspiracy, interference with economic
advantage and liability for ultra vires acts. The plaintiffs seek an
accounting of the corporate stock in Xpedite, compensatory damages of
$4,845,953.13, plus $200,000 in "lost investments," interest and/or dividends
that have accrued and have not been paid, punitive damages in an unspecified
amount, and for certain equitable relief, including a request for Xpedite to
issue 139,430 shares of common stock in the plaintiffs' names, attorneys' fees
and costs and such other and further relief as the Court deems just and
equitable. Xpedite intends to file and answer denying the material allegations
of the complaint and asserting various affirmative defenses and a motion to
dismiss the counts of the complaint against it. Premiere believes that Xpedite
has meritorious defenses to the plaintiffs' allegations, but due to the
inherent uncertainties of the litigation process, Premiere is unable to
predict the outcome of this litigation. If the outcome of this litigation is
adverse to Xpedite, it could have a material adverse effect on Xpedite's
business, operating results and financial condition.
Due to the inherent uncertainties of the litigation process and the judicial
system, the Company is unable to predict the outcome of the foregoing
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. See also "Proprietary
Rights and Technology." 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.
23
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.
1997 HIGH LOW
---- ------- -------
First Quarter............................................. $27.500 $16.500
Second Quarter............................................ 30.500 19.250
Third Quarter............................................. 34.500 22.875
Fourth Quarter............................................ 38.500 22.875
1996 HIGH LOW
---- ------- -------
First Quarter............................................. 27.750 18.000
Second Quarter............................................ 50.000 23.625
Third Quarter............................................. 35.750 16.000
Fourth Quarter............................................ 31.250 14.500
The closing price of the Common Stock as reported on the Nasdaq National
Market on March 26,1998 was $35.375. As of March 26, 1998 there were
approximately 600 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.
Therefore, 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, 1997, certain current and former
employees, directors and investors exercised options to purchase an aggregate
of 328,190 shares of Common Stock at prices ranging from $0.41 to $1.61 per
share in transactions exempt from registration pursuant to Section 4(2) and
Rule 701 of the Securities Act.
On June 12, 1997, in connection with its acquisition of the Voice-Tel
Entities, the Company issued approximately 7.4 million shares of its Common
Stock to the stockholders of the Voice-Tel Entities in transactions exempt
from registration pursuant to Rule 4(2) of the Securities Act and the
regulations thereunder.
On June 30, 1997, the Company sold $172.5 million of 5 3/4% Convertible
Subordinated notes due 2004. The notes, unless previously redeemed or
repurchased, are convertible at the option of the holder at any time through
the close of business on the final maturity date into shares of Common Stock
at a conversion price of $33.00 per share, subject to adjustment in certain
events to certain stockholders of Voice-Com in transactions exempt from
registration pursuant to Rule 4(2) of the Securities Act and the regulations
thereunder.
During the third quarter of 1997, in connection with its acquisition of
VoiceCom, the Company issued approximately 446,000 shares of its Common Stock
to certain stockholders of Voice-Com in transactions exempt from registration
pursuant to Rule 4(2) of the Securities Act and the regulations thereunder.
24
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated statement of operations data for the
years ended December 31, 1997, 1996 and 1995, and the consolidated balance
sheet data as of December 31, 1997 and 1996, have been derived from the
audited consolidated financial statements of the Company included in this
Annual Report on Form 10-K, which give retroactive effect to the mergers with
Voice-Tel and VoiceCom, 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 unaudited consolidated
statement of operations data for the years ended December 31, 1994 and 1993
and the unaudited consolidated balance sheet data at December 31, 1994 and
1993 are derived from unaudited consolidated financial statements of the
Company which give retroactive effect to the mergers with Voice-Tel and
VoiceCom, both of which were accounted for as poolings-of-interests, and
include all adjustments, consisting only of normal recurring adjustments,
which the company considers necessary for a fair presentation thereof. 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.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ----------- ----------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Revenues............... $229,352 $197,474 $147,543 $119,136 $100,055
Gross margin........... 165,378 141,873 103,675 85,229 59,111
Operating income
(loss)(1)............. (28,998) 6,806 7,003 (13,232) (754)
Net income (loss)(1)... (25,375) 3,458 4,171 (15,519) (5,116)
Net income (loss)
attributable to common
shareholders for
--basic net income
(loss) per share...... $(25,375) $ 3,429 $ 3,863 $(15,839) $ (5,116)
--diluted net income
(loss) per share...... (25,375) 3,429 3,863 (15,839) (5,116)
Net income (loss) per
common and common
equivalent shares for
--basic(1)(2).......... $ (0.78) $ 0.12 $ 0.19 $ (1.18) $ (0.51)
--diluted(1)(2)........ $ (0.78) $ 0.11 $ 0.17 $ (1.18) $ (0.51)
Shares used in computing
net income (loss) per
common and common
equivalent shares for
--basic................ 32,443 27,670 19,868 13,468 9,947
--diluted.............. 32,443 31,288 24,312 13,468 9,947
BALANCE SHEET DATA (AT
PERIOD END):
Cash, cash equivalents
and investments....... $176,339 $ 83,836 $ 11,759 $ 7,849 $ 5,663
Working capital........ 136,182 45,377 (16,093) (12,521) (17,742)
Total assets........... 375,878 201,541 78,131 60,051 54,953
Total debt............. 176,468 47,975 52,650 49,203 35,112
Total shareholders'
equity (deficit)...... 100,814 104,533 (11,639) (14,921) (1,711)
- --------
(1) Excluding charges for purchased research and development, accrued
settlement costs and restructuring and other special charges incurred by
Premiere in the amounts of approximately $0, $2.5 and $0 million,
respectively, in 1995, and approximately $11.0, $1.3 and $0 million,
respectively, in 1996, and approximately $0, $1.5 and $73.6 million
respectively, in 1997, operating income, net income, basic net income per
share and diluted net income per share would have been approximately $9.5
million, $5.7 million, $0.29 and $0.23, respectively, for 1995, and
approximately $19.2 million, $11.0 million, $0.38 and $0.35, respectively,
for 1996 and approximately $46.1 million, $28.5 million, $0.88 and $0.79
respectively, for 1997.
(2) Basic net income (loss) per share is computed using the weighted average
number of shares of common stock. Diluted net income (loss) per share is
computed using the weighted average number of shares of common stock and
dilutive common stock equivalents from convertible preferred stock and
convertible subordinated notes (using the if-converted method) and from
stock options (using the treasury stock method).
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company operates in one industry segment, enhanced communications
services. The Company's services include 800-based services for mobile
individuals, voice messaging, full service conference calling and, in 1998,
enhanced document distribution services (Xpedite) and internet based
communications. The Company's principal competitive advantage is that it
integrates these services through its intelligent network and provides its
customers a single source solution for enhanced communications. By offering a
network-based solution, the Company's customers can access and use its
services through a telephone or computer anywhere in the world and avoid costs
associated with purchasing and maintaining technology and equipment
themselves.
Revenues from 800-based services consist of usage fees from individual
subscribers which are generally based on per minute rates. Revenues from 800-
based services also include license fees from corporations, primarily
telecommunication carriers, under outsourcing arrangements. License fees are
also generally based on per minute rates. Voice messaging revenues generally
consist of fixed monthly fees and usage fees based on the number of messages
initiated by a subscriber. Although the Company does not currently derive any
revenues for its Internet-based services, management anticipates that revenues
from these products will consist of both fixed monthly and usage based
components.
Cost of services consists primarily of transmission costs. License customers
generally arrange for, and directly bear the cost of, transmission.
Consequently, while the per minute fees for licensee platform usage are lower
than those for individual subscriber services, the gross margin from license
arrangements is considerably higher than for subscriber services.
Selling, general and administrative expenses include direct and indirect
commissions, the cost of print advertisements, salaries and benefits, travel
and entertainment expenses, bad debt expense, rent and facility expense,
accounting and audit fees, legal fees, property taxes and other administrative
expenses.
Depreciation and amortization include depreciation of computer and
telecommunications equipment and amortization of intangible assets. The
Company provides for depreciation using the straight-line method of
depreciation over the estimated useful lives of the assets, which range from
five to ten years, with the exception of leasehold improvements which are
depreciated on a straight-line basis over the shorter of the term of the lease
or the estimated useful life of the assets. Amortization of intangible assets
includes deferred software development costs, goodwill and strategic
investments and alliances, which are amortized over lives ranging from five to
40 years.
26
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from the estimates. The following
discussion and analysis provides information which management believes is
relevant to an assessment and understanding of the Company's consolidated
results of operations and financial condition. This discussion should be read
in conjunction with the consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship of certain statements of operations items to total revenues.
YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
REVENUES................................ 100.0% 100.0% 100.0%
COST OF SERVICES........................ 27.9 28.2 29.7
----- ----- -----
GROSS MARGIN............................ 72.1 71.8 70.3
----- ----- -----
OPERATING EXPENSES
Selling, general and administrative... 44.2 55.0 56.7
Depreciation and amortization......... 7.8 7.2 7.1
Restructuring and other special
changes.............................. 32.1 5.6 0.0
Accrued settlement costs.............. 0.7 0.6 1.7
----- ----- -----
Total operating expenses............ 84.8 68.4 65.5
----- ----- -----
OPERATING INCOME (LOSS)................. (12.7) 3.4 4.8
----- ----- -----
OTHER INCOME (EXPENSE)
Interest, net......................... 0.0 (0.9) (3.0)
Gain on contract termination.......... -- -- 0.8
Other, net............................ 0.1 (0.1) 0.2
----- ----- -----
Total other income (expense)........ 0.1 (1.0) (2.0)
----- ----- -----
NET INCOME (LOSS) BEFORE INCOME TAXES... (12.6) 2.4 2.8
PROVISION FOR (BENEFIT FROM) INCOME
TAXES................................... (1.5) 0.7 0.0
----- ----- -----
NET INCOME (LOSS)....................... (11.1)% 1.7% 2.8%
===== ===== =====
27
Overview
The Company has achieved substantial growth particularly since its initial
public offering during the first quarter of 1996. Excluding restatement
effects in prior years from pooling of interests acquisitions, revenues grew
from $22.3 million in 1995 to $229.4 million in 1997, a compounded annual
growth rate of 220.7%. Similarly, operating profits before restructuring and
other special charges grew from $2.3 million to $46.1 million, a compounded
annual growth rate of 347.7% over the same period. The Company has achieved
growth in revenues and operating profits before restructuring and other
special charges by pursuing its strategy to become the leading provider of
enhanced communication services. During 1996 and 1997 the Company did the
following:
. Pursued an aggressive acquisition strategy to expand its service offerings
to encompass all services comprising enhanced communications. In 1997, the
Company acquired Voice-Tel (voice messaging) and VoiceCom (voice messaging
and 800-based services) thereby acquiring technology necessary to offer
voice messaging on a local access basis and one of the largest private
networks in the world utilizing frame relay and internet protocols. During
1996, the Company acquired TeleT, an enterprise engaged in computer
telephony software development, which provided it with the foundation of
its Orchestrate service offering which integrates the Company's enhanced
communication services by allowing users the flexibility to utilize these
services through a computer or telephone.
. Continued strong internal growth in the Company's 800-based business.
. Reduced costs by efficiently integrating its acquisitions and containing
growth in other operating costs thereby enabling it to improve operating
leverage from increased revenues.
Analysis
The Company's financial statements for all periods presented have been
restated to include the operations of the Voice-Tel Acquisitions and VoiceCom
which were accounted for as poolings of interests. The following discussion
and analysis is prepared on that basis.
Revenues increased 16.1% to $229.4 million in 1997 and 33.8% to $197.5
million in 1996. Revenue growth was due principally to growth in the following
areas:
. Strategic partner programs, particularly new programs such as American
Express, DeltaTel and First USA, which experienced significant increases
in new subscribers,
. License programs, both from growth in revenue from existing customers and
new license customers, and
. New 800-based services, including prepaid and enhanced feature calling
cards which offer new features such as voice messaging through local
access, call connect and call screening services and text-to-voice e-mail.
Revenues from the Company's 800-based services grew 53.0% in 1997 and 74.4%
in 1996.
Gross profit margins were 72.1%, 71.8% and 70.3% in 1997, 1996 and 1995,
respectively. Improving gross margins result primarily from changes in revenue
mix toward higher margin products, primarily license arrangements for 800-
based services and voice messaging products. In addition, the Company has been
able to obtain more favorable transmission rates from carriers as a result of
volume discounts obtained by leveraging increasing minute volumes. Gross
margins have also benefitted from general industry trends in which long
distance transport and the cost of local access service costs have decreased
as a result of increased capacity and competition among long distance and
local exchange carriers.
Selling, general and administrative costs as a percent of revenues were
44.2%, 55.0% and 56.7% in 1997, 1996 and 1995. These costs declined as a
percent of revenues due to aggressive restructuring of acquired businesses
(Voice-Tel and VoiceCom) in 1997. These activities included substantially
reducing the workforce of acquired businesses, exiting duplicative facilities,
eliminating redundant business activities and general spending reductions.
Operating leverage during 1997 and 1996 has also been improved by increased
revenues as the Company's administrative cost structure is highly fixed in
nature.
28
Depreciation and amortization was $18.0 million or 7.8% of revenues in 1997,
$14.2 million or 7.2% of revenues in 1996 and $10.5 million or 7.1% of
revenues in 1995. Increased depreciation and amortization expense results
mainly from depreciation associated with increased purchases of computer
telephony equipment to support new business growth, amortization of goodwill
and other intangibles acquired in connection with the Voice-Tel acquisitions
in 1997 and the WorldCom strategic investment entered into in 1996.
Net interest expense decreased to $0.02 million in 1997, from $1.7 million
in 1996 and $4.3 million in 1995. Net interest expense decreased primarily
from investment of excess proceeds from the Company's initial public offering
in March 1996. Interest expense in 1996 and 1995 resulted mainly from
indebtedness of Voice-Tel and VoiceCom. The majority of these obligations were
retired in connection with the acquisitions.
Accrued settlement costs for the year ended December 31, 1997 were $1.5
million compared to $1.3 million for the year ended December 31, 1996. See
Note 13--Commitments and Contingencies of the Notes to the Consolidated
Financial Statements and "Legal Proceedings" under Item 1 of Part II of this
document for further information about this matter.
Restructuring and other special charges incurred in 1997 were $73.6 million
compared to $11.0 million in the year ended December 31, 1996. See Note 3--
Acquisitions and Note 15--Restructuring and Other Special Charges in the Notes
to Consolidated Financial Statements and "Restructuring and Other Special
Charges" which follows in this discussion.
In the years ended December 31, 1997 and 1996 the Company's effective income
tax rate was less than 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 14-- Income Taxes in the Notes to Consolidated Financial
Statements for additional information.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its growth through cash generated by operations,
proceeds from its initial public offering in March 1996 and by issuing
convertible indebtedness in 1997. Cash provided by operations was $27.2
million or 11.8% of revenues in 1997, $36.9 million or 18.7% of revenues in
1996 and $13.6 million or 9.2% of revenues in 1995. Excluding payments made
for restructuring, accrued settlement costs and other special charges, cash
provided by operations was $57.7 million or 25.2% of revenues in 1997.
Improving operating cash flow margins, excluding restructuring and special
charges, resulted mainly from the Company's integration and cost reduction
initiatives associated with the Voice-Tel and VoiceCom acquisitions in 1997
which reduced operating costs of these businesses. Also, the Company's
increasing revenue base which, because of the Company's relatively fixed cost
structure, improved operating leverage and profits. In addition, operating
cash flows have not been burdened by significant investment in working
capital. This is largely because a significant portion of the Company's
revenues are billed and collected electronically in the case of its 800-based
service customers or billed and collected in advance in the case of its voice
messaging customers. As a result, the Company carried only 24.5 days sales in
receivables at December 31, 1997 as compared with approximately 77.9 days of
expenses in accounts payable and accrued liabilities.
The Company used cash in investing activities of approximately $160.0
million in 1997, $96.1 in 1996 and $13.2 million in 1995. Investment of $86.7
million of excess proceeds from the issuance of convertible subordinated notes
in 1997 and $67.2 million from the Company's initial public offering in 1996
accounted for a majority of the Company's investing activities in 1997 and
1996. The Company purchased property and equipment, primarily computer and
telecommunications equipment, of approximately $33.4 million in 1997, $21.9
million in 1996 and $12.2 million in 1995. These expenditures were made
primarily to expand operational infrastructure to support new business growth.
Management anticipates that these expenditures will continue to increase in
the future as the Company upgrades and expands the operational infrastructure
of both its existing computer telephony network and integrates the network of
its recent acquisition, Xpedite. The Company made investments of approximately
$23.8 million in 1997 in various companies engaged in emerging technologies,
such as telemedicine and the internet, as well as in marketing alliances and
outsourcing programs designed to reduce costs and develop new markets and
distribution channels for the Company's products. Management will
29
continue to make such investments in the future in complementary businesses
and other initiatives that further its strategic business plan. The Company
paid approximately $16.2 million of cash in connection with the acquisition of
the Voice-Tel Franchisees in 1997 and $2.9 million in the acquisition of TeleT
in 1996. See Note 3 -- Acquisitions in Notes to Consolidated Financial
Statements.
The Company utilized proceeds from the issuance of convertible subordinated
notes of $172.5 million in 1997 and its initial public offering proceeds of
$74.6 million in 1996 to support growth in its existing businesses and also to
make acquisitions and other strategic investments. In addition to cash paid to
purchase certain Voice-Tel Franchisees in 1997, the Company also repaid
approximately $29.5 million of indebtedness in 1997 assumed in connection with
the Voice-Tel acquisitions. Cash distributions to shareholders of VoiceCom and
certain Voice-Tel companies, primarily S Corporations, used $9.4 million, $3.6
million and $1.5 million in 1997, 1996 and 1995, respectively. Such
distributions were made in periods prior to the Voice-Tel and VoiceCom
acquisitions and were made primarily to reimburse S Corporation shareholders
for taxes paid on the proportionate share of taxable income of such companies
they were required to report in their individual income tax returns.
At December 31, 1997, the Company's principal commitments involve certain
indebtedness, lease obligations and minimum purchase requirements under supply
agreements with telecommunications providers. The Company is in compliance
under all such agreements at this date. See also Note 6--Long-Term Debt and
Note 13--Contingencies and Commitments in Notes to Consolidated Financial
Statements.
Management believes that cash and marketable securities on-hand of
approximately $176.3 million and cash generated by operating activities will
be adequate to fund growth in the Company's existing businesses for the
forseeable future. However, the Company will be required to repay or refinance
certain indebtedness assumed in connection with its acquisition on February
27, 1998 of Xpedite. Such indebtedness approximates $140 million and
management is currently evaluating alternatives in this regard.
RESTRUCTURING AND OTHER SPECIAL CHARGES
On February 27, 1998, the Company acquired Xpedite in a transaction to be
accounted for as a pooling of interests. The Company anticipates that it will
record restructuring and other special charges before income taxes in the
range of $50 million in connection with the Xpedite acquisition. Such amount
includes charges recorded by Xpedite in the fourth quarter of 1997 expected by
management to be in the range of $20 million before income taxes. These
charges result principally from transaction fees which the Company is required
to expense under the pooling of interests method of accounting, including a
$9.5 million transaction "break-up fee" paid by Xpedite to a company which was
party to an unsuccessful attempt to acquire Xpedite. In addition, such costs
result from legal and professional fees and the write-down of impaired assets
and associated costs to exit certain duplicative facilities and business
activities.
In connection with the VoiceCom Acquisition, the Company recorded
restructuring and other special charges of approximately $28.2 million in the
third quarter of 1997. Such amounts consisted of transaction costs, asset
impairments, costs to terminate or restructure certain contractual obligations
and other costs.
Transaction costs associated with the Voicecom acquisition were expensed as
required by the pooling-of-interests method of accounting. Other restructuring
and special charges recorded in the third quarter result principally from
management's plan to restructure VoiceCom's operations by reducing its
workforce, exiting certain facilities, discontinuing duplicative product
offerings and terminating or restructuring certain contractual obligations.
The Company recorded approximately $45.4 million of restructuring and other
special charges in the second quarter of 1997 in connection with the Voice-Tel
Acquisitions. Those charges result from management's plan to restructure the
operations of the Voice-Tel Entities under a consolidated business group model
and discontinue its franchise operations. This initiative involves substantial
reduction in the administrative workforce, abandoning duplicative facilities
and assets and other costs necessary to discontinue redundant business
activities. See Note 15--Restructuring and Other Special Charges of Notes to
Consolidated Financial Statements.
30
During the third quarter of 1996 in connection with the acquisition of
TeleT, the Company allocated approximately $11.0 million of the purchase price
to incomplete research and development projects. Accordingly, this cost was
expensed as of the acquisition date. This allocation represents the estimated
value related to the incomplete projects determined by an independent
appraisal. The development of these projects had not yet reached technological
feasibility and the technology had no alternative future use.
OTHER MATTERS
It is possible that a significant portion of the Company's currently
installed computer systems, software products, billing systems, telephony
platforms, networks, database or other business systems (hereinafter referred
to collectively as "Systems"), or those of the Company's customers, vendors or
resellers, working either alone or in conjunction with other software or
systems, will not accept input of, store, manipulate and output dates for the
years 1999, 2000 or thereafter without error or interruption (commonly known
as the "Year 2000" problem). The Company is currently in the process of
evaluating its Systems to determine whether or not modifications will be
required to prevent problems related to the Year 2000. There can be no
assurance that the Company will identify all such Year 2000 problems in its
Systems or those of its customers or vendors, including network transmission
providers, in advance of their occurrence or that the Company will be able to
successfully remedy any problems that are discovered. In addition, the Company
is dependent upon third parties for transmission of its calls and other
communications. There can be no assurance that these third party providers
will identify and remedy any Year 2000 problems in their transmission
facilities. The expenses of the Company's efforts to identify and address such
problems, the expenses or liabilities to which the Company may be subject as a
result of such problems, or the failure of third party providers of
transmission facilities, could have a material adverse effect on the Company's
business, financial condition and results of operations. The financial
stability of existing customers may be adversely impacted by Year 2000
problems which could have a material adverse impact on the Company's revenues.
In addition, failure of the Company to identify and remedy Year 2000 problems
could put the Company at a competitive disadvantage relative to companies that
have corrected Year 2000 problems.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997 the FASB has issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Management is currently studying the impact the new Standards
will have on its financial statement disclosures.
FACTORS AFFECTING FUTURE PERFORMANCE
When used in this Annual Report on Form 10-K, in documents incorporated
herein and elsewhere by management or the Company from time to time, the words
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements concerning the Company's business
operations, economic performance and financial condition, including in
particular, the Company's business strategy and means to implement the
strategy, the Company's objectives, the amount of future capital expenditures,
the likelihood of the Company's success in developing and introducing new
products and expanding its business, and the timing of the introduction of new
and modified products or services. For these statements, the Company claims
the protection of the safe harbor for forward looking statements contained in
the Private Securities Litigation Reform Act of 1995. These statements are
based on a number of assumptions and estimates which are inherently subject to
significant risks and uncertainties, many of which are beyond the control of
the Company and reflect future business decisions which are subject to change.
A variety of factors could cause actual results to differ materially from
those anticipated in the Company's forward-looking statements, including the
factors set forth in the section captioned "Special Cautionary Notice
Regarding Forward Looking Statements" and those set forth below.
Ability to Manage Growth; Acquisition Risks. Premiere continually evaluates
acquisition opportunities and, as a result, frequently engages in acquisition
discussions, conducts due diligence activities in connection with
31
possible acquisitions, and, where appropriate, engages in acquisition
negotiations. Premiere has experienced substantial growth in revenue and
personnel in recent years, particularly in 1997. A substantial portion of such
growth has been accomplished through acquisitions, including the Voice-Tel
Acquisitions, the acquisition of VoiceCom and the Xpedite Merger. Premiere's
growth has placed significant demands on all aspects of Premiere's business,
including its administrative, technical and financial personnel and systems.
Additional expansion by Premiere, including the Xpedite Merger, may further
strain Premiere's management, financial and other resources. There can be no
assurance that Premiere's systems, procedures, controls and existing space are
or will be adequate to support expansion of Premiere's operations. Premiere's
future operating results will substantially depend on the ability of its
officers and key employees to manage changing business conditions and to
implement and improve its administrative, technical and financial control and
reporting systems. If Premiere is unable to respond to and manage changing
business conditions, then the quality of Premiere's services, its ability to
retain key personnel and its results of operations could be materially
adversely affected. At certain stages of growth in network usage, Premiere
will be required to add capacity to its computer telephony platform and its
digital central office switches and will need to continually add capacity to
its private frame relay network, thus requiring Premiere continuously to
attempt to predict growth in its network usage and add capacity accordingly.
Difficulties in managing continued growth, including difficulties in
predicting the growth in network usage, could have a material adverse effect
on Premiere's business, financial condition and results of operations.
Acquisitions, including the Xpedite Merger, also involve numerous additional
risks, including difficulties in the assimilation of the operations, services,
products and personnel of the acquired company, the diversion of Premiere's
management's attention from other business concerns, entry into markets in
which Premiere has little or no direct prior experience and the potential loss
of key employees of the acquired company. Premiere is unable to predict
whether or when any prospective acquisition candidate will become available or
the likelihood that any acquisition will be completed.
Future acquisitions by Premiere may result in potentially dilutive issuances
of equity securities, the incurrence of additional debt, the assumption of
known and unknown liabilities, the write-off of software development costs and
the amortization of expenses related to goodwill and other intangible assets,
all of which could have a material adverse effect on Premiere's business,
financial condition and results of operations. For example, the Voice-Tel
Entities and VoiceCom established reserves for certain potential tax
liabilities that Premiere's management believes to be adequate based on
certain assumptions which Premiere's management believes are reasonable. If,
however, such assumptions prove to be incorrect and the potential liabilities
ultimately exceed established reserves, Premiere's business, financial
condition and results of operations could be materially adversely affected.
Premiere has recorded approximately $14.8 million of goodwill and other
intangible assets in connection with the Voice-Tel Acquisitions. Premiere is
amortizing the goodwill on a straight-line basis over 40 years, and Premiere
believes the useful life of the Voice-Tel Entities to be at least 40 years. If
the amortization period is accelerated due to a reevaluation of the useful
life of the Voice-Tel Entities or otherwise, amortization expense may
initially increase on a quarterly basis or require a write-down of the
goodwill. An increase in the rate of amortization of goodwill or future write-
downs and restructuring charges could have a material adverse effect on
Premiere's business, financial condition and results of operations.
Premiere has taken, and in the future may take, charges in connection with
acquisitions. During the second quarter of 1997, Premiere took a pre-tax
charge of approximately $45.4 million in connection with the Voice-Tel
Acquisitions and during the third quarter of 1997, Premiere took a pre-tax
charge of approximately $28.2 million in connection with the acquisition of
VoiceCom. In connection with the Xpedite Merger, Premiere and Xpedite are
expected to take additional charges. See "Management's Discussion and Analysis
of Financial Condition" or "Results of Operations--Restructuring and Other
Special Charges." Moreover, Premiere may take additional charges in connection
with future acquisitions. There can be no assurance that the costs and
expenses incurred will not exceed the estimates upon which such charges are
based.
In June 1997, Premiere completed the Voice-Tel Acquisitions. Prior to the
Voice-Tel Acquisitions, the Voice-Tel Entities operated approximately 210 POPs
in five countries. VTE operated as a franchisor, and each of the approximately
100 Franchisees was independently owned and operated. Premiere is in the
process of
32
consolidating these separate businesses by attempting to eliminate duplicative
and unnecessary costs and to operate them under common management. Potential
challenges to the successful consolidation of the Voice-Tel Entities include,
but are not limited to: (i) centralization and consolidation of financial,
operational and administrative functions; (ii) consolidation of the service
centers, network and work force; (iii) elimination of unnecessary costs; and
(iv) realization of economies of scale. Premiere is in the process of
integrating Voice-Tel's service offerings, operations and systems with those
of Premiere, and therefore, the Voice-Tel integration plans may materially
change in the future. Challenges to the successful integration of the Voice-
Tel Entities include, but are not limited to: (i) localization of Premiere
products; (ii) integration of the Premiere platform with the Voice-Tel
network; (iii) cross-selling of products and services to the customer base of
Voice-Tel and Premiere; (iv) integration of new personnel; and (v) compliance
with regulatory requirements.
Because of the size and fragmented nature of the facilities and businesses
of the Voice-Tel Entities and the technical complexity of integrating
Premiere's products with those of Voice-Tel, the integration process is
particularly complex and will place significant demands on Premiere's
management, engineering, financial and other resources. There can be no
assurance that the Voice-Tel Entities will be successfully consolidated or
integrated with Premiere's operations on schedule or at all, that the Voice-
Tel Acquisitions will result in sufficient net sales or earnings to justify
Premiere's investment therein or the expenses related thereto, or that
operational synergies will develop. The successful consolidation of the Voice-
Tel Entities and their integration into Premiere's operations are critical to
Premiere's future performance. Failure to successfully consolidate and
integrate the Voice-Tel Entities or to achieve operating synergies would have
a material adverse effect on Premiere's business, financial condition and
results of operations.
Competition. The market for the Company's services is intensely competitive,
rapidly evolving and subject to rapid technological change. The Company
expects competition to increase in the future. Many of the Company's current
and potential competitors have longer operating histories, greater name
recognition, larger customer bases and substantially greater financial,
personnel, marketing, engineering, technical and other resources than the
Company. The Company believes that existing competitors are likely to expand
their service offerings and that new competitors are likely to enter the
personal communications market and to attempt to integrate such services,
resulting in greater competition for the Company. Such competition could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company attempts to differentiate itself from its competitors by
offering an integrated suite of enhanced personal communications services.
Other providers currently offer each of the individual services and certain
combinations of the services offered by the Company. The Company's worldwide
mobile communications services and features compete with services provided by
companies such as AT&T Corp. ("AT&T"), MCI Communications Corp. ("MCI") and
Sprint Corp. ("Sprint") as well as smaller interexchange long distance
providers. The Company's voice mail services, including those acquired in the
Voice-Tel Acquisitions and the VoiceCom acquisition, compete with voice mail
services provided by AT&T, certain regional Bell Operating Companies ("RBOCs")
and other service bureaus as well as by equipment manufacturers, such as Octel
Communications Corporation ("Octel"), Northern Telecom, Inc. ("Northern
Telecom"), Siemens Business Communications Systems, Inc. ("Siemens"),
Centigram Communications Corporation ("Centigram"), Boston Technology, Inc.
("Boston Technology") and Digital Sound Corporation ("Digital Sound"). The
Company's enhanced travel, concierge, news and e-mail services compete with
services provided by America Online, Inc. ("America Online"), Prodigy Services
Co. ("Prodigy") and numerous Internet service providers. The Company's paging
services compete with paging services offered by companies such as AT&T and
MCI.
The Company's Orchestrate service, which the Company anticipates beginning
marketing during the second quarter of 1998, is expected to compete with
products offered by companies such as Octel, Microsoft Corp. ("Microsoft"),
Novell, Inc. ("Novell"), Lucent Technologies, Inc. ("Lucent") and numerous
other entities. For example, Octel and Microsoft recently announced a service,
called "Unified Messenger," which places all voice mail, e-mail and fax
messages in a single mailbox accessible by computer or telephone. In addition,
the number of companies offering call center technology, including AT&T, MCI
and Lucent, has grown dramatically over the past few years, primarily in
response to major outsource initiatives and significantly lower technology
costs.
33
The Company expects that other parties will develop and implement information
and telecommunications service platforms similar to its platform, thereby
increasing competition for the Company's services.
Through the recently completed Xpedite Merger, Premiere offers enhanced
document distribution services ("Enhanced Services"). Xpedite's fax
communication services currently compete with services provided by each of
AT&T, MCI and Sprint, and many of the national postal, telephone and telegraph
companies ("PTTs") around the world. Neither Premiere nor Xpedite can predict
whether AT&T, MCI, Sprint, any Internet service provider or PTT or any other
competitor will expand its fax communications services business, and there can
be no assurance that these or other competitors will not commence or expand
their businesses. Moreover, Xpedite's receiving, queuing, routing and other
systems logic and architecture are not proprietary to Xpedite, and as a
result, there can be no assurance that such information will not be acquired
or duplicated by Xpedite's existing and potential competitors. Xpedite does
not typically have long-term contractual agreements with its customers, and
there can be no assurance that its customers will continue to transact
business with Premiere in the future. In addition, even if there is continued
growth in the use of electronic document distribution services, there can be
no assurance that potential customers will not elect to use their own
equipment to fulfill their needs for electronic document distribution
services. There also can be no assurance that customers will not elect to use
alternatives to Xpedite's electronic document distribution services, including
the Internet, to carry such customers' communications or that companies
offering such alternatives will not develop product features or pricing which
are more attractive to customers than those currently offered by Xpedite.
Furthermore, on February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996, as amended (the "1996 Act"), which allows
local exchange carriers ("LECs"), including the RBOCs, to provide long
distance telephone service between Local Access and Transport Areas ("LATAs"),
which will likely significantly increase competition for long distance
services. The new legislation also grants the Federal Communications
Commission (the "FCC") the authority to deregulate other aspects of the
telecommunications industry, which in the future may, if authorized by the
FCC, facilitate the offering of an integrated suite of information and
telecommunications services by regulated entities, including the RBOCs, in
competition with the Company. Such increased competition could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Telecommunications companies compete for consumers based on price, with
major long distance carriers conducting extensive advertising campaigns to
capture market share. There can be no assurance that a decrease in the rates
charged for communications services by the major long distance carriers or
other competitors, whether caused by general competitive pressures or the
entry of the RBOCs and other LECs into the long distance market, would not
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company expects that the information and telecommunications services
markets will continue to attract new competitors and new technologies,
possibly including alternative technologies that are more sophisticated and
cost effective than the technology of the Company. The Company does not have
the contractual right to prevent its Premiere WorldLink subscribers from
changing to a competing network, and the Company's subscribers may generally
terminate their service with the Company at will.
Dependence on Key Management and Personnel. The Company's success is largely
dependent upon its executive officers and other key personnel, the loss of one
or more of whom could have a material adverse effect on the Company. The
Company believes that its continued success will depend to a significant
extent upon the efforts and abilities of Boland T. Jones, Chairman and
President, and certain other key executives. Mr. Jones has entered into an
employment agreement with the Company which expires in December 1999, and the
Company maintains key man life insurance on Mr. Jones in the amount of $3.0
million. During the fourth quarter of 1997, D. Gregory Smith, a co-founder of
the Company, resigned as a director, Executive Vice President and Assistant
Secretary of the Company and as a director and officer of PCI and certain
other subsidiaries, and Leonard A. DeNittis resigned as the Vice President of
Engineering and Operations of PCI.
34
The Company also believes that to be successful it must hire and retain
highly qualified engineering and product development personnel. Competition in
the recruitment of highly qualified personnel in the information and
telecommunications services industry is intense. The inability of the Company
to locate, hire and retain such personnel may have a material adverse effect
on the Company. No assurance can be given that the Company will be able to
retain its key employees or that it will be able to attract qualified
personnel in the future.
Reliance on Amway and Certain other Relationships. Historically, the Voice-
Tel Entities have relied on sales through Amway Corporation ("Amway") for a
substantial portion of their revenue. Such sales accounted for approximately
27.5%, 23.7% and 17.5% of the Company's revenue for 1995, 1996 and 1997,
respectively. Amway's relationship with VTE commenced in 1990 when VTE began
managing the voice messaging operations previously conducted by Amway's
subsidiary, Amvox, Inc. ("Amvox"). VTE subsequently acquired and franchised
the former Amvox service centers from Amway in exchange for an equity interest
in VTE. Amway later invested in the development of the private frame relay
digital messaging network through VTN. As a result of these transactions,
Amway also became the single largest equity holder in VTE and VTN. VTE and
Amway have entered into a service and reseller agreement (the "Amway
Agreement") providing, among other things, for the sale by VTE of voice
messaging and network transmission services on an exclusive basis to Amway in
the United States, Canada, New Zealand and Australia for resale by Amway to
its independent distributors under the "Amvox" tradename. The Amway Agreement
does not bind the Amway distributors, who are free to acquire messaging
services from alternative vendors. The Amway Agreement may be canceled by
either party upon 180 days prior written notice or upon shorter notice in the
event of a breach. The Amway Agreement does not prohibit VTE from continuing
to provide voice messaging and network transmission services to Amway's
distributors following termination of the Amway Agreement. However, in the
event that Amway recommended a voice messaging and network transmission
services provider other than the Company, there can be no assurance that
Amway's distributors would not follow such recommendation. Amway sold a
significant portion of the Common Stock that it acquired in the Voice-Tel
Acquisitions in an offering pursuant to a demand registration by certain
former owners of the Voice-Tel Entities. Such sale decreased Amway's interest
in the Company and may increase the possibility that Amway will recommend a
voice messaging and network transmission services provider other than the
Company. There can be no assurance that the Company's relationship with Amway
and the Amway distributors will continue at historical levels or at all, nor
can there be any assurance of long-term price protection for services provided
to Amway. Loss or diminution in the Amway relationship, or a decrease in
average sales price without an offsetting increase in volume, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In September 1997, Premiere entered into an agreement with Digitec 2000,
Inc. ("Digitec") pursuant to which Digitec will act as a distributor to market
and sell prepaid telephone cards. Under the terms of such agreement, Digitec
agreed, starting January 1, 1998, to sell cards with a minimum retail value
each month. In the event that Digitec has not sold all of the cards by August
31, 1998, Digitec will be obligated to pay Premiere an amount equal to the
retail value of the unsold cards less commissions that would have been payable
on such cards. Digitec is not currently selling the monthly minimum amount and
no assurance can be given that Digitec will be able to sell the amount of
cards that it is obligated to sell under the terms of such agreement. In the
event that Digitec is unable to do so, the Company believes that it is
unlikely that Digitec would have the financial resources available to it to
make the payment required on August 31, 1998 under such agreement.
Technological Change; Risk of Obsolescence; Dependence on New Services. The
market for the Company's services is characterized by rapid technological
change, frequent new product introductions and evolving industry standards.
The Company's future success will depend in significant part on its ability to
anticipate industry standards, continue to apply advances in technologies,
enhance its current services, develop and introduce new services in a timely
fashion, enhance its software and its computer telephony platform and compete
successfully with products and services based on evolving or new technologies.
The Company expects new products and services, and enhancements to existing
products and services, to be developed and introduced which will compete with
the services offered by the Company. Among the new and evolving technologies
with which the Company expects to compete are notebook computers equipped with
sound cards, fax modems and
35
cellular modems, portable Internet appliances which would allow connection to
the Internet over wireless networks and personal digital assistants with
enhanced communications features. In addition, aspects of the Company's
Orchestrate product line, which has been marketed to customers during the
first quarter of 1998, is expected to compete within markets where larger
companies are working to provide a unified messaging solution. The Company is
also aware that products currently exist which provide text-to-voice e-mail
conversion and "call connect/call screening" services.
Through the recently completed Xpedite Merger, Premiere offers Enhanced
Services. See "--Risks Associated with Expansion of Enhanced Document
Distribution Services." Technological advances may result in the availability
of new services, products or methods of electronic document delivery that
could compete with the electronic document distribution services currently
provided by Premiere and Xpedite or decrease the cost of existing products or
services which could enable Premiere's and/or Xpedite's established or
potential customers to meet their own needs for electronic document
distribution services more cost efficiently than through the use of Premiere
or Xpedite or in the future through the use of the combined company's
services. In addition, Premiere may experience difficulty integrating
incompatible systems of acquired businesses into its network. There can be no
assurance that Premiere will not be materially adversely affected in the event
of such technological change or difficulty, or that changes in technology will
not enable additional companies to offer services which could replace, or be
more cost-effective than, some or all of the services offered now by Premiere
or Xpedite or in the future by the combined company.
The Voice-Tel Acquisitions constitute a significant investment by the
Company in a private frame relay network architecture. Alternative
architectures currently exist, and technological advances may result in the
development of additional network architectures. There can be no assurance
that the telecommunications industry will not standardize on a protocol other
than frame relay or that the Company's frame relay architecture will not
become obsolete. Such events would require the Company to invest significant
capital in upgrading or replacing its private frame relay network and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company must continually introduce new products in response to evolving
industry standards and customer demands for enhancements to the Company's
existing products. One such new product is Orchestrate, which is operational
and has been available in limited release. The Company anticipates commencing
marketing of the Orchestrate product during the second quarter of 1998. The
Company believes that its competitors have not yet developed a publicly
available network-based product which incorporates all of the functionalities
of Orchestrate, although the Company's competitors have developed products
which the Company believes offer some, but not all, of the bundled services
offered through Orchestrate . There can be no assurance that: (i) the Company
will be successful in developing and marketing service enhancements or new
services that respond to these or other technological changes or evolving
industry standards; (ii) the Company will not experience difficulties that
could delay or prevent the successful development, introduction and marketing
of its services, including Orchestrate; or (iii) its new services and the
enhancements thereto, including Orchestrate, will adequately meet the
requirements of the marketplace and achieve market acceptance. Delays in the
introduction of new services, the inability of the Company to develop such new
services or the failure of such services to achieve market acceptance could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Uncertainty of Market Acceptance of Computer Telephony. The Company's future
success depends upon the market acceptance of its existing and future computer
telephony product lines and services. Computer telephony integrates the
functionality of telephones and computers and thus represents a departure from
standards for information and telecommunications services. Market acceptance
of computer telephony products and services generally requires that
individuals and enterprises accept a new way of exchanging information. The
Company believes that broad market acceptance of its computer telephony
product lines and services will depend on several factors, including ease of
use, price, reliability, access and quality of service, system security,
product functionality and the effectiveness of strategic marketing and
distribution relationships. There can be no assurance that the Company's
computer telephony products and services will achieve broad market acceptance
36
or that such market acceptance will occur at the rate which the Company
currently anticipates. A decline in the demand for, or the failure to achieve
broad market acceptance of, the Company's computer telephony product lines and
services would have a material adverse effect on the Company's business,
financial condition and results of operations.
Limited Protection of Proprietary Rights and Technology. The Company relies
primarily on a combination of intellectual property laws and contractual
provisions to protect its proprietary rights and technology. These laws and
contractual provisions provide only limited protection of the Company's
proprietary rights and technology. The Company's proprietary rights and
technology include confidential information and trade secrets which the
Company attempts to protect through confidentiality and nondisclosure
provisions in its licensing, services, reseller and distribution agreements.
The Company typically attempts to protect its confidential information and
trade secrets through these contractual provisions for the term of the
applicable agreement and, to the extent permitted by applicable law, for some
negotiated period of time following termination of the agreement, typically
one to two years at a minimum. Although the Company is not aware of any
current or previous infringement of its proprietary rights and technology,
there can be no assurance that the Company's means of protecting its
proprietary rights and technology will be adequate or that the Company's
competitors will not independently develop similar technology. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights to as great an extent as the laws of the U.S.
Risks of Infringement Claims. Many patents, copyrights and trademarks have
been issued in the general areas of information and telecommunications
services and computer telephony. The Company believes that in the ordinary
course of its business third parties will claim that the Company's current or
future products or services infringe the patent, copyright or trademark rights
of such third parties. No assurance can be given that actions or claims
alleging patent, copyright or trademark infringement will not be brought
against the Company with respect to current or future products or services, or
that, if such actions or claims are brought, the Company will ultimately
prevail. Any such claiming parties may have significantly greater resources
than the Company to pursue litigation of such claims. Any such claims, whether
with or without merit, could be time consuming, result in costly litigation,
cause delays in introducing new or improved products and services, require the
Company to enter into royalty or licensing agreements, or cause the Company to
discontinue use of the challenged technology, tradename or service mark at
potentially significant expense to the Company associated with the marketing
of a new name or the development or purchase of replacement technology, all of
which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is aware of other companies that use the terms "WorldLink" or
"Premiere" in describing their products and services, including
telecommunications products and services. Certain of those companies hold
registered trademarks which incorporate the names "WorldLink" or "Premiere."
The Company has received correspondence from a provider of prepaid calling
cards which claims that the Company's use of the term "WorldLink" infringes
upon its trademark rights. In addition, the Company has received
correspondence from a major bank, which is among the holders of registered
trademarks incorporating the term "WorldLink," inquiring as to the nature of
the Company's use of the term "WorldLink" as part of its mark "Premiere
WorldLink." Based on, among other things, the types of businesses in which the
other companies are engaged and the low likelihood of confusion, the Company
believes these claims to be without merit.
In October 1996, VTE received a letter from a third party claiming that
certain aspects of VTE's products and services may be infringing upon one or
more of the third party's patents. The Company has reviewed the patent claims
of the third party and does not believe that the Company's products or
services infringe on the claims of the third party. No patent infringement
claims against the Company have been filed by the third party at this time.
Should the third party file patent infringement claims against the Company,
the Company believes that it would have meritorious defenses to any such
claims. However, due to the inherent uncertainties of litigation, the Company
is unable to predict the outcome of any potential litigation with the third
party, and any adverse outcome could have a material adverse effect on the
Company's business, results of operations or financial condition. Even if the
Company were to ultimately prevail, the Company's business could be adversely
affected by the diversion of management attention and litigation costs.
Because of this risk, the Company
37
withheld in escrow approximately 123,000 shares of Common Stock from the
purchase price of VTE and VTN. This escrow arrangement terminates in April
2000. There can be no assurance that such escrow will be sufficient to fully
cover the Company's exposure in the event of litigation or an adverse outcome
to the potential infringement claims.
In May 1997, Premiere received a letter from a manufacturer and marketer of
certain telecommunications equipment asserting that Premiere is offering
certain "calling card and related enhanced services," "single number service"
and "call connecting services" covered by three patents held by that company
and inviting Premiere to obtain a license. Premiere has preliminarily reviewed
the subject patents and, based on that review, presently believes that its
products and services currently being marketed do not infringe these patents.
Premiere intends, however, to conduct a further review of these two patents in
order to determine whether it would be helpful to its future products and
services to license the patents. If Premiere ultimately determines that it is
infringing these patents, or any one of them, it could seek to license the
technology or discontinue using it and employ an alternate technology. There
can be no assurance that Premiere would be able to license the technology on
commercially reasonable terms or that it could easily and inexpensively
migrate to a new call reorganization technology. Premiere's call
reorganization service is only one service that it offers, and management does
not believe that this service is critical to the marketing of Premiere's
overall suite of services. Consequently, Premiere does not believe that its
inability to license the technology or migrate to a new technology would have
a material adverse effect on its business, financial condition and results of
operations. No claim has been asserted beyond this letter, but no assurance
can be given that the third party will not commerce an infringement action
against Premiere. If a patent infringement claim is brought against Premiere,
there can be no assurance that Premiere would prevail and any adverse outcome
could have a material adverse effect on Premiere's business, financial
condition and results of operations.
In May 1997, the Company received a letter from counsel for a provider of
goods and services in the telecommunications field objecting to the Company's
use of the phrase "personal assistant" based on that company's federally
registered "personal assistant" service mark. On June 18, 1997, counsel for
the Company responded to the objections, noting that the Company did not
intend to use, nor would it use in the future, the words "personal assistant"
as a trademark or service mark, but instead would merely use these words to
describe the nature of its product. The Company has not heard anything further
from the potential claimant and believes that the matter has been resolved.
In July 1997, the Company received a letter from counsel for a French
publishing company objecting to the Company's use of the "Premiere" trademark.
Based on, among other things, the type of business in which the French company
is engaged and the unlikelihood that the Company will engage in competitive
activities using the Premiere mark in France, the Company believes that no
action will be brought. Due to the inherent uncertainties of litigation,
however, the Company is unable to predict the outcome of any potential
litigation with the French company, and any adverse outcome could have a
material effect on the Company's business, financial condition and results of
operations. Even if the Company were to prevail in such a challenge, the
Company's business could be adversely affected by the diversion of management
attention and litigation costs.
In February 1997, the Company entered into a long-term nonexclusive license
agreement with AudioFAX settling a patent infringement suit filed by AudioFAX
in June 1996. In the third quarter of 1996, the Company took a one-time charge
for the estimated legal fees and other costs that the Company expected to
incur to resolve this matter. In September 1997, VoiceCom also entered into a
long-term nonexclusive license agreement with AudioFAX.
In July 1996, Xpedite received a letter from counsel for AudioFAX, which
informed Xpedite that AudioFAX is the owner of certain U.S. and Canadian
patents relevant to the fax processing business, and inquired as to Xpedite's
interest in obtaining a license to use these patents. The Company is currently
negotiating with AudioFAX with respect to entering into a long-term, non-
exclusive license for use of these patents by Xpedite. In the event Premiere
is unable to enter into a license agreement with Audio FAX, the Company cannot
predict the outcome of this matter, including but not limited to whether or
not AudioFAX will commence a
38
lawsuit against Xpedite. There can be no assurance that the resolution of such
matter will not have a material adverse effect on Premiere's business,
financial condition and results of operations.
Uncertainty of Strategic Relationships. A principal element of the Company's
strategy is the creation and maintenance of strategic relationships that will
enable the Company to offer its services to a larger customer base than the
Company could otherwise reach through its direct marketing efforts. The
Company has experienced growth in its existing strategic relationships during
1996 and 1997 and has entered into or initiated new strategic relationships
with several companies, including WorldCom, American Express and CompuServe.
Although the Company intends to continue to expand its direct marketing
channels, the Company believes that strategic partner relationships may offer
a potentially more effective and efficient marketing channel. Consequently,
the Company's success depends in part on the ultimate success of these
relationships and on the ability of these strategic partners to market the
Company's services effectively. Failure of one or more of the Company's
strategic partners to successfully develop and sustain a market for the
Company's services, or the termination of one or more of the Company's
relationships with a strategic partner, could have a material adverse effect
on the Company's overall performance. The telecommunications industry is
experiencing rapid consolidation. Recently WorldCom, which is a strategic
partner of the Company, entered into an agreement to acquire MCI, which
competes with the Company with respect to certain services. Consolidation in
the communications industry, including consolidations involving the Company's
customers and strategic partners, could have a material adverse effect on the
Company's business, financial condition and results of operations.
In November 1996, the Company entered into a strategic alliance agreement
with WorldCom, whereby WorldCom is required, among other things, to provide
the Company with the right of first opportunity to provide certain enhanced
computer telephony services for a period of at least 25 years. In connection
with this agreement, the Company issued to WorldCom 2,050,000 shares of Common
Stock valued at approximately $25.2 million (based on an independent
appraisal) and paid WorldCom $4.7 million in cash. The Company recorded the
value of this agreement as an intangible asset. While the Company believes
that the intangible asset will be recovered over the life of the agreement,
this recoverability is dependent upon the success of the strategic
relationship. The Company will continually evaluate the realizability of the
intangible asset recorded, and there can be no assurance that future
evaluations will not require a write-down of this asset.
Although the Company views its strategic relationships as a key factor in
its overall business strategy and in the development and commercialization of
its services, there can be no assurance that its strategic partners view their
relationships with the Company as significant for their own businesses or that
they will not reassess their commitment to the Company in the future. The
Company's arrangements with its strategic partners do not always establish
minimum performance requirements for the Company's strategic partners, but
instead rely on the voluntary efforts of these partners in pursuing joint
goals. Certain of these arrangements prevent the Company from entering into
strategic relationships with other companies in the same industry as the
Company's strategic partners, either for specified periods of time or while
the arrangements remain in force. In addition, even when the Company is
without contractual restriction, it may be restrained by business
considerations from pursuing alternative arrangements. The ability of the
Company's strategic partners to incorporate the Company's services into
successful commercial ventures will require the Company, among other things,
to continue to successfully enhance its existing services and develop new
services. The Company's inability to meet the requirements of its strategic
partners or to comply with the terms of its strategic partner arrangements
could result in its strategic partners failing to market the Company's
services, seeking alternative providers of communications and information
services or canceling their contracts with the Company, any of which could
have a material adverse impact on the Company's business, financial condition
and results of operations.
Dependence on Licensing and Strategic Relationships. The Company has
licensing relationships with companies that have chosen to outsource part or
all of their communications card services to Premiere. License fees accounted
for approximately 7.0% of Premiere's revenues in 1996 and 11.8% of Premiere's
revenues during 1997. One licensee, Communications Network Corporation
("CNC"), accounted for approximately 19.6% of Premiere's 1996 license fees and
approximately 1.4% of the Company's total 1996 revenues. On August 6, 1996,
CNC was placed into bankruptcy under Chapter 11 of the United States
Bankruptcy Code. CNC owed the
39
Company approximately $627,000 as of December 31, 1996. However, CNC's
transmission provider, WorldCom Network Services, Inc., d/b/a WilTel, is also
obligated to pay this amount to the Company. In addition, WorldCom accounted
for approximately 43.5% of the Company's 1996 license fees and approximately
3.0% of the Company's total 1996 revenues, and approximately 66.8% of the
Company's license fees and 7.8% of the Company's total 1997 revenues. The
Company believes that through a combination of new licensing agreements, the
strategic alliance agreement with WorldCom and increased revenues from
existing licensees, the Company has replaced all of the anticipated CNC
revenue.
The Company intends to increase its number of licensees and its licensee
transaction volume in the future. The Company's success depends in part upon
the ultimate success or failure of its licensees. The telecommunications
industry is intensely competitive and rapidly consolidating. The majority of
companies that have chosen to outsource communications card services to
Premiere are small or medium-sized telecommunications companies that may be
unable to withstand the intense competition in the telecommunications
industry. Licensees that ceased doing business with Premiere due to financial
difficulties contributed in the aggregate approximately $2.9 million of
Premiere's 1996 revenues. Although the Company was able to add new licensees
in 1996 and the first three quarters of 1997, there can be no assurance that
the failure of one or more of the Company's licensees to develop and sustain a
market for the Company's services, or termination of one or more of the
Company's licensing relationships, will not have a material adverse effect on
the Company's business, financial condition and results of operations.
Year 2000 Problem. It is possible that a significant portion of the
Company's currently installed computer systems, software products, billing
systems, telephony platforms, networks, database or other business systems
(hereinafter referred to collectively as "Systems"), or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem). The Company is
currently in the process of evaluating its Systems to determine whether or not
modifications will be required to prevent problems related to the Year 2000.
There can be no assurance that the Company will identify all such Year 2000
problems in its Systems or those of its customers or vendors, including
network transmission providers, in advance of their occurrence or that the
Company will be able to successfully remedy any problems that are discovered.
In addition, the Company is dependent upon third parties for transmission of
its calls and other communications. There can be no assurance that these third
party providers will identify and remedy any Year 2000 problems in their
transmission facilities. The expenses of the Company's efforts to identify and
address such problems, the expenses or liabilities to which the Company may be
subject as a result of such problems, or the failure of third party providers
of transmission facilities, could have a material adverse effect on the
Company's business, financial condition and results of operations. The
financial stability of existing customers may be adversely impacted by Year
2000 problems which could have a material adverse impact on the Company's
revenues. In addition, failure of the Company to identify and remedy Year 2000
problems could put the Company at a competitive disadvantage relative to
companies that have corrected Year 2000 problems.
Risks of Leverage. In connection with the issuance of its convertible notes
to the public on June 30 and July 30, 1997 (the "Convertible Notes"), Premiere
incurred $172.5 million in indebtedness. As a result of this increased
leverage, Premiere's principal and interest obligations have increased
substantially. The degree to which Premiere is leveraged could adversely
affect Premiere's ability to obtain additional financing for working capital,
acquisitions or other purposes and could make it more vulnerable to economic
downturns and competitive pressures. Premiere's increased leverage could also
adversely affect its liquidity, as a substantial portion of available cash
from operations may have to be applied to meet debt service requirements, and
in the event of a cash shortfall, Premiere could be forced to reduce other
expenditures and forego potential acquisitions to be able to meet such
requirements. The indenture related to the Convertible Notes does not contain
any financial covenants or any other agreements restricting the payments of
dividends, the repurchase of securities of Premiere, the issuance of
additional equity or the incurrence of additional indebtedness. In December
1997, Xpedite entered into a credit agreement with certain banks which
provides a $150 million revolving credit
40
facility, a $70 million portion of which is available for pound sterling
borrowings. All borrowing under this Credit Agreement becomes due and payable
on December 16, 1998. Substantially all of the assets of Xpedite collateralize
the revolving credit facility. The credit agreement also contains certain
financial covenant provisions.
Shares Eligible for Future Sale; Registration Rights. As of March 26, 1998,
the Company had approximately 45,260,000 shares of Common Stock outstanding
(including 329,840 Exchangeable Non-Voting Shares of Voice-Tel Canada Limited,
a subsidiary of the Company (the "Exchangeable Shares"), which are convertible
at any time into a like number of shares of Common Stock and approximately
10,984,000 shares issued or issuable in connection with the Xpedite Merger. Of
these shares, approximately 31,348,000 shares of Common Stock are freely
transferable without restriction or limitation under the Securities Act. The
remaining shares (approximately 13,912,000 shares) are "restricted securities"
("the Restricted Shares") within the meaning of Rule 144 ("Rule 144") adopted
under the Securities Act. Approximately 7,032,000 Restricted Shares are
immediately eligible for sale in the public market pursuant to Rule 144.
Beginning on April 30, 1998 and September 30, 1998, approximately 6,434,000
additional shares and approximately 446,000 additional shares, respectively,
will be eligible for sale pursuant to Rule 144, subject to the volume, manner
of sale and notice requirements of Rule 144. The Company is aware that Mr. D.
Gregory Smith, the beneficial owner of approximately 1.8 million shares,
executed a letter agreement with a third party broker that restricts his
ability to sell or offer for sale any shares of Common Stock of Premiere until
December 5, 1998 without the consent of the third party. There can be no
assurance such third party will not give its consent to the sale of shares of
Common Stock by Mr. Smith or will enforce its rights under such agreement.
As of December 31, 1997 options and warrants to purchase an aggregate of
approximately 7,413,000 shares of Common Stock were outstanding, of which
options and warrants to purchase approximately 3,302,000 shares of Common
Stock are vested and immediately exercisable. Substantially all of the shares
issuable upon the exercise of outstanding options and warrants will be
eligible for immediate resale, if and when issued, under Rule 701 adopted
under the Securities Act or pursuant to Registration Statements on Form S-8.
In addition, an aggregate of approximately 543,000 shares of Common Stock are
issuable upon the exercise of options and warrants previously granted by
Xpedite and converted into the right to acquire Premiere Common Stock in the
Merger. The Company intends to file a Registration on Form S-8 to register the
share issuable upon the exercise of the options and warrants assumed in the
Merger.
The Convertible Notes are convertible into a maximum of approximately
3,227,000 shares of Common Stock at any time prior to final maturity at a
conversion price of $33.00 per share, subject to adjustment. The Convertible
Notes and the Common Stock issuable upon conversion of the Convertible Notes
are currently registered for resale under the Securities Act and may be resold
pursuant to such registration statement.
Excluding certain holders of shares of Common Stock issued in connection
with the Xpedite Merger discussed below, the holders of approximately
10,641,494 shares of Common Stock and their permitted transferees are entitled
to certain rights with respect to the registration of such shares under the
Securities Act.
Prior to the Company's initial public offering in March 1996, the Company
granted certain registration rights to holders of convertible preferred stock
and warrants. Although these contractual rights remain in force, the shares
subject to such registration rights may be freely disposed of pursuant to Rule
144 under the Securities Act.
Subsequent to the Company's initial public offering, the Company has granted
registration rights in connection with the Company's execution of a strategic
alliance agreement with WorldCom, and the Company's acquisitions of TeleT
Communications, LLC ("TeleT"), the Voice-Tel Entities and VoiceCom. In each of
these instances, the Company is required to notify the holders of the
Company's intent to register any of its Common Stock under the Securities Act
and allow such holders an opportunity to include their shares of Common Stock
in the Company's registration; provided, however, that (i) with respect to
WorldCom and VoiceCom such notice
41
must be given only if the Company intends to register and sell newly issued
shares; (ii) with respect to CMG@Ventures, L.P. ("CMG"), such notice must be
given only if 20% of the shares held by CMG remain outstanding; and (iii) with
respect to the former owners of the Voice-Tel Entities, such notice must be
given only until April 30, 1998. These registration rights are subject to
certain limitations and restrictions, including the right of the underwriters
of an underwritten offering to limit the number of shares offered in such
registration if such underwriter determines that the number of shares
requested to be registered cannot be underwritten. In addition, the Company
agreed to file a shelf registration statement for the former holders of
VoiceCom within 30 days after the filing of this Annual Report on Form 10-K,
and use reasonable commercial efforts to have the registration statement
declared effective as soon as practicable thereafter.
WorldCom has a one-time right to require the Company to file a registration
statement under the Securities Act, provided that such request is made: (i)
between November 13, 1998 and November 13, 1999; or (ii) within 60 days from
the date of a change in control of Premiere, the termination of Boland T.
Jones as an executive officer or the termination of the strategic alliance
agreement with WorldCom if the events described in clause (ii) occur prior to
November 13, 1999. In addition, the registration must be with respect to such
minimum number of shares of Common Stock having an aggregate proposed offering
price equal to $10.0 million.
With respect to the former owners of the Voice-Tel Entities, the Company
agreed to file a shelf registration statement (the "Voice-Tel Shelf") as soon
as practicable following December 15, 1997 to include any shares of Common
Stock then held by the former owners of the Voice-Tel Entities. The Company
exercised certain contractual rights to postpone this requirement for up to 90
days. The Company has received requests to register approximately 4.5 million
shares of Common Stock and is using its commercially reasonable efforts to
file the Voice-Tel Shelf as soon as practicable.
The shares of Premiere Common Stock issued in connection with the Xpedite
Merger were registered under the Securities Act and, unless issued to
affiliates of Xpedite as of the date of the Xpedite stockholders meeting to
consider the Xpedite Merger, are freely transferable without restriction or
limitation under the Securities Act.
For a period of three months commencing 30 days after financial results
covering at least 30 days of combined operations of Premiere and Xpedite have
been published, each person who is precluded by the Securities Act from
selling or disposing of all of their shares of Premiere Common Stock received
in the Xpedite Merger within one calendar quarter (a "Large Stockholder") will
have a one-time right to require Premiere to file a registration statement
under the Securities Act relating to all or part of their registrable
securities (an "Xpedite Demand Registration"). Premiere is obligated to use
its commercially reasonable efforts to effect an Xpedite Demand Registration
as soon as reasonably practical after the request is made, except that
Premiere has the right, under certain circumstances, to delay the effective
date of a registration statement or any sales thereunder for a period not to
exceed 120 days from the date of the request for registration. In addition,
Premiere is not obligated to effect an Xpedite Demand Registration (i) for
less than one million shares or (ii) within three months of a Large
Stockholder selling any registrable securities pursuant to an Xpedite
Piggyback Registration (defined below). Unless Premiere shall otherwise
consent, any offering pursuant to an Xpedite Demand Registration shall be
underwritten and Premiere shall select the underwriters and any additional
investment bankers to be used.
If Premiere proposes to file a registration statement under the Securities
Act with respect to an offering for Premiere's own account (other than for
offerings pursuant to certain acquisitions or employee benefit plans, non-
underwritten offerings or offerings of certain convertible securities), or for
the account of any holders of Premiere Common Stock other than the Large
Stockholders (other than for non-underwritten offerings), any Large
Stockholder may request registration under the Securities Act of all or part
of its Registrable Securities on the same terms and conditions as Premiere or
such other holders of Premiere Common Stock (an "Xpedite Piggyback
Registration"). In the case of an Xpedite Piggyback Registration, Premiere has
the right to terminate or withdraw any registration undertaken by it prior to
the effectiveness of such registration whether or not any Large Stockholder
has elected to include registrable securities in such registration.
42
No prediction can be made as to the effect, if any, that the availability of
additional shares for sale will have on the market prices of the Common Stock
prevailing from time to time. Nevertheless, sales of substantial amounts of
the Common Stock in the public market could adversely affect prevailing market
prices of the Common Stock and the ability of the Company to raise equity
capital in the future.
Potential Adverse Impact of Pending Litigation. In the ordinary course of
its business, the Company is subject to claims and litigation from third
parties alleging that the Company's products and services infringe the
patents, trademarks and copyrights of such third parties. See "--Risk of
Infringement Claims." The Company has several litigation matters pending not
involving infringement claims, as described below, which the Company is
defending vigorously. Due to the inherent uncertainties of the litigation
process and the judicial system, the Company is unable to predict the outcome
of such litigation matters. If the outcome of one or more of such matters is
adverse to the Company, it could have a material adverse effect on the
Company's business, financial condition and results of operations.
On January 21, 1997, Eric Bott, E.B. Elliott and Cost Recovery Systems, Inc.
("CRS") filed a complaint against the Company, PCI and the Company's
president, Boland T. Jones, in the Superior Court of Fulton County, Georgia
("Civil Action"). As of December 2, 1997, the Company, PCI and Mr. Jones
entered into a settlement agreement with Mr. Bott which settled and disposed
of Mr. Bott's claims in connection with this litigation. On December 12, 1997,
Mr. Elliott and CRS filed a Second Amended Complaint against Premiere and
Boland T. Jones in the Civil Action. The first count seeks an accounting of
commissions that Mr. Elliott and CRS allege may be due to them under a sales
commission agreement between CRS and Premiere. The second count seeks options
for 72,000 shares of Premiere Common Stock that Mr. Elliott and CRS claim are
due to them, or damages in the alternative. The third count seeks to recover
the Plaintiffs' reasonable attorneys' fees. In the Second Amended Complaint,
the remaining plaintiffs have dropped their prior request for punitive
damages. The Company believes it has meritorious defenses to Mr. Elliott's and
CRS' remaining allegations, but due to the inherent uncertainties of the
litigation process, the Company is unable to predict the outcome of this
litigation. If the outcome of this litigation is adverse to the Company, it
could have a material adverse effect on the Company's business, financial
condition and results of operations. The settlement with Mr. Bott will not
have a material adverse effect on the Company's business, financial condition
or results of operations.
On August 6, 1996, CNC, a licensing customer of the Company, was placed into
bankruptcy (the "Bankruptcy Case") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code"). On August 23, 1996, CNC filed a
motion to intervene in a separate lawsuit brought by a CNC creditor in the
United States District Court for the Southern District of New York against
certain guarantors of CNC's obligations and to file a third-party action
against numerous entities, including such CNC creditor and PCI for alleged
negligent misrepresentations of fact in connection with an alleged fraudulent
scheme designed to damage CNC (the "Intervention Suit"). The District Court
has denied CNC's request to intervene and has transferred the remainder of the
Intervention Suit to the Bankruptcy Case. Based upon the bankruptcy examiner's
findings and the subsequently appointed bankruptcy trustee's investigation of
potential actions directed at PCI, including an avoidable preference claim
under the Bankruptcy Code of an amount up to approximately $950,000, the
bankruptcy trustee (the "Trustee") and PCI have reached a tentative settlement
on all issues between the parties, subject to Bankruptcy Court approval. The
terms of the proposed settlement have been incorporated into a proposed plan
of reorganization (the "Plan") filed by the Trustee with the Bankruptcy Court,
which is also subject to Bankruptcy Court approval. Based upon hearings before
the Bankruptcy Court, the Trustee filed on November 18, 1997, a motion
requesting approval of the settlement to accompany the Plan. If only the
settlement is approved, PCI will obtain a release from the Trustee and the
Trustee will dismiss the Intervention Suit in consideration of PCI making a
cash payment of $1,200,000 to the Trustee. If the Plan is subsequently
approved by the Court, PCI will make an additional cash payment of up to
$300,000 to the Trustee in consideration of PCI obtaining certain allowed
subordinated claims and the Court granting an injunction in Premiere's favor
against possible nuisance suits relating to the CNC business. The Company has
previously taken a reserve for the settlement and Plan payments. If the
outcome of this matter is adverse to PCI, the settlement is not approved
43
and the Trustee successfully pursues possible litigation against the Company,
it could have a material adverse effect on the Company's business, operating
results or financial condition.
On November 26, 1997, Wael Al-Khatib ("Al-Khatib"), the sole shareholder and
former president of CNC, and his company, Platinum Network, Corp. ("Platinum")
(Al-Khatib and Platinum are collectively referred to herein as "Plaintiffs"),
filed a complaint against PCI, WorldCom Network Services, Inc. f/k/a WilTel,
Inc., Bernard J. Ebbers, David F. Meyers, Robert Vetera, Joseph Cusick,
William Trower, Don Wilmouth, Digital Communications of America, Inc., Boland
Jones, Patrick Jones, and John Does I-XX (the "Defendants") in the Eastern
District of New York, United States District Court (the "Al-Khatib lawsuit").
Plaintiffs contend that, during 1996, PCI, certain officers of PCI and the
other Defendants engaged in a fraudulent scheme to restrain trade in the debit
card market nationally and in the New York debit card sub-market and made
misrepresentations of fact in connection with the scheme. The Plaintiffs are
seeking at least $250 million in compensatory damages and $500 million in
punitive damages from PCI and the other Defendants. Pursuant to the local
rules of the District Court, PCI has filed a letter stating the reaons it
believes the lawsuit should be dismissed. PCI has also filed a motion for
sanctions under Federal Rule of Civil Procedure 11. PCI believes that it has
meritorious defenses to the Plaintiffs' allegations and will vigorously defend
the same. Due to the inherent uncertainties of the judicial system, the
Company is not able to predict the outcome of the Al-Khatib lawsuit. If the
Al-Khatib lawsuit is not resolved in the Company's favor, it could have a
material adverse effect on the Company's business, financial condition and
results of operations.
On July 8, 1997, various limited partners purporting to act on behalf of
Telentry Research Limited Partnership, Telentry Development Limited
Partnership, Telentry XL Limited Partnership, Telentry Research Limited
Partnership II and Telentry Development Limited Partnership II (collectively,
the "Telentry Partnerships") filed a complaint in the Superior Court of New
Jersey for Morris County against Xpedite and two other defendants. The
complaint alleges, inter alia, that Xpedite is in breach of its obligations to
make royalty payments under a series of license agreements between Xpedite and
the Telentry Partnerships. In this action, the plaintiff's seek, inter alia,
damages of $2,030,040 and an accounting of royalties. On September 29, 1997.
Xpedite filed a motion to dismiss the complaint. The court subsequently
elected to treat this motion as a motion for summary judgment. The motion has
been fully briefed by both parties, and oral argument is currently scheduled
for April 3, 1998. To date, no discovery has been taken in this action.
On February 23, 1998, Rudolf R. Nobis and Constance Nobis filed a complaint
in the Superior Court of Union County, New Jersey against 15 named defendants
including Xpedite Systems, Inc. ("Xpedite") and certain of its alleged current
and former officers, directors, agents and representatives. The lawsuit is
styled Rudolf R. Nobis and Constance Nobis v. Edward Angrisani, et al., Civil
Action File No. UNN-L-113698, Superior Court of New Jersey Law Division: Union
County. The plaintiffs allege that the 15 named defendants and certain
unidentified "John Doe defendants" engaged in wrongful activities in
connection with the management of the plaintiffs' investments with Equitable
Life Assurance Society of the United States and/or Equico Securities, Inc.
(collectively "Equitable"). More specifically, the complaint asserts
wrongdoing in connection with the plaintiffs' investment in securities of
Xpedite and in unrelated investments involving insurance-related products. The
defendants include Equitable and certain of its current or former
representatives. The allegations in the complaint against Xpedite are limited
to plaintiffs' investment in Xpedite. The plaintiffs have alleged that two of
the named defendants, allegedly acting as officers, directors, agents or
representatives of Xpedite, induced the plaintiffs to make certain investments
in Xpedite but that the plaintiffs failed to receive the benefits that they
were promised. The plaintiffs allege that Xpedite knew or should have known of
alleged wrongdoing on the part of other defendants. The plaintiffs' claims
against Xpedite include breach of contract, breach of fiduciary duty, unjust
enrichment, conversion, fraud, conspiracy, interference with economic
advantage and liability for ultra vires acts. The plaintiffs seek an
accounting of the corporate stock in Xpedite, compensatory damages of
$4,845,953.13, plus $200,000 in "lost investments," interest and/or dividends
that have accrued and have not been paid, punitive damages in an unspecified
amount, and for certain equitable relief, including a request for Xpedite to
issue 139,430 shares of common stock in the plaintiffs' names, attorneys' fees
and costs and such other and further relief as the Court deems just and
equitable. Xpedite intends to file and answer denying the material allegations
of the complaint and asserting various affirmative defenses and a motion to
dismiss the counts of the complaint against it. Premiere believes that Xpedite
has meritorious
44
defenses to the plaintiffs' allegations, but due to the inherent uncertainties
of the litigation process, Premiere is unable to predict the outcome of this
litigation. If the outcome of this litigation is adverse to Xpedite, it could
have a material adverse effect on Xpedite's business, operating results and
financial condition.
Dependence on Switching Facilities and Computer Telephony Platforms; Damage,
Failure and Downtime. The Company currently maintains switching facilities and
computer telephony platforms in Atlanta, Georgia, Dallas, Texas and London,
England. The Company's network service operations are dependent upon its
ability to protect the equipment and data at its switching facilities against
damage that may be caused by fire, power loss, technical failures,
unauthorized intrusion, natural disasters, sabotage and other similar events.
The Company has taken precautions to protect itself and its subscribers from
events that could interrupt delivery of the Company's services. These
precautions include physical security systems, uninterruptible power supplies,
on-site power generators, upgraded backup hardware and fire protection
systems. The Company's network is further designed such that the data on each
network server is duplicated on a separate network server. Notwithstanding
such precautions, and although the Company has not experienced any significant
downtime of its network in the last three years due to technical failures,
natural disasters or similar events, there can be no assurance that a fire,
act of sabotage, technical failure, natural disaster or a similar event would
not cause the failure of a network server and its backup server, other
portions of the Company's network or one of the switching facilities as a
whole, thereby resulting in an interruption of the Company's services. Such an
interruption could have a material adverse effect on the Company's business,
financial condition and results of operations. Although the Company maintains
business interruption insurance providing for aggregate coverage of
approximately $10.8 million per policy year, there can be no assurance that
the Company will be able to maintain its business interruption insurance, that
such insurance will continue to be available at reasonable prices or that such
insurance will be sufficient to compensate the Company for losses it
experiences due to the Company's inability to provide services to its
subscribers.
Factors Affecting Operating Results; Potential Fluctuations in Quarterly
Results. The Company's operating results have varied significantly in the past
and may vary significantly in the future. Special factors that may cause the
Company's future operating results to vary include: (i) the unique nature of
strategic relationships into which the Company may enter in the future; (ii)
changes in operating expenses resulting from such strategic relationships and
other factors; (iii) the continued acceptance of the Company's licensing
program; (iv) the financial performance of the Company's licensees; (v) the
timing of new service announcements; (vi) market acceptance of new and
enhanced versions of the Company's services; (vii) potential acquisitions;
(viii) changes in legislation and regulation that may affect the competitive
environment for the Company's communications services; and (ix) general
economic and seasonal factors.
In the future, revenues from the Company's strategic relationships may
become an increasingly significant portion of the Company's total revenues.
Due to the unique nature of each strategic relationship, these relationships
may change the Company's mix of expenses relative to revenues.
Quarterly revenues are difficult to forecast because the market for the
Company's services is rapidly evolving. The Company's expense levels are
based, in part, on its expectations as to future revenues. If revenue levels
are below expectations, the Company may be unable or unwilling to reduce
expenses proportionately and operating results would likely be adversely
affected. As a result, the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to all of the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and
investors. In such event, the market price of the Company's Common Stock will
likely be materially adversely affected.
Risk of Software Failures or Errors. The software developed and utilized by
the Company in providing its services, including the Orchestrate software, may
contain undetected errors. Although the Company generally engages in extensive
testing of its software prior to introducing the software onto its network,
there can be no assurance that errors will not be found in the software after
the software goes into use. Any such error may result in partial or total
failure of the Company's network, additional and unexpected expenses to fund
further product development or to add programming personnel to complete a
development project, and loss of revenue because of the inability of
subscribers to use Premiere's network or the cancellation by subscribers of
their service with
45
Premiere, any of which could have a material adverse effect on the Company.
The Company maintains technology errors and omissions insurance coverage of
$10.0 million per policy aggregate. However, there can be no assurance that
the Company will be able to maintain its technology errors and omissions
insurance, that such insurance will continue to be available at reasonable
prices or will be sufficient to compensate the Company for losses it
experiences due to the Company's inability to provide services to its
subscribers.
Dependence upon Telecommunication Providers; No Guaranteed Supply. The
Company does not own a transmission network and, accordingly, depends on
WorldCom, LCI International Telecom Corp. ("LCI"), MCI, Sprint, The Telephone
Company of Central Florida and other facilities-based and non-facilities based
carriers for transmission of its subscribers' long distance calls. These long
distance telecommunications services generally are procured pursuant to supply
agreements for terms of three to five years, subject to earlier termination in
certain events. Certain of these agreements provide for minimum purchase
requirements. Further, the Company is dependent upon LECs for call origination
and termination. If there is an outage affecting one of the Company's
terminating carriers, the Company's platform automatically switches calls to
another terminating carrier if capacity is available. The Company has not
experienced significant losses in the past due to interruptions of service at
terminating carriers, but no assurance can be made in this regard in the
future. The Company's ability to maintain and expand its business depends, in
part, on its ability to continue to obtain telecommunication services on
favorable terms from long distance carriers and the cooperation of both
interexchange and LECs in originating and terminating service for its
subscribers in a timely manner. The partial or total loss of the ability to
receive or terminate calls would result in a loss of revenues by the Company
and could lead to a loss of subscribers, which could have a material adverse
effect on the Company.
The Company leases capacity on the WorldCom backbone to provide connectivity
and data transmission within the Company's private data network. The lease
agreement expires in September 2000. The Company's hub equipment is collocated
at various WorldCom sites pursuant to co-location agreements that are
terminable by either party upon 30 days written notice. The Company's ability
to maintain network connectivity is dependent upon its access to transmission
facilities provided by WorldCom or an alternative provider. The Company has no
assurance that it will be able to continue such relationship with WorldCom
beyond the terms of its current agreements with WorldCom or that it will be
able to find an alternative provider on terms as favorable as those offered by
WorldCom or on any other terms. If the Company were required to relocate its
hub equipment or change its network transmission provider, it could experience
shutdowns in its service and increase costs which could have a material
adverse effect on its customer relationships and customer retention and,
therefore, its business, financial condition and results of operations.
Reliance on Supplier of Voice Messaging Equipment. The Company does not
manufacture voice messaging equipment used at its voice messaging service
centers, and such equipment is currently available from a limited number of
sources. Although the Company has not historically experienced any significant
difficulty in obtaining equipment required for its operations and believes
that viable alternative suppliers exist, no assurance can be given that
shortages will not arise in the future or that alternative suppliers will be
available. The inability of the Company to obtain this equipment could result
in delays or reduced delivery of messages which would materially and adversely
affect the Company's business, financial condition and results of operations.
Regulation. Various regulatory factors affect the Company's financial
performance and its ability to compete. The Company's operating subsidiaries
that provide regulated long distance telecommunications services ("Operating
Subsidiaries") are subject to regulation by the FCC and by various state
public service and public utility commissions ("PUCs"), and are otherwise
affected by regulatory decisions, trends and policies made by these agencies.
FCC rules currently require interexchange carriers to permit resale of their
transmission services. FCC rules also require LECs to provide all
interexchange carriers with equal access to local exchange facilities for
purposes of origination and termination of long distance calls. If either or
both of these requirements were eliminated, the Company could be adversely
affected. Moreover, the underlying carriers that provide services to the
Operating Subsidiaries or that originate or terminate the Operating
Subsidiaries' traffic may increase rates or experience disruptions in service
due to factors outside the Company's control, which could cause the Operating
Subsidiaries to experience increases in rates for telecommunications services
or disruptions in transmitting their subscribers' long distance calls.
46
PCI, one of the Operating Subsidiaries, has made the requisite filings with
the FCC to provide interstate and international long distance services.
VoiceCom Systems, Inc. ("VCOM"), another Operating Subsidiary, is in the
process of making the requisite filings with the FCC to provide interstate and
international long distance services. There can be no assurance that the FCC
will approve VCOM's filings. Failure by VCOM to comply with FCC requirements
in connection with its provision of interstate and international long distance
services could have a material adverse effect on the Company's or on VCOM's
business, financial condition and results of operation.
In order to provide intrastate long distance service, the Operating
Subsidiaries generally are required to obtain certification from state PUCs,
to register with such state PUCs or to be found exempt from registration by
such state PUCs. Each of PCI and VCOM has either filed the applications
necessary to provide intrastate long distance telecommunications services
throughout the United States or is in the process of filing such applications.
To date, PCI is authorized to provide long distance telecommunications
services in 46 states and in the District of Columbia and is seeking
authorization to provide long distance telecommunications services in four
states. With the exception of three states, Colorado, Michigan and Arizona, in
which PCI's applications to provide operator service (i.e., "0+") are pending,
PCI is authorized to provide operator service in each state where PCI provides
long distance telecommunications service. VCOM, on the other hand, is
authorized to provide long distance telecommunications services in 13 states
and in the District of Columbia and is in the process of filing applications
for certificates to provide long distance telecommunications services in 37
states. The Operating Subsidiaries' facilities do not prevent subscribers from
using the facilities to make long distance calls in any state, including
states in which the Operating Subsidiaries currently are not authorized to
provide intrastate telecommunications services and operator services. There
can be no assurance that the Operating Subsidiaries' provision of long
distance telecommunications and operator services in states where the
Operating Subsidiaries are not authorized to provide such services will not
have a material adverse effect on the Company's or on the Operating
Subsidiaries' business, financial condition and results of operations.
The 1996 Act is intended to increase competition in the long distance and
local telecommunications markets. The 1996 Act opens competition in the local
services market and, at the same time, contains provisions intended to protect
consumers and businesses from unfair competition by incumbent LECs, including
the RBOCs. The 1996 Act allows RBOCs to provide long distance service outside
of their local service territories but bars them from immediately offering in-
region interLATA long distance services until certain conditions are
satisfied. An RBOC must apply to the FCC to provide in-region interLATA long
distance services and must satisfy a set of pro-competitive criteria intended
to ensure that RBOCs open their own local markets to competition before the
FCC will approve such application. Further, while the FCC has final authority
to grant or deny such RBOC application, the FCC must consult with the
Department of Justice to determine if, among other things, the entry of the
RBOC would be in the public interest, and with the relevant state to determine
if the pro-competitive criteria have been satisfied. While the FCC has yet to
grant any RBOC inter-LATA application, the Company is unable to determine how
the FCC will rule on any such applications in the future.
In response to a constitutional challenge filed by SBC Communications Inc.,
the United States District Court for the Northern District of Texas found the
1996 Act's restrictions on RBOC interLATA services to be an unconstitutional
bill of attainder, but stayed the effect of its decision pending further
appeal. As a result of the 1996 Act and if the interLATA restrictions are
ultimately struck down, the Company may experience increased competition from
others, including the RBOCs. In addition, the Operating Subsidiaries may be
subject to additional regulatory requirements and fees, including universal
service assessments and payphone compensation surcharges resulting from the
implementation of the 1996 Act.
In conducting its business, the Company is subject to various laws and
regulations relating to commercial transactions generally, such as the Uniform
Commercial Code and is also subject to the electronic funds transfer rules
embodied in Regulation E promulgated by the Board of Governors of the Federal
Reserve System (the "Federal Reserve"). Congress has held hearings regarding,
and various agencies are considering, whether to regulate providers of
services and transactions in the electronic commerce market. For example, the
Federal
47
Reserve recently completed a study, directed by Congress, regarding the
propriety of applying Regulation E to stored value cards. The Department of
Treasury recently promulgated proposed rules applying record keeping,
reporting and other requirements to a wide variety of entities involved in
electronic commerce. It is possible that Congress, the states or various
government agencies could impose new or additional requirements on the
electronic commerce market or entities operating therein. If enacted, such
laws, rules and regulations could be imposed on the Company's business and
industry and could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's proposed
international activities also will be subject to regulation by various
international authorities and the inherent risk of unexpected changes in such
regulation.
Risks Associated with International Expansion. A key component of the
Premiere strategy is its planned expansion into international markets. In
1996, the Company opened a POP site in London, England which is currently
being upgraded to a full switching facility and computer telephony platform.
In addition, the Company intends to pursue long term strategic relationships
with European partners. Premiere also intends to establish high speed
client/server networks of personal computers (called "Telnodes") and PCs
utilizing the Company's proprietary software (called "Network Managers") in
Canada, New Zealand and potentially other countries in 1998. The Company
currently has voice messaging service centers in Canada, Australia, New
Zealand and Puerto Rico, If international revenues are not adequate to offset
the expense of establishing and maintaining these international operations,
Premiere's business, financial condition and results of operations could be
materially adversely affected. To date, Premiere has only limited experience
in marketing and distributing its services internationally. There can be no
assurance that Premiere will be able to successfully establish the proposed
international Telnodes and Network Managers or to market, sell and deliver its
services in international markets. In addition to the uncertainty as to
Premiere's ability to expand its international presence, there are certain
difficulties and risks inherent in doing business on an international level,
such as burdensome regulatory requirements and unexpected changes in these
requirements, export restrictions, export controls relating to technology,
tariffs and other trade barriers, difficulties in staffing and managing
international operations, longer payment cycles, problems in collecting
accounts receivable, political instability, fluctuations in currency exchange
rates, seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world and potentially adverse tax
consequences. The Company denominates foreign transactions in foreign currency
and does not engage in hedging transactions. The Company has not experienced
any material losses from fluctuations in currency exchange rates, but there
can be no assurance that the Company will not incur material losses due to
currency exchange rate fluctuations in the future.
Premiere recently completed the Xpedite Merger. A significant portion of
Xpedite's business is conducted outside the United States and a significant
portion of its revenues and expenses are derived in foreign currencies.
Accordingly, Xpedite's results of operations may be materially affected by
fluctuations in foreign currencies. Many aspects of Xpedite's international
operations and business expansion plans are subject to foreign government
regulations, currency fluctuations, political uncertainties and differences in
business practices. There can be no assurance that foreign governments will
not adopt regulations or take other actions that would have a direct or
indirect adverse impact on the business or market opportunities of Xpedite
within such governments' countries, including increased tariffs. Furthermore,
there can be no assurance that the political, cultural and economic climate
outside the United States will be favorable to Xpedite's operations and growth
strategy.
Risks Associated with Expansion of Enhanced Document Distribution
Services. Premiere intends to accelerate growth of Enhanced Document
Distribution Services throughout the world by expansion of Xpedite's
proprietary private world-wide document distribution network (the "Xpedite
Network"), the integration of the Xpedite Network with Premiere's private
frame relay network and computer telephony platform and the acquisition of
entities engaged in the business of Enhanced Document Distribution Services.
There can be no assurance that Premiere will be able to expand its ability to
provide services at a rate or in a manner satisfactory to meet the demands of
existing or future customers, including, but not limited to, increasing the
capacity of the Xpedite Network to process increasing amounts of document
traffic, integrating and increasing the capability of the Xpedite Network to
perform tasks required by Premiere's customers or identifying and establishing
alliances
48
with new partners in order to enable Premiere to expand its network in new
geographic regions. Such inability may adversely affect customer relationships
and perceptions of Premiere in the markets in which it provides services,
which could have a material adverse effect on Premiere's business, financial
condition or results of operations. In addition, such growth will involve
substantial investments of capital, management and other resources. There can
be no assurance that Premiere will generate sufficient cash for future growth
of the Enhanced Document Distribution Services business through earnings or
external financings, or that such external financings will be available on
terms acceptable to Premiere or that Premiere will be able to employ any such
resources in a manner that will result in accelerated growth.
Risk of loss from Returned Transactions; Fraud; Bad Debt; Theft of
Services. Premiere uses two principal financial payment clearance systems: the
Federal Reserve's Automated Clearing House for electronic fund transfers; and
the national credit card systems for electronic credit card settlement. In its
use of these established payment clearance systems, Premiere generally bears
credit risks similar to those normally assumed by other users of these systems
arising from returned transactions caused by insufficient funds, stop payment
orders, closed accounts, frozen accounts, unauthorized use, disputes, theft or
fraud. From time to time, persons have gained unauthorized access to
Premiere's network and obtained services without rendering payment to Premiere
by unlawfully using the access numbers and Personal Identification Numbers
("PINs") of authorized users. In addition, in connection with Premiere's
wholesale prepaid telephone card relationships, Premiere has experienced
unauthorized activation of prepaid telephone cards. No assurance can be given
that losses due to unauthorized use of access numbers and PINs, unauthorized
activation of prepaid calling cards or activation of prepaid calling cards in
excess of the prepaid amount, or theft of prepaid calling cards will not be
material. Premiere attempts to manage these risks through its internal
controls and proprietary billing system. Premiere's computer telephony
platform is designed to prohibit a single access number and PIN from
establishing multiple simultaneous connections to the platform, and Premiere
establishes preset spending limits for each subscriber. Premiere also
maintains reserves for such risks. Past experience in estimating and
establishing reserves and Premiere's historical losses are not necessarily
accurate indicators of Premiere's future losses or the adequacy of the
reserves established by Premiere in the future. Although Premiere believes
that its risk management and bad debt reserve practices are adequate, there
can be no assurance that Premiere's risk management practices, including its
internal controls, or reserves will be sufficient to protect Premiere from
unauthorized or returned transactions or thefts of services which could have a
material adverse effect on Premiere's business, financial condition and
results of operations.
Anti-Takeover Effects of Certain Provisions of Articles of Incorporation,
Bylaws and Georgia Law. The Board of Directors of the Company is empowered to
issue preferred stock without shareholder action. The existence of this
"blank-check" preferred could render more difficult or discourage an attempt
to obtain control of the Company by means of a tender offer, merger, proxy
contest or otherwise. The Company's Articles of Incorporation, as amended (the
"Articles"), divide the Board of Directors into three classes, as nearly equal
in size as possible, with staggered three-year terms. One class will be
elected each year. The classification of the Board of Directors could have the
effect of making it more difficult for a third party to acquire control of the
Company. The Company is also subject to certain provisions of the Georgia
Business Corporation Code which relate to business combinations with
interested shareholders. In addition to considering the effects of any action
on the Company and its shareholders, the Company's Articles permit the Board
of Directors and the committees and individual members thereof to consider the
interests of various constituencies, including employees, customers,
suppliers, and creditors of the Company, communities in which the Company
maintains offices or operations, and other factors which such directors deem
pertinent, in carrying out and discharging the duties and responsibilities of
such positions and in determining what is believed to be in the best interests
of the Company. See "Description of Capital Stock."
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................... 51
Consolidated Balance Sheets, December 31, 1997 and 1996.................... 52
Consolidated Statements of Operations, Three Years Ended December 31, 1997. 53
Consolidated Statements of Shareholders' Equity (Deficit), Three Years
Ended December 31, 1997................................................... 54
Consolidated Statements of Cash Flows, Three Years Ended December 31, 1997. 55
Notes to Consolidated Financial Statements................................. 56
50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Premiere Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of PREMIERE
TECHNOLOGIES, INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31,
1997 and 1996 and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the years ended December 31,
1997, 1996 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Premiere Technologies,
Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for the years ended December 31, 1997,
1996 and 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 3, 1998, except with respect
to Note 17, which is dated
February 27, 1998
51
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
1997 1996
-------- --------
ASSETS
CURRENT ASSETS
Cash and equivalents..................................... $ 21,770 $ 15,936
Marketable securities.................................... 154,569 67,900
Accounts receivable (less allowances of $3,303 and
$1,435, respectively)................................... 20,719 14,604
Prepaid expenses and other............................... 6,941 8,719
Deferred income taxes, net............................... 25,715 4,168
-------- --------
Total current assets................................... 229,714 111,327
-------- --------
PROPERTY AND EQUIPMENT, NET................................ 63,577 46,181
-------- --------
OTHER ASSETS
Deferred income taxes, net............................... 3,963 5,346
Strategic alliances and investments, net................. 51,895 29,814
Goodwill, net............................................ 18,104 4,213
Intangibles and other.................................... 8,625 4,660
-------- --------
$375,878 $201,541
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable......................................... $ 30,704 $ 16,999
Deferred revenue......................................... 7,139 419
Accrued taxes............................................ 9,745 10,472
Accrued liabilities...................................... 20,192 18,073
Current maturities of long-term debt..................... 2,849 16,168
Current portion of capital lease obligations............. 3,058 3,819
Accrued restructuring and other special charges.......... 19,845 --
-------- --------
Total current liabilities.............................. 93,532 65,950
-------- --------
LONG-TERM LIABILITIES
Long-term debt........................................... 854 20,539
Obligations under capital lease.......................... 2,437 7,449
Convertible subordinated notes, net of issue costs....... 167,270 --
Other accrued liabilities................................ 10,971 3,070
-------- --------
Total long-term liabilities............................ 181,532 31,058
-------- --------
COMMITMENTS AND CONTINGENCIES.............................. -- --
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 150,000,000 shares
authorized, 34,100,018 and 31,645,386 shares issued and
outstanding, respectively............................... 341 316
Additional paid-in capital............................... 180,084 147,029
Note receivable, shareholder............................. (973) --
Accumulated deficit...................................... (78,638) (42,812)
-------- --------
Total shareholders' equity............................. 100,814 104,533
-------- --------
$375,878 $201,541
======== ========
Accompanying notes are integral to these financial statements.
52
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
-------- -------- --------
REVENUES.......................................... $229,352 $197,474 $147,543
COST OF SERVICES.................................. 63,974 55,601 43,868
-------- -------- --------
GROSS PROFIT...................................... 165,378 141,873 103,675
-------- -------- --------
OPERATING EXPENSES
Selling, general and administrative............. 101,308 108,603 83,719
Depreciation and amortization................... 17,971 14,184 10,453
Restructuring and other special charges......... 73,597 11,030 --
Accrued settlement costs........................ 1,500 1,250 2,500
-------- -------- --------
Total operating expenses...................... 194,376 135,067 96,672
-------- -------- --------
OPERATING INCOME (LOSS)........................... (28,998) 6,806 7,003
-------- -------- --------
OTHER INCOME (EXPENSE)
Interest, net................................... (15) (1,690) (4,323)
Gain on contract termination.................... -- -- 1,193
Other, net...................................... 226 (286) 313
-------- -------- --------
Total other income (expense).................. 211 (1,976) (2,817)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES................. (28,787) 4,830 4,186
PROVISION FOR (BENEFIT FROM) INCOME TAXES......... (3,412) 1,372 15
-------- -------- --------
NET INCOME (LOSS)................................. $(25,375) $ 3,458 $ 4,171
======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE................. $ (0.78) $ 0.12 $ 0.19
======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE............... $ (0.78) $ 0.11 $ 0.17
======== ======== ========
Accompanying notes are integral to these financial statements.
53
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
SERIES A TOTAL
(FORMERLY ADDITIONAL STOCK NOTE STOCK SHAREHOLDERS'
SERIES 1994) COMMON PAID-IN- SUBSCRIPTIONS RECEIVABLE WARRANTS ACCUMULATED EQUITY
PREFERRED STOCK STOCK CAPITAL RECEIVABLE SHAREHOLDER OUTSTANDING DEFICIT (DEFICIT)
--------------- ------ ---------- ------------- ----------- ----------- ----------- -------------
BALANCE, DECEMBER 31,
1994................. $ 3,907 $134 $ 24,046 $ (75) $ -- $ 244 $(45,069) $(16,813)
Common stock issued on
subscription......... -- 56 2,306 (2,362) -- -- -- --
Exercise of stock
options.............. -- 8 350 -- -- -- -- 358
Income tax benefit
from exercise of
stock options........ -- -- 2,622 -- -- -- -- 2,622
Other equity
transactions,
primarily S-
corporation
distributions ....... -- -- (178) -- -- -- (1,799) (1,977)
Net income............ -- -- -- -- -- -- 4,171 4,171
------- ---- -------- ------- ----- ----- -------- --------
BALANCE, DECEMBER 31,
1995................. $ 3,907 $198 $ 29,146 $(2,437) $ -- $ 244 $(42,697) $(11,639)
Conversion of Series A
Preferred Stock ..... (3,907) 31 3,876 -- -- -- -- --
Conversion of stock
warrants............. -- 6 238 -- -- (244) -- --
Payment of
subscriptions
receivable........... -- -- -- 2,437 -- -- -- 2,437
Issuance of common
stock:
Initial public
offering............ -- 46 74,571 -- -- -- -- 74,617
Acquisition (TeleT).. -- 5 7,495 -- -- -- -- 7,500
Strategic investment
(WorldCom).......... -- 21 25,174 -- -- -- -- 25,195
Exercise of stock
options............. -- 9 308 -- -- -- -- 317
Income tax benefit
from exercise of
stock options........ -- -- 6,886 -- -- -- -- 6,886
Other equity
transactions,
primarily S-
corporation
distributions ....... -- -- (665) -- -- -- (3,573) (4,238)
Net income............ -- -- -- -- -- -- 3,458 3,458
------- ---- -------- ------- ----- ----- -------- --------
BALANCE, DECEMBER 31,
1996................. $ -- $316 $147,029 $ -- $ -- $ -- $(42,812) $104,533
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)
Net loss.............. -- -- -- -- -- -- (25,375) (25,375)
------- ---- -------- ------- ----- ----- -------- --------
BALANCE, DECEMBER 31,
1997................. $ -- $341 $180,084 $ -- $(973) $ -- $(78,638) $100,814
======= ==== ======== ======= ===== ===== ======== ========
Accompanying notes are integral to these financial statements.
54
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
1997 1996 1995
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................... $ (25,375) $ 3,458 $ 4,171
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization.................. 17,971 14,184 10,453
Payments for restructuring, accrued settlement
costs and other special charges............... (30,586) -- --
Restructuring, accrued settlement costs and
other special charges......................... 75,097 12,280 2,500
Provision for (benefit from) income taxes ..... (3,412) 1,372 15
Changes in assets and liabilities:
Accounts receivable, net...................... (6,467) (1,668) (3,696)
Prepaid expenses and other.................... (1,330) (2,525) (5,314)
Accounts payable and accrued expenses......... 1,261 9,788 5,430
--------- -------- --------
Total adjustments............................ 52,534 33,431 9,388
--------- -------- --------
Net cash provided by operating activities.... 27,159 36,889 13,559
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities, net......... (86,669) (67,182) (1,655)
Strategic alliances and investments............ (23,801) (4,777) --
Purchase of property and equipment............. (33,387) (21,905) (12,183)
Acquisitions................................... (16,198) (2,870) --
Other ......................................... -- 622 652
--------- -------- --------
Net cash used in investing activities........ (160,055) (96,112) (13,186)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Initial public offering, net................... -- 74,617 --
Payment of stock subscriptions receivable...... -- 2,437 --
Exercise of stock options...................... 13,823 317 358
Shareholder distributions, primarily S-
corporation distributions..................... (9,360) (3,550) (1,480)
Principal payments under borrowing
arrangements.................................. (29,469) (9,547) (8,571)
Proceeds from convertible subordinated notes... 172,500 -- --
Debt issue costs, convertible subordinated
notes......................................... (6,028) -- --
Issuance of debt............................... -- 3,985 13,421
Issuance of shareholder note receivable........ (973) -- --
Other ......................................... (1,763) (1,343) (205)
--------- -------- --------
Net cash provided by financing activities.... 138,730 66,916 3,523
--------- -------- --------
NET INCREASE IN CASH AND EQUIVALENTS............ 5,834 7,693 3,896
CASH AND EQUIVALENTS, beginning of period....... 15,936 8,243 4,347
--------- -------- --------
CASH AND EQUIVALENTS, end of period............. $ 21,770 $ 15,936 $ 8,243
========= ======== ========
Accompanying notes are integral to these financial statements.
55
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND ITS BUSINESS
Premiere Technologies, Inc. and subsidiaries ("Company") is a leading
provider of enhanced communications services that simplify communications for
businesses and individuals. The Company's enhanced communication services
include 800-based services, voice and data messaging and internet-based
communications which the Company delivers through its state of the art
network. The Company's private network integrates these enhanced communication
services by utilizing digital switching technology, frame relay and internet
protocols. Management believes a network-based solution provides the Company's
customers the flexibility of accessing and utilizing the Company's services
through a computer or telephone and to avoid costly investment in equipment.
The Company markets its services globally through its direct sales force,
direct marketing and direct response campaigns and strategic partner programs.
The Company's operation centers consist of points of presence in over 200
locations in the United States, Canada, Australia and New Zealand allowing it
to provide both local access and long-distance-based enhanced communication
services to substantially all of these populations. The Company began
operations in 1991 and came public in March 1996.
In June 1997, the Company completed the acquisitions of Voice-Tel
Enterprises, Inc. ("VTE"), its affiliate Voice-Tel Network Limited Partnership
("VTNLP"), VTN, Inc. ("VTN"), the general partner of VTNLP and substantially
all of the approximately 100 independently owned and operated Voice-Tel
franchise businesses (Franchisees). The acquisitions of VTE, VTNLP, VTN and
the Franchisees are sometimes referred to collectively as the "Voice-Tel
Acquisitions". The Voice-Tel entities are engaged in interactive data and
voice messaging utilizing a digital frame relay network with points of
presence allowing to offer enhanced communications services through local
access in the United States, Canada, Australia and New Zealand. The majority
of the Voice-Tel Acquisitions were accounted for as pooling-of-interests. The
financial statements have been restated for all periods presented to include
the operations of the acquired entities accounted for as pooling-of-interests.
See Note 3--Acquisitions.
In September 1997, the Company acquired VoiceCom Holdings, Inc.
("VoiceCom"), a provider of 800-based and voice messaging communication
services. This transaction has been accounted for as a pooling-of-interests,
and the Company's financial statements have been restated for all periods
presented to include the operations of VoiceCom. See Note 3--Acquisitions.
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 in consolidation.
Cash and Equivalents
Cash and equivalents include cash on hand and highly liquid investments with
a maturity of three months or less.
56
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Marketable Securities
The Company follows Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 mandates that a
determination be made of the appropriate classification for debt and equity
securities at the time of purchase and a reevaluation of such designation as
of each balance sheet date. At December 31, 1997 and 1996, investments
consisted of commercial paper, United States Treasury bills, municipal bonds,
coupon municipals, auction rate preferred investments with various maturities
and equity instruments. Management considers all debt instruments as "held to
maturity" and all equity instruments as "available for sale." Debt instruments
are carried at cost, and equity instruments are carried at the lower of cost
or market. As cost approximates market, there were no unrealized gains or
losses at December 31, 1997 or 1996.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided under
the straight-line method over the estimated useful lives of the assets,
commencing when the assets are placed in service. The estimated useful lives
are ten years for furniture and fixtures, seven years for office equipment and
five 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 is amortized
using the straight line method over lives ranging from 20 to 40 years.
Valuation of Long-Lived Assets
Management periodically evaluates carrying values of long-lived assets,
including property and equipment, strategic investments, goodwill and other
intangible assets, to determine whether events and circumstances indicate that
these assets have been impaired. An asset is considered impaired when
undiscounted cash flows to be realized from such asset are less than its
carrying value. In that event, a loss is determined based on the amount the
carrying value exceeds the fair market value of such asset.
Strategic Alliances and Investments
The Company has entered into alliances with and made investments in various
companies that are engaged in telecommunications and emerging technologies
that are complementary with the Company's core businesses and which further
the Company's strategic plan. These alliances and investments involve
outsourcing initiatives, equity investments and innovative marketing programs.
Each of the equity investments represent less than a twenty percent ownership
interest and are therefore carried at cost. Intangible assets representing
strategic alliances are amortized over the term of the arrangement and such
investments are carried net of accumulated amortization. See Note 5--Strategic
Alliances and Investments.
Stock-Based Compensation Plans
The Company recognizes stock based compensation using the intrinsic value
method as permitted by SFAS No. 123. Accordingly, no compensation expense is
recorded for stock based awards issued at market value at the
57
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
date such awards are granted. The Company makes pro forma disclosures of net
income and net income per share as if the market value method was followed.
See Note 10--Stock Based Compensation Plans.
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 Income (Loss) Per Share
In 1997, the Company adopted SFAS No. 128, "Earnings per Share." That
statement requires the disclosure of basic net income (loss) per share and
diluted net income (loss) per share. Basic net income (loss) per share is
computed by dividing net income (loss) available to common shareholders by the
weighted-average number of common shares outstanding during the period and
does not include any other potentially dilutive securities. Diluted net income
(loss) per share gives effect to all potentially dilutive securities. The
Company's convertible subordinated notes and stock options are potentially
dilutive securities. In 1997, both potentially dilutive securities were anti-
dilutive and therefore are not included in diluted net income (loss) per
share. A reconciliation of basic net income (loss) per share to diluted net
income (loss) per share follows:
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED NET WEIGHTED NET
AVERAGE NET LOSS NET AVERAGE INCOME NET AVERAGE INCOME
NET LOSS SHARES PER SHARE INCOME SHARES PER SHARE INCOME SHARES PER SHARE
-------- -------- --------- ------ -------- --------- ------ -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss)............... $(25,375) -- -- $3,458 -- -- $4,171 -- --
Less: Preferred stock dividends. -- -- -- 29 -- -- 308 -- --
-------- ------ ------- ------ ------ ----- ------ ------ -----
Basic net income (loss)......... $(25,375) 32,443 $ (0.78) $3,429 27,670 $0.12 $3,863 19,868 $0.19
======== ====== ======= ====== ====== ===== ====== ====== =====
Dilutive Securities
Stock options................... -- -- -- -- 3,618 -- -- 1,348 --
Series A convertible redeemable
8% cumulative preferred stock.. -- -- -- -- -- -- 350 3,096 --
-------- ------ ------- ------ ------ ----- ------ ------ -----
Diluted net income (loss)....... $(25,375) 32,443 $ (0.78) $3,429 31,288 $0.11 $4,213 24,312 $0.17
======== ====== ======= ====== ====== ===== ====== ====== =====
Concentration of Credit Risk
Revenues from one customer of the Company represented approximately $40.1
million, $46.8 million and $40.6 million of the Company's consolidated
revenues for 1997, 1996 and 1995, respectively.
New Accounting Pronouncements
During 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Both are effective for fiscal years beginning after December 15,
1997. Management is currently studying the impact the new standards will have
on its financial statement disclosures.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997
presentation. These changes had no impact on previously reported results of
operations.
58
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITIONS
VoiceCom Acquisition
During the third quarter of 1997, the Company acquired VoiceCom through the
issuance of approximately 446,000 shares of its common stock. This transaction
was accounted for as a pooling-of-interests and the Company's financial
statements have been restated for all periods presented to include the
operations of VoiceCom.
Voice-Tel Acquisitions
In June 1997, the Company completed the Voice-Tel Acquisitions. The Company
issued approximately 7.4 million shares of its common stock, paid
approximately $16.2 million in cash and assumed approximately $21.3 million in
indebtedness, net of cash acquired.
Most of the transactions were structured as tax-free mergers or share
exchanges and were accounted for under the pooling-of-interests method of
accounting. Accordingly, the financial results of the Company have been
restated for all periods presented to include the results of operations of the
Voice-Tel Acquisitions that were accounted for as pooling-of-interests.
The Company purchased 15 of the Franchisees and the limited partner interest
in VTNLP for an aggregate of approximately $15.5 million in cash and
approximately 94,000 shares of its common stock. The excess of the purchase
price over the fair value of the net assets acquired is recorded as an
intangible asset.
A reconciliation of previously reported operating results to those restated
for pooling-of-interests transactions is as follows:
1996 1995
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
Revenue:
Premiere, as previously reported.......................... $ 52,079 $ 22,326
Voice-Tel Acquisitions.................................... 90,075 68,690
VoiceCom.................................................. 55,320 56,527
-------- --------
Premiere, as restated................................... $197,474 $147,543
-------- --------
Net income (loss):
Premiere, as previously reported.......................... $ (956) $ 1,918
Voice-Tel Acquisitions.................................... 3,972 3,006
VoiceCom.................................................. 442 (753)
-------- --------
Premiere, as restated................................... $ 3,458 $ 4,171
-------- --------
Net income (loss) per share:
Premiere, as previously reported
Basic.................................................... $ (0.05) $ 0.13
======== ========
Diluted.................................................. $ (0.05) $ 0.12
======== ========
Premiere, as restated
Basic.................................................... $ 0.12 $ 0.19
======== ========
Diluted.................................................. $ 0.11 $ 0.17
======== ========
59
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TeleT Acquisition
On September 18, 1996, the Company purchased substantially all of the assets
and business operations of TeleT Communications LLC ("TeleT") for 498,187
shares of the Company's common stock and approximately $2,870,000 in cash.
TeleT was an Internet-based technology development company focused on the
integration of computers and telephones.
In connection with this acquisition, the Company allocated approximately
$11.0 million of the purchase price to research and development projects which
had not yet reached technological feasibility and had no alternate future use.
This allocation was based on values determined by an independent appraisal.
See also Note 15--Restructuring and Other Special Charges.
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1997 and 1996 assume the acquisitions of the Voice-
Tel Entities accounted for as purchases and TeleT occurred as of January 1,
1996 (in thousands, except per share data).
1997 1996
-------- --------
Revenues.............................................. $231,659 $202,220
Net income (loss)..................................... $(25,730) $ 9,177
Basic net income (loss) per share..................... $ (0.79) $ 0.33
Diluted net income (loss) per share................... $ (0.79) $ 0.29
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 is as follows (in thousands):
1997 1996
-------- -------
Computer and telecommunications equipment............... $ 92,137 $75,993
Furniture and fixtures.................................. 2,123 2,733
Office equipment........................................ 5,476 3,570
Leasehold improvements.................................. 7,199 5,068
Construction in progress................................ 13,926 1,450
-------- -------
120,861 88,814
Less accumulated depreciation........................... 57,284 42,633
-------- -------
Property and equipment, net............................. $ 63,577 $46,181
======== =======
Assets under capital leases included in property and equipment at December
31 are as follows (in thousands):
1997 1996
------- -------
Telecommunications equipment............................. $18,345 $17,305
Less accumulated depreciation............................ 10,867 7,202
------- -------
Property and equipment, net.............................. $ 7,478 $10,103
======= =======
60
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. STRATEGIC ALLIANCES AND INVESTMENTS
Strategic alliances and investments at December 31 is as follows (in
thousands):
1997 1996
-------- -------
WorldCom................................................. $ 29,972 $29,972
Intangible assets........................................ 18,500 --
Less accumulated amortization............................ 1,878 158
-------- -------
46,594 29,814
Equity investments....................................... 5,301 --
-------- -------
$ 51,895 $29,814
======== =======
In November 1996, the Company entered into a strategic alliance agreement
with WorldCom, Inc. (WorldCom), the fourth largest long-distance carrier in
the United States. Under the agreement, WorldCom is required, among other
things, to provide the Company with the right of first opportunity to provide
enhanced computer telephony products for a period of at least 25 years. In
connection with this agreement, the Company issued to WorldCom 2,050,000
shares of common stock valued at approximately $25.2 million (based on an
independent appraisal), and paid WorldCom approximately $4.7 million in cash.
The Company periodically reviews this asset for impairment. Based on such
reviews, management believes that this intangible asset is appropriately
valued. Management will continue to review this intangible periodically, and
there can be no assurance that future reviews will not require a write down of
this asset.
Intangible assets and equity investments classified as strategic alliances
and investments consist of initiatives funded by the Company to further its
strategic plan. These investments and alliances involve emerging technologies,
such as telemedicine and the internet, as well as marketing alliances and
outsourcing programs designed to reduce costs and develop new markets and
distribution channels for the Company's products. Costs classified as
intangible assets are being amortized over seven years which management
believes matches the revenues produced from and periods benefited by the
related programs. All equity investments held by the Company in other
organizations represent a less than 20 percent ownership and are being
accounted for under the cost method.
6. LONG-TERM DEBT
Long-term debt at December 31 is as follows (in thousands):
1997 1996
----- -------
Notes payable to banks, interest ranging from 7% to 9%........... $ 573 $16,796
Notes payable to shareholders and individuals, interest ranging
from 5% to 16%.................................................. 3,130 19,911
----- -------
3,703 36,707
Less current portion............................................. 2,849 16,168
----- -------
$ 854 $20,539
===== =======
Notes payable to shareholders and individuals consist principally of
indebtedness assumed by the Company in connection with the Voice-Tel and
VoiceCom acquisitions. A majority of these obligations were repaid in 1997 in
connection with the acquisitions. The Company issued approximately 484,000
shares to redeem approximately $11,582,000 of such indebtedness in connection
with the acquisitions.
The Company has lines of credit with two banks that provide committed
borrowing facilities aggregating up to $11 million. Interest rates on these
lines of credit are prime and prime plus 2%. Commitment fees under
61
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
these arrangements are not significant. There were no borrowings outstanding
under these arrangements at December 31, 1997.
Maturities of long-term debt are as follows (in thousands):
1998.................................. $2,849
1999.................................. 515
2000.................................. 160
2001.................................. 120
2002.................................. 59
------
$3,703
======
7. 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. Issue
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 note.
8. FINANCIAL INSTRUMENTS
The carrying amount of cash and equivalents, marketable securities, accounts
receivable and payable and accrued liabilities approximates fair value due to
the short maturity of these instruments.
The carrying amounts of notes payable and capital lease obligations does not
vary materially from fair value at December 31, 1997 and 1996.
9. SHAREHOLDERS' EQUITY
On January 18, 1996, the holder of the Series A Preferred Stock elected to
convert all of the shares of the Series A Preferred Stock into 3,095,592
shares of the Company's common stock at $93 per share (presplit). The Series A
Preferred Stock was fully cumulative, and the holders of the shares were
entitled to receive dividends at a rate of 8%. The Company accrued $308,419
and $29,337 of dividends payable, plus accrued interest, if applicable, during
the years ended December 31, 1995 and 1996, respectively. No dividends were
paid during the year ended December 31, 1995, and $676,981 in dividends was
paid during the year ended December 31, 1996.
During 1997 and 1996, stock options were exercised under the Company's stock
option plans. None of the options exercised qualified as incentive stock
options, as defined in Section 422 of the Internal Revenue Code (the "Code").
Approximately $15,262,000 and $6,886,000 were recorded as increases in
additional paid-in capital reflecting tax benefits to be realized by the
Company as a result of the exercise of such options during the years ended
December 31, 1997 and 1996, respectively.
The Company made distributions to shareholders of approximately $9,360,000,
$3,550,000 and $1,480,000 in the years ended December 31, 1997, 1996 and 1995.
These distributions were made to shareholders of Voice-Tel and VoiceCom in
periods prior to their acquisition by the Company. Such distributions
consisted principally of amounts paid to shareholders of S-Corporations in
connection with their responsibility to pay income tax on
62
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the proportionate share of taxable income they were required to include in
their individual income tax return. Upon acquisition by the Company, these S-
Corporations became subject to income tax. Accumulated earnings of S-
Corporations at the date of acquisition have been reclassified as additional
paid-in capital representing the recapitalization of these entities.
In 1995, the Company declared a 24-to-1 stock split on its common stock. In
addition, each outstanding share of Series 1994 Preferred Stock was converted
into one share of Series A Preferred Stock.
10. STOCK BASED COMPENSATION PLANS
The Company has two stock based compensation plans, 1994 Stock Option Plan
and 1995 Stock Plan, which provide for the issuance of options, warrants or
stock appreciation rights to directors, key employees and non-employee
consultants of the Company. These plans are administered by a committee
consisting of members of the board of directors of the Company.
Options for all 960,000 shares of common stock available under 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
1,500,000 shares of common stock have been reserved in connection with the
plan. Options issued under the plan may be either incentive stock options,
which permit income tax deferral upon exercise of options, or nonqualified
options not entitled to such deferral.
As permitted by SFAS No. 123, the Company recognizes stock based
compensation using the intrinsic value method. 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 income (loss) and net income (loss) per share would
have been reduced to the following pro forma amounts:
1997 1996
----------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income (loss):
As Reported........................................... $ (25,375) $ 3,458
Pro forma............................................. (32,399) 2,077
Net income (loss) per share:
As Reported -- Basic.................................. $ (0.78) $ 0.12
-- Diluted............................................ (0.78) 0.11
Pro forma -- Basic.................................... (1.02) 0.07
-- Diluted............................................ (1.02) 0.07
Significant assumptions used in the Black-Scholes option pricing model
computations are as follows:
1997 1996
---------- ----------
Risk-free interest rate........................... 6.30% 6.26%
Dividend yield.................................... 0% 0%
Volatility factor................................. .46 .42
Weighted average expected life.................... 2.10 years 2.34 years
The pro forma amounts reflect options granted since January 1, 1995. Pro
forma compensation cost may not be representative of that expected in future
years.
63
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1994.... 8,470,461 $ 0.39
Granted................................... 5,292,447 1.44
Exercised................................. (5,832,170) 0.43
Forfeited................................. (395,347) 0.45
---------- ------
Options outstanding at December 31, 1995.... 7,535,391 $ 1.07
Granted................................... 1,332,088 18.89
Exercised................................. (1,372,369) 0.51
Forfeited................................. (88,778) 18.03
---------- ------
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
========== ======
The following table summarizes information about stock options outstanding
at December 31, 1997:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WEIGHTED EXERCISE PRICE EXERCISE PRICE
RANGE OF OPTIONS AVERAGE OF OPTIONS OPTIONS OF OPTIONS
EXERCISE PRICES OUTSTANDING REMAINING LIFE OUTSTANDING EXERCISABLE EXERCISABLE
- --------------- ----------- -------------- -------------- ----------- --------------
$ 0--$10 3,236,096 7.48 $ 1.46 1,978,096 $ 1.46
$11--$20 1,286,130 6.95 18.39 543,273 18.54
$21--$30 2,867,250 7.34 24.20 771,416 24.26
$31--$40 23,272 8.73 34.33 8,772 36.86
--------- ---- ------ --------- ------
7,412,748 7.50 $13.29 3,301,557 $ 9.69
========= ==== ====== ========= ======
11. 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 has not made any contributions to the discretionary plans for any of
the periods disclosed in the accompanying financial statements.
12. RELATED-PARTY TRANSACTIONS
The Company has in the past entered into agreements and arrangements with
certain officers, directors and principal shareholders of the Company
involving loans of funds, grants of options and warrants and the acquisition
of a business. Certain of these transactions may be on terms more favorable to
officers, directors and principal shareholders than they could acquire in a
transaction with an unaffiliated party. The Company follows a policy that
requires all material transactions between the Company and its officers,
directors or other affiliates (i) be approved by a majority of the
disinterested members of the board of directors of the Company and (ii) be on
terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
In November 1995, the Company loaned $90,000 with recourse to a certain
officer in connection with the officer's transition from his previous employer
to the Company. This unsecured loan is evidenced by a promissory note bearing
interest at 6.11%, the interest on which is payable beginning in November 1997
and continuing each year until November 1999. Principal is to be repaid in
five equal annual installments, with
64
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accrued interest, commencing in November 2000; however, pursuant to the
officer's employment agreement, the officer may be required to make earlier
payments from certain bonus compensation paid to the officer under such
employment agreement.
In November 1995, the Company loaned a total of $2,338,000 with recourse to
three officers to fund the exercise of stock warrants and options. These loans
were repaid in full in 1996. These loans were evidenced by recourse promissory
notes bearing interest at 6.55%, which were secured by a pledge of the common
stock acquired upon the exercise of the warrants and options. All principal
and accrued interest were to be paid in November 2005; however, if any of the
common stock securing the promissory notes was sold, the net proceeds of such
sale were to be applied to the outstanding principal and interest due under
that promissory note. Additionally, the Company loaned such officers an
additional total amount of $168,220 to assist the officers in paying the
federal and state income taxes associated with the exercise of the warrants
and options which were repaid in full in 1996.
In September 1996, the Company loaned $75,000 with recourse to a certain
officer in connection with the officer's transition from his previous employer
to the Company. This unsecured loan is evidenced by a promissory note bearing
interest at 6.64%, the interest on which is payable beginning in September
1998 and continuing each year until September 2000. Principal is to be repaid
in five equal annual installments, with accrued interest, commencing in
September 2001; however, pursuant to the officer's employment agreement, the
officer may be required to make earlier payments from certain bonus
compensation paid to the officer under such employment agreement.
During 1997, an officer of the Company exercised an option to purchase
100,000 shares of the Company's common stock at an exercise price of $0.27 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.
13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases computer and telecommunications equipment, office space
and other equipment under noncancelable lease agreements. The leases generally
provide that the Company pay the taxes, insurance and maintenance expenses
related to the leased assets. Future minimum operating and capital lease
payments as of December 31, 1997 are as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
------- ---------
1998................................................... $3,701 $ 6,584
1999................................................... 1,914 4,933
2000................................................... 613 3,998
2001................................................... 175 3,129
2002................................................... 13 2,437
Thereafter............................................. -- 10,929
------ -------
Net minimum lease payments............................. 6,416 $32,010
=======
Less amount representing interest...................... 921
------
Present value of net minimum lease payments............ 5,495
Less current portion................................... 3,058
------
Obligations under capital lease, net of current
portion............................................... $2,437
======
65
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense under operating leases was approximately $7,516,000, $8,275,000
and $7,869,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. Future minimum payments for facilities rent are reduced by
scheduled sublease income of approximately $700,000 in 1998. During 1997, 1996
and 1995, additions of computer and telecommunications equipment resulted in
an increase in capital lease obligations of approximately $829,000, $85,000
and $984,000, respectively.
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.
Litigation
On January 21, 1997, two former employees and an affiliate of one of the
former employees filed a complaint against the Company seeking remuneration
for alleged work performed on behalf of the Company. In December 1997, the
Company reached a settlement with one of the claimants. The amount of this
settlement was not material to the Company's financial position. The remaining
plaintiffs are seeking an accounting of commissions allegedly due to them,
options to purchase 72,000 shares of the Company's common stock and reasonable
attorney's fees. Management of the Company believes it has meritorious
defenses to the remaining allegations, but due to the inherent uncertainties
of the litigation process, the Company is unable to predict the outcome of
this litigation and the effect, if any, on its financial position or results
of operations.
On June 28, 1996, AudioFAX IP LLC ("AudioFAX") filed a lawsuit against the
Company alleging that the Company infringed certain patents held by AudioFAX
for enhanced facsimile products. In the third quarter of 1996, the Company
recorded a charge to operations of $1,500,000 for the estimated legal fees and
other costs to resolve this matter. On February 11, 1997, the Company entered
into a long-term, non-exclusive license agreement with AudioFAX settling this
litigation. Costs accrued in the third quarter of 1996 were adequate to cover
the actual costs of litigation. The cost of the license is not expected to
have a material effect on the Company's future results of operations.
On August 6, 1996, Communications Network Corporation ("CNC"), a licensing
customer of the Company, was placed into bankruptcy (the "Bankruptcy Case")
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code").
On August 23, 1996, CNC filed a motion to intervene in a separate lawsuit
brought by a CNC creditor in the United States District Court for the Southern
District of New York against certain guarantors of CNC's obligations and to
file a third-party action against numerous entities, including such CNC
creditor and Premiere Communications, Inc. ("PCI") for alleged negligent
misrepresentations of fact in connection with an alleged fraudulent scheme
designed to damage CNC (the "Intervention Suit"). The District Court has
denied CNC's request to intervene and has transferred the remainder of the
Intervention Suit to the Bankruptcy Judge presiding over the Bankruptcy Case.
Based upon the findings of the bankruptcy examiner and an investigation by the
bankruptcy trustee (the "Trustee") of potential actions directed at PCI,
including an avoidable preference claim of approximately $950,000, the Trustee
and PCI reached a tentative settlement of all
66
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
issues, subject to Bankruptcy Court approval. The terms of the proposed
settlement have been incorporated into a proposed plan of reorganization (the
"Plan") filed by the Trustee, which is also subject to Bankruptcy Court
approval. If only the settlement is approved, PCI will obtain a release from
the Trustee and the Trustee will dismiss the Intervention Suit in
consideration of PCI making a cash payment of $1,200,000 to the Trustee. If
the Plan is subsequently approved, PCI will make an additional cash payment of
up to $300,000 to the Trustee in consideration of PCI obtaining, among other
things, an injunction against possible nuisance suits relating to the CNC
business. The Company has previously taken a reserve for the settlement and
Plan payments. If the settlement is not approved and the Trustee successfully
pursues possible litigation against the Company, it could have a material
adverse effect on the Company's business, operating results or financial
condition.
On November 26, 1997, Wael Al-Khatib ("Al-Khatib"), the sole shareholder and
former president of CNC, and his company, Platinum Network, Corp. ("Platinum")
(Al-Khatib and Platinum are collectively referred to herein as "Plaintiffs"),
filed a complaint against PCI, WorldCom Network Services, Inc. f/k/a WilTel,
Inc., Bernard J. Ebbers, David F. Meyers, Robert Vetera, Joseph Cusick,
William Trower, Don Wilmouth, Digital Communications of America, Inc., Boland
Jones, Patrick Jones, and John Does I-XX in the Eastern District of New York,
United States District Court. Plaintiffs contend that PCI, certain officers of
PCI and the other defendants engaged in a fraudulent scheme to restrain trade
in the debit card market nationally and in the New York debit card sub-market
and made misrepresentations of fact in connection with the alleged scheme. The
Plaintiffs are seeking at least $250 million in compensatory damages and $500
million in punitive damages from PCI and the other defendants. Pursuant to the
local rules of the District Court, PCI has filed a letter stating the reasons
it believes the lawsuit should be dismissed. PCI has also filed a motion for
sanctions under Rule 11 of the Federal Rules of Civil Procedure. PCI believes
that it has meritorious defenses to the Plaintiffs' allegations and will
vigorously defend the same. Due to the inherent uncertainties of the judicial
system, the Company is not able to predict the outcome of this lawsuit. If
this lawsuit is not resolved in PCI's favor, it could have a material adverse
effect on the Company's business, operating results or financial condition.
On September 20, 1996, Peter Lucina ("Lucina") filed a complaint against the
Company, Donald B. Gasgarth ("Gasgarth") and Patrick G. Jones ("Jones") in the
United States District Court for the Eastern District of Illinois. As of
December 3, 1997, the Company, Gasgarth and Jones have entered into a
settlement agreement with Lucina for an immaterial amount settling and
disposing of Lucina's claims in connection with this litigation.
67
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. INCOME TAXES
The difference between the statutory federal income tax rate and the
Company's effective income tax rate applied to income before income taxes was
as follows for the years ended December 31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995
------- ------- -------
Income taxes at federal statutory rate.............. $(9,787) $ 1,951 $ 2,100
State taxes, net of federal benefit................. 276 229 263
Non-deductible merger costs......................... 8,390 -- --
Change in valuation allowance....................... -- 940 (1,123)
S-corporation earnings not subject to corporate
level taxes........................................ (3,117) (1,462) (1,420)
Non-taxable investment income....................... (1,265) (723) --
Establish deferred taxes for non-taxable predecessor
entities........................................... 1,207 -- --
Other, primarily non-deductible expenses............ 884 437 195
------- ------- -------
Income taxes at the Company's effective rate........ $(3,412) $ 1,372 $ 15
======= ======= =======
Components of the Company's income tax provision
(benefit) are as follows:
Current:
Federal........................................... $ -- $ 3,247 $ 208
State............................................. 1,000 598 99
International..................................... 490 42 25
------- ------- -------
1,490 3,887 332
------- ------- -------
Deferred:
Federal........................................... (4,405) (3,303) 100
State............................................. (582) (553) 47
International..................................... 85 1,341 (464)
------- ------- -------
(4,902) (2,515) (317)
------- ------- -------
$(3,412) $ 1,372 $ 15
======= ======= =======
68
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Differences between financial accounting and tax bases of assets and
liabilities which give rise to deferred tax assets and liabilities are as
follows at December 31 (in thousands):
1997 1996
------- -------
Deferred tax assets:
Net operating loss carryforwards......................... $17,715 $ 6,880
In-process research and development...................... 4,302 4,218
Deferred revenue......................................... 1,832 174
Intangibles.............................................. 3,826 3,929
Restructuring and other special charges.................. 11,489 --
Accrued liabilities...................................... 3,082 3,521
Other assets............................................. 449 2,466
------- -------
42,695 21,188
Deferred tax liabilities:
Depreciation and amortization............................ (4,242) (2,097)
Other.................................................... (20) (822)
------- -------
38,433 18,269
Valuation allowance........................................ (8,755) (8,755)
------- -------
Net deferred tax assets.................................... $29,678 $ 9,514
======= =======
The issuances of stock by the Company have resulted in an ownership change
under the Internal Revenue Code. Therefore, the Company's net operating loss
carryforwards could be subject to limitations. Management of the Company has
recorded valuation allowances for deferred tax assets amounts based on their
estimate regarding the 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, 1997, the Company had net operating loss carryforwards for
state and federal income tax purposes of approximately $46,000,000 expiring in
2008 through 2011. Deferred tax benefits of approximately $15 million in 1997
are associated with nonqualified stock option exercises, the benefit of which
was credited directly to additional paid-in capital.
15. RESTRUCTURING AND OTHER SPECIAL CHARGES
In connection with the VoiceCom acquisition, the Company recorded
restructuring and other special charges of approximately $28.2 million in the
third quarter of 1997. Such amounts consisted of transaction costs, asset
impairments, costs to terminate or restructure certain contractual obligations
and other costs. Transaction costs associated with the VoiceCom acquisition
were expensed as required by the pooling-of-interests method of accounting.
Other restructuring and special charges recorded in the third quarter result
principally from management's plan to restructure VoiceCom's operations by
reducing its workforce, exiting certain facilities, discontinuing duplicative
product offerings and terminating or restructuring certain contractual
obligations.
The Company recorded approximately $45.4 million of restructuring and other
special charges in the second quarter of 1997 in connection with the Voice-Tel
Acquisitions. Those charges result from management's plan to restructure the
operations of the Voice-Tel Entities under a consolidated business group model
and discontinue its franchise operations. This initiative involves substantial
reduction in the administrative workforce, abandoning duplicate facilities and
assets and other costs necessary to discontinue redundant business activities.
69
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Restructuring and other special charges against operations for the year
ended December 31, 1997 are as follows (in thousands):
ACCRUED
COSTS
CHARGES TO COSTS DECEMBER 31,
OPERATIONS INCURRED 1997
---------- -------- ------------
Severance............................... $11,881 $ 5,680 $ 6,201
Asset impairments....................... 13,401 2,570 10,831
Restructure or terminate contractual
obligations............................. 17,911 4,557 13,354
Transaction costs....................... 20,015 15,075 4,940
Other costs, primarily to exit
facilities and certain activities...... 10,389 6,601 3,788
------- ------- -------
$73,597 $34,483 $39,114
======= ======= =======
16. STATEMENT OF CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information (in thousands):
1997 1996 1995
------- ------- -------
Cash paid during the year for:
Interest........................................ $ 7,100 $ 4,516 $ 4,570
Income taxes.................................... $ 840 $ 309 $ 61
Cash paid for acquisitions accounted for as purchases are as follows:
1997 1996 1995
------- ------- -------
Fair value of assets acquired................... $19,833 $11,030 $ --
Less liabilities assumed........................ 2,124 100 --
Less common stock issued to sellers............. 2,255 8,060 --
------- ------- -------
Net cash paid................................... $15,454 $ 2,870 $ --
======= ======= =======
17. SUBSEQUENT EVENTS
On February 27, 1998, the Company completed the acquisition of Xpedite
Systems, Inc. In connection the acquisition, the Company issued approximately
11 million shares of its common stock. This transaction will be accounted for
as a pooling-of-interests. Xpedite is a worldwide leader and innovator in the
enhanced fax services business and also provides discounted fax, e-mail,
telex, Internet and mailgram services. Xpedite serves customers who require
high-quality, cost-effective, rapid, and confirmed communications. Xpedite has
developed sophisticated applications in a wide range of industries that enable
customers to deliver common or customized documents to hundreds or thousands
of recipients around the world via fax or electronic mail using Xpedite's
proprietary, private, world-wide document distribution network (the "Xpedite
Network"). Based in Eatontown, New Jersey, Xpedite delivers its document
distribution services over the Xpedite Network, with points of presence in
over 70 cities in approximately 29 countries around the world. The Xpedite
Network includes over 14,500 dedicated lines in addition to complete Internet
access and compatibility to allow for the ability to receive and deliver
messages in whatever format is optimal to ensure timely delivery.
The Company anticipates that it will record restructuring and other special
charges before income taxes in the range of $50 million in connection with the
Xpedite acquisition. Such amount includes charges recorded by Xpedite in the
fourth quarter of 1997 expected by management to be in the range of $20
million before income taxes. These charges result principally from transaction
fees which the Company is required to expense under the pooling of interests
method of accounting, including a $9.5 million transaction "break-up fee" paid
by Xpedite to a company which was party to an unsuccessful attempt to acquire
Xpedite. In addition, such costs result from legal and professional fees and
the write-down of impaired assets and associated costs to exit certain
duplicative facilities and business activities.
70
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.
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.
71
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
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).
72
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 MMP
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
73
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).
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).
74
3.1 Articles of Incorporation (incorporated by reference to Exhibit 3.1 to
the Registrant's Registration Statement on Form S-1 (No. 33-80547)).
3.2 Articles of Amendment to Articles of Incorporation (incorporated by
reference to Exhibit 3.2 to the Registrant's Registration Statement on
Form S-8 (No. 333-29787)).
3.3 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2
to the Registrant's Registration Statement on Form S-1 (No. 33-80547)).
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 Registration Rights Agreement, dated as of April 30, 1997, by and among
the Registrant, those stockholders of Voice-Tel Enterprises, Inc.
("VTE") appearing as signatories thereto, those shareholders of VTN,
Inc. appearing as signatories thereto and those stockholders or other
equity owners of franchisees of VTE that executed adoption agreements
(incorporated by reference to Exhibit 4 to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated April 2, 1997 and filed
April 4, 1997).
4.7 Stock Restriction and Registration Rights Agreement dated as of
September 30, 1997, by and among the Registrant and those shareholders
of VoiceCom Holdings, Inc. appearing as signatories thereto
(incorporated by reference to Exhibit 3 to Exhibit 2.1 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 1997).
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 Employment and Incentive Option Agreement dated
November 6, 1995 between the Registrant and Leonard A. DeNittis
(incorporated by reference to Exhibit 10.13 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547)).***
10.3 Amended and Restated Employment Agreement dated November 6, 1995
between Premiere Communications, Inc. and Leonard A. DeNittis
(incorporated by reference to Exhibit 10.14 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547)).***
10.4 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)).***
10.5 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)).***
10.6 Mutual Release dated December 5, 1997 by and among the Registrant,
Premiere Communications, Inc. and David Gregory Smith.
75
10.7 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)).***
10.8 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)).***
10.9 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)).***
10.10 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)).***
10.11 Promissory Note dated November 17, 1995 payable to the Registrant made
by Patrick G. Jones (incorporated by reference to Exhibit 10.27 to the
Registrant's Registration Statement on Form S-1 (No. 33-80547)).***
10.12 Voice-Tel Enterprises, Inc. Employment Agreement dated April 30, 1997
between Voice-Tel, Inc. and William Welsh (incorporated by reference
to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1997).***
10.13 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)).***
10.14 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)).***
10.15 55 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)).
10.16 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).
10.17 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).
10.18 Second Amendment of Lease dated July 1, 1997, between Premiere
Communications, Inc. and Beverly Hills Center LLC.
10.19 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.
10.20 Sublease Agreement dated as of December 16, 1997, by and between
Premiere Communications, Inc. and Endeavor Technologies, Inc.
10.21 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)).***
10.22 Carrier Agreement dated January 1, 1996 between Premiere
Communications, Inc. and Communications Network Corporation
(incorporated by reference to Exhibit 10.37 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547)).*
76
10.23 Carrier Service Agreement dated August 4, 1995 between Premiere
Communications, Inc. and Cherry Communications Incorporated, as
amended (incorporated by reference to Exhibit 10.38 to the
Registrant's Registration Statement on Form S-1 (No. 33-80547)).*
10.24 Carrier Services Agreement Dated July 12, 1995 between Premiere
Communications, Inc. and Corporate Telemanagement Group, Inc., as
amended (incorporated by reference to Exhibit 10.39 to the
Registrant's Registration Statement on Form S-1 (No. 33-80547)).*
10.25 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)).*
10.26 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. 1 dated
November 1, 1997.**
10.27 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).**
10.28 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).*
10.29 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).
10.30 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).*
10.31 Independent Distributor Agreement dated September 26, 1997, by and
between Registrant and Digitec 2000, Inc. (incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report as Form 10-Q for
the Quarter ended September 30, 1997).
10.32 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)).
10.33 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)).
10.34 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)).***
10.35 Promissory Note dated October 18, 1996 between Premiere
Communications, Inc. and NationsBank, N.A. (South) (incorporated by
reference to Exhibit 10.51 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996).
10.36 Continuing and Unconditional Guaranty Agreement dated October 18,
1996, between Premiere Communications, Inc. and NationsBank, N.A.
(South) (incorporated by reference to Exhibit 10.52 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996).
10.37 Promissory Note dated April 30, 1997 between Premiere Communications,
Inc. and NationsBank, N.A. (South) (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).
10.38 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).
77
10.39 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)).
10.40 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)).
10.41 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)).
10.42 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).
10.43 First Amendment to Premiere Technologies, Inc. Second Amended and
Restated 1995 Stock Plan.
10.44 VoiceCom Holdings, Inc. 1995 Stock Option Plan (assumed by the
Registrant).
10.45 VoiceCom Holdings, Inc. Amended and Restated 1985 Stock Option Plan
(assumed by the Registrant).
11.1 Statement re: Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule for the year ended December 31, 1997.
27.2 Restated Financial Data Schedule for the years ended December 31, 1996
and 1995.
- --------
*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.
**Confidential treatment has been requested. 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.
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PREMIERE TECHNOLOGIES, INC.
BY: /s/ Boland T. Jones
_________________________________
BOLAND T. JONES
CHAIRMAN OF THE
BOARD OF DIRECTORS
AND PRESIDENT
Date: March 27, 1998
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 27, 1998
_________________________________ President (principal
BOLAND T. JONES executive officer)
/s/ Patrick G. Jones Senior Vice President of March 27, 1998
_________________________________ Finance and Legal and
PATRICK G. JONES Secretary (principal
financial and accounting
officer)
/s/ George W. Baker, Sr. Director March 27, 1998
_________________________________
GEORGE W. BAKER, SR.
/s/ Eduard J. Mayer Director March 27, 1998
_________________________________
EDUARD J. MAYER
/s/ Raymond H. Pirtle, Jr. Director March 27, 1998
_________________________________
RAYMOND H. PIRTLE, JR.
/s/ Roy B. Andersen, Jr. Director March 27, 1998
_________________________________
ROY B. ANDERSEN, JR.
79
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
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).
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
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 MMP 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).
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
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).
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).
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
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).
3.1 Articles of Incorporation (incorporated by reference to Exhibit
3.1 to the Registrant's Registration Statement on Form S-1 (No.
33-80547)).
3.2 Articles of Amendment to Articles of Incorporation
(incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-8 (No. 333-29787)).
3.3 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form
S-1 (No. 33-80547)).
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 Registration Rights Agreement, dated as of April 30, 1997, by
and among the Registrant, those stockholders of Voice-Tel
Enterprises, Inc. ("VTE") appearing as signatories thereto,
those shareholders of VTN, Inc. appearing as signatories
thereto and those stockholders or other equity owners of
franchisees of VTE that executed adoption agreements
(incorporated by reference to Exhibit 4 to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated April 2, 1997 and
filed April 4, 1997).
4.7 Stock Restriction and Registration Rights Agreement dated as of
September 30, 1997, by and among the Registrant and those
shareholders of VoiceCom Holdings, Inc. appearing as
signatories thereto (incorporated by reference to Exhibit 3 to
Exhibit 2.1 to the Registrant's Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 1997).
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 Employment and Incentive Option Agreement
dated November 6, 1995 between the Registrant and Leonard A.
DeNittis (incorporated by reference to Exhibit 10.13 to the
Registrant's Registration Statement on Form S-1 (No. 33-
80547)).
10.3 Amended and Restated Employment Agreement dated November 6,
1995 between Premiere Communications, Inc. and Leonard A.
DeNittis (incorporated by reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1 (No. 33-
80547)).
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
10.4 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)).
10.5 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)).
10.6 Mutual Release dated December 5, 1997 by and among the
Registrant, Premiere Communications, Inc. and David Gregory
Smith.
10.7 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)).
10.8 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)).
10.9 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)).
10.10 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)).
10.11 Promissory Note dated November 17, 1995 payable to the
Registrant made by Patrick G. Jones (incorporated by reference
to Exhibit 10.27 to the Registrant's Registration Statement on
Form S-1 (No. 33-80547)).
10.12 Voice-Tel Enterprises, Inc. Employment Agreement dated April
30, 1997 between Voice-Tel, Inc. and William Welsh
(incorporated by reference to Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1997).
10.13 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)).
10.14 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)).
10.15 55 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)).
10.16 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).
10.17 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).
10.18 Second Amendment of Lease dated July 1, 1997, between Premiere
Communications, Inc. and Beverly Hills Center LLC.
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
10.19 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.
10.20 Sublease Agreement dated as of December 16, 1997, by and
between Premiere Communications, Inc. and Endeavor
Technologies, Inc.
10.21 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)).
10.22 Carrier Agreement dated January 1, 1996 between Premiere
Communications, Inc. and Communications Network Corporation
(incorporated by reference to Exhibit 10.37 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547)).*
10.23 Carrier Service Agreement dated August 4, 1995 between Premiere
Communications, Inc. and Cherry Communications Incorporated, as
amended (incorporated by reference to Exhibit 10.38 to the
Registrant's Registration Statement on Form S-1 (No. 33-
80547)).*
10.24 Carrier Services Agreement Dated July 12, 1995 between Premiere
Communications, Inc. and Corporate Telemanagement Group, Inc.,
as amended (incorporated by reference to Exhibit 10.39 to the
Registrant's Registration Statement on Form S-1 (No. 33-
80547)).*
10.25 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)).*
10.26 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. 1 dated November 1, 1997.**
10.27 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).**
10.28 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).*
10.29 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).
10.30 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).*
10.31 Independent Distributor Agreement dated September 26, 1997, by
and between Registrant and Digitec 2000, Inc. (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report
as Form 10-Q for the Quarter ended September 30, 1997).
10.32 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)).
10.33 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)).
10.34 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)).
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
10.35 Promissory Note dated October 18, 1996 between Premiere
Communications, Inc. and NationsBank, N.A. (South)
(incorporated by reference to Exhibit 10.51 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1996).
10.36 Continuing and Unconditional Guaranty Agreement dated October
18, 1996, between Premiere Communications, Inc. and
NationsBank, N.A. (South) (incorporated by reference to Exhibit
10.52 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.37 Promissory Note dated April 30, 1997 between Premiere
Communications, Inc. and NationsBank, N.A. (South)
(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).
10.38 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).
10.39 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)).
10.40 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)).
10.41 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)).
10.42 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).
10.43 First Amendment to Premiere Technologies, Inc. Second Amended
and Restated 1995 Stock Plan.
10.44 VoiceCom Holdings, Inc. 1995 Stock Option Plan (assumed by the
Registrant).
10.45 VoiceCom Holdings, Inc. Amended and Restated 1985 Stock Option
Plan (assumed by the Registrant).
11.1 Statement re: Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule for the year ended December 31, 1997.
27.2 Restated Financial Data Schedule for the years ended December
31, 1996 and 1995.
- --------
* 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.
** Confidential treatment has been requested. 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.