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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, 1996
Commission file number: 0-27778
PREMIERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-3074176
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3399 Peachtree Road, N.E., The Lenox Building, Suite 400, Atlanta, Georgia 30326
(address of principal executive office)
(Registrant's telephone number, including area code): (404) 262-8400
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
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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 17, 1997,
as reported by The Nasdaq Stock Market's National Market, was approximately
$335,008,438.
As of March 17, 1997, there were 24,089,769 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.
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INDEX
PAGE
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PART I
Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 13
Item 3. Legal Proceedings...................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................................... 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 15
Item 6. Selected Financial Data................................................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 18
Item 8. Financial Statements and Supplementary Data............................................ 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 59
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 59
Item 11. Executive Compensation................................................................ 59
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 59
Item 13. Certain Relationships and Related Transactions........................................ 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 60
Signatures...................................................................................... 67
Exhibits........................................................................................ 68
PART I
ITEM 1. BUSINESS
GENERAL
Premiere Technologies, Inc. ("Premiere" or the "Company") is a network-
based computer telephony company specializing in the integration of information
and telecommunications services. The Company delivers its services through its
advanced computer telephony platform, which is accessible from, and provides
access to, a variety of devices, including the telephone, fax machine, pager and
computer. The platform is modular and scalable, with an open-systems design
which allows the Company to quickly customize its services to meet the needs of
its subscribers and business partners and to easily expand system capacity.
The Company's growth to date has been based primarily upon the sale of
Premiere WorldLink Communications Services in both the retail and wholesale
markets. WorldLink services include worldwide long distance calling, voice
mail, fax mail, text-to-voice e-mail, conference calling, financial news,
headline news, sports updates, weather reports, active message notification,
travel and concierge services, electronic banking and bill payment and "call
connect" services. These services have catered primarily to the mobile business
traveler and have been marketed and offered through communications cards. The
Company intends to expand its markets through the development and implementation
of its new Orchestrate(SM) product and network-based call center technology.
The Company's September 1996 acquisition of TeleT Communications LLC
("TeleT"), an Internet-based technology development company, made possible the
development of Orchestrate(SM), which the Company believes will be the first
network-based product to fully integrate the functionality of telephones and
computers. Orchestrate(SM) will allow subscribers to control their
communications through either a computer or telephone, according to their own
preferences independent of how a communication was originally sent. As currently
designed, Orchestrate(SM) functions will include messaging, conference calling,
information services and a personal home page on the World Wide Web (the "Web"),
which subscribers will be able to utilize without the purchase of any special
software or hardware. Premiere intends to launch and implement its
Orchestrate(SM) product during 1997.
Premiere intends to implement its network-based call center technology in
1997, beginning with NationsBanc Services, Inc. ("NationsBanc Services"), an
affiliate of NationsBank Corporation, the nation's fourth largest banking
company. This technology will allow Premiere to streamline and enhance call
processing and distributing for financial institutions and other large
corporations.
Individuals may subscribe to Premiere's WorldLink services through direct
distribution channels or through one of Premiere's co-branded or licensing
relationships. In addition, Premiere has formed strategic relationships with
companies such as DeltaTel, Inc. ("DeltaTel"), a subsidiary of Delta Airlines,
Inc., WorldCom, Inc. ("WorldCom") and CompuServe Incorporated ("CompuServe") in
order to market and expand its services.
Premiere has developed an advanced electronic billing and information
system ("EBIS"), which enables Premiere to monitor and bill transactions based
on a variety of parameters. Individual usage thresholds can be established for
each subscriber and fees can be electronically charged to the subscriber's
credit card or bank account. The EBIS allows Premiere to speed receipt of
funds, monitor spending and fraud controls on a real-time basis and minimize the
number of personnel involved in billing and collection functions.
THE PREMIERE STRATEGY
Premiere's goal is to be the leading network-based computer telephony
company specializing in the integration of telecommunications and information
services. Premiere's strategy for achieving that goal includes the following
key elements:
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Build Subscriber Base. Premiere seeks to increase the number of
subscribers to its services and to retain its subscribers by capitalizing
on existing and creating new strategic marketing relationships, exploiting
its other distribution channels, expanding the range of services available
on its platform, maintaining an attractive pricing strategy for its
services and providing superior customer service. Premiere emphasizes
retaining existing subscribers in order to provide Premiere with a
recurring revenue base.
Develop Additional Services. Premiere intends to launch and implement
its Orchestrate(SM) product and call center technology in 1997 and to
continue developing additional functions and features on its platform.
Premiere believes that relationships with its existing and future strategic
partners will assist it in developing new services. Premiere intends to
make available to its general subscriber base the services it develops in
connection with certain of these strategic partners.
Develop Local Access Capability. Premiere believes that the launch
and implementation of Orchestrate(SM) will place Premiere in a position to
begin developing local access to its services, which should result in
Premiere's services being used more on a daily basis by subscribers,
whether they are at home, in the office or traveling. Orchestrate(SM) is
designed to be a time-saving tool for controlling all of a user's daily
communications. Premiere believes that offering local access at a low flat
rate to its subscribers will be important in developing the market for the
Orchestrate(SM) package and the individual Orchestrate(SM) service
components.
Enter into Strategic Relationships. Premiere believes that its
relationships with strategic partners will continue to be important in
building Premiere's subscriber base. Each strategic partner brings to
Premiere an existing base of prospective users of Premiere's services.
Premiere has sought and established strategic relationships with parties
whose customers are likely to be extensive users of Premiere's services.
Expand Internationally. Premiere believes that there is a large
international market for its services. Premiere currently has subscribers
in more than 100 countries, and its platform currently communicates with
subscribers in 10 languages. In 1996, Premiere opened a data and switching
center in London, England. This data center has allowed Premiere to reduce
the transmission costs associated with system access from many European
locations and to more effectively pursue long term strategic relationships
with European partners. Premiere intends to continue its international
expansion activities in 1997.
Continue Investment in Computer Telephony Platform. Premiere has
developed its platform to be modular and scalable, with an open systems
design and readily available hardware components, thereby allowing its
subscriber base and network traffic to grow without significant upgrades or
changes to existing platform hardware.
Continue Investment in EBIS. Premiere has designed the EBIS to
automate real-time monitoring and billing of subscriber transactions.
Premiere believes that the EBIS reduces overhead requirements by automating
the billing process and enhances cash flow by expediting payment. Premiere
also believes that the EBIS reduces exposure to credit risks, since it
establishes predetermined spending limits for each subscriber, requires a
valid credit card or bank account from each subscriber before commencing
service and bills usage charges directly to the credit card or bank account
of each subscriber. The Company plans to continue its investment in
development and support of the EBIS.
INFORMATION AND TELECOMMUNICATIONS SERVICES
WorldLink Communications Services. Premiere's computer telephony platform
provides subscribers with a single point of access for information and
telecommunications services. The platform can communicate with a wide variety
of communications devices. Subscribers can access the platform from virtually
any telephone worldwide, and access is toll-free from telephones in the United
States and approximately 60 other countries and
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territories. In addition, following the introduction of the Company's
Orchestrate(SM) product, subscribers will be able to access the platform from
any PC connected to the Internet or other available data connections. After
accessing the platform from a telephone, the subscriber is presented with a
variety of options that can be configured in different ways depending upon how
Premiere or its partners position the following services:
Worldwide Long Distance. Subscribers can place worldwide long
distance calls at rates that are generally significantly lower than the
standard card plan rates currently charged by AT&T Corp. ("AT&T"), MCI
Communications Corporation ("MCI"), Sprint Corporation ("Sprint") or in the
case of United Kingdom ("U.K.") subscribers, British Telecom.
Messaging. Premiere offers a universal inbox for voice, fax and e-
mail messages. Subscribers are notified of new messages every time they
access Premiere's platform, and subscribers can receive message
notification through any pager. The messaging services are offered as part
of the Premiere WorldLink Communications Services package, and also through
Premiere's Message Center and E-Mail Message Center services. The
messaging functionality for each of these services is very similar, but the
orientation, prompts and positioning differ considerably. The individual
messaging functions are described below:
Voice Mail. Premiere's voice mail service provides traditional
voice mail features, allowing subscribers to customize their mailbox
greetings and to receive, retrieve, save and delete voice mail
messages.
Fax Mail. The fax mail service allows subscribers to receive and
store facsimile transmissions no matter where they travel. Senders of
facsimile messages may attach a voice mail message identifying the
facsimile. The recipient is able to later instruct the system to
forward the stored facsimiles to a specified location.
E-Mail. E-mail messages can be read to the subscriber over the
telephone using Premiere's advanced text-to-speech functionality. E-
mail messages can also be sent to any fax machine. In addition,
subscribers can respond to e-mail by choosing from a variety of
standard responses.
Information Services. Subscribers can access financial news, headline
news, sports updates, weather reports and other information updates,
provided on the system through a digital feed from a subsidiary of the
Chicago Tribune. These services are frequently updated and the information
is accessible by a series of menus presented to the user via voice prompts.
Information is first presented in a general format, with the subscriber
then being given the option to retrieve more detailed information on the
topic selected.
Conference Calling. Subscribers can initiate conference calls
involving up to four parties. The conference calling feature is automated
and the subscriber is guided through each step.
Enhanced Travel and Concierge Services. Premiere offers travel and
concierge services through its platform which allow subscribers to make
lodging, airline, rental car, dining and golf reservations and to obtain
concert, theater and sporting event tickets. In addition, Premiere's
concierge services provide subscribers with access to travel assistance
services, including emergency medical referrals, legal referrals, tracing
and redirecting lost luggage and pre-trip destination information. A record
of each use by a subscriber of the travel and concierge feature is
maintained so that the subscriber is provided with increasingly efficient
and personalized service.
Electronic Banking and Bill Payment. In connection with its
relationship with Checkfree Corporation ("Checkfree"), Premiere offers
subscribers the option to pay bills electronically through its platform.
-3-
"Call Connect" Service. Premiere offers a service that allows inbound
callers to the platform to send a message to a subscriber's pager informing
the subscriber that the subscriber has an incoming call. The system prompts
inbound callers to identify themselves and records this information. While
the inbound caller waits on the line, the subscriber can then call the
platform and be informed of the identity of the inbound caller. The
subscriber then has the choice of having the platform automatically connect
the two calls or route the original call to voice mail.
Other. Premiere provides its subscribers with other services,
including speed dialing, certain travel services, sequential calling,
operator assistance, detailed transaction statements on demand and detailed
voice prompts, available in 10 languages. In addition, the Company offers
telecommunications services to the hospitality industry. This service,
which was the first offered by the Company, consists primarily of reselling
"0+" long distance services to guests of hotels and motels.
Orchestrate(SM). Premiere intends to launch and implement its
Orchestrate(SM) product during 1997. When accessing the platform from a PC using
the new Orchestrate(SM) functionality, the subscriber will be presented with a
visually rich on-screen interface for control of all communications and
information functions, including:
Messaging. All voice, fax and e-mail messages will be displayed
individually on the subscriber's PC. As currently designed, messages in
the inbox can be viewed and/or listened to (depending upon the type of
message), forwarded to individuals or groups or broadcast, all with the
click of the mouse. This service will include a personal contact database
that will allow subscribers to send or broadcast messages just by clicking
on the names of the appropriate individuals or defined groups in the
database. Messages will be delivered over the Internet as appropriate to
reduce transmission costs. Premiere is also developing a feature that will
allow subscribers to transfer information to the Premiere platform from
other contact databases such as ACT or Microsoft Outlook.
Conference Calling. Subscribers will be able to establish conference
calls simply by clicking on the names of individuals or groups. The
subscriber will be able to control all aspects of the conference call,
including adding, dropping and muting parties on the conference call, all
with a click of the mouse.
Information Services. Subscribers will be able to tap into a spectrum
of customized information services offered in conjunction with content
providers such as Cable News Network, Inc.. The types of information
available would include news, sports updates, stock quotes, weather
reports, airline and hotel information and reservations, banking,
entertainment and other specialized information.
Personal Home Page. Each subscriber will be provided with a personal
home page on the Web. The page will act as a "virtual receptionist,"
presenting contact information and a voice greeting to any Web user. The
Web user will be able to page, fax or send e-mail to the subscriber
directly from this page. The page will be fully customizable and a
subscriber will be able to update his personal home page from any telephone
or any PC connected to the Internet.
As part of the development of Orchestrate(SM), Premiere intends to greatly
enhance the telephone interface to its platform, allowing a user to access the
same set of functions available via the computer. Using voice and/or telephone
keypad commands, a subscriber will be able to send, forward and broadcast
messages to individuals or groups included in his or her personal
Orchestrate(SM) contact database. The subscriber will also be able to set up
conference calls in a similar manner. Upon the introduction of voice recognition
and other enhancements, the platform will offer true "personal assistant" or
"personal agent" functionality.
Call Center Technology. Upon the implementation of its network-based call
center technology during 1997, Premiere's platform will also be used to provide
an outsource solution for call center management. This technology will allow
Premiere to streamline and enhance call processing and call routing for
financial institutions and other large corporations. In a typical financial
services application, such as the one currently being developed for NationsBanc
Services, Premiere's platform will be used to enhance call processing service
for checking, savings and other account information available through toll-free
telephone access.
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Other Services Under Development. The following additional services are
also under development:
Customized On-line Information Access/Content Management. In
connection with the Orchestrate(SM) product, Premiere intends to implement
a feature enabling subscribers to retrieve on demand or at predetermined
intervals selected information from the Internet or on-line service
providers. This feature would allow each subscriber to establish "filter
and forward" criteria specifying the type of information desired. A search
engine would retrieve the information requested and transmit this
information to the platform, notifying the subscriber by page, telephone
call or other means as appropriate. The subscriber can then access the
information through any PC connected to the Internet or from any telephone
by utilizing the text-to-speech capabilities of the system.
Enhanced "Follow Me" Services. Premiere is developing an
application that would allow subscribers to provide callers access to all
of their current home, business, voice mail, facsimile and mobile numbers
via a single number. When a subscriber's Premiere number is called, the
platform would attempt to contact each of the subscriber's other specified
numbers, without the caller having to remember each number or place each
call separately. For example, when a subscriber receives a call, the
platform would attempt to locate the subscriber at a series of
predetermined numbers and page the subscriber if the paging option is
enabled. The platform would allow the caller to leave a voice mail message
if the subscriber is not located.
MARKETING AND DISTRIBUTION
Premiere markets its services through multiple distribution channels that
encompass (i) direct marketing efforts where Premiere is responsible for lead
generation and sales, (ii) co-branded 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, (iii) strategic relationships
where Premiere may develop custom applications for its platform and market its
services jointly with its strategic partners, and (iv) licensing 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 enters into agreements pursuant to which
it agrees to pay commissions to or share revenues with the parties who assist
Premiere in marketing its services.
Premiere intends to employ several different distribution strategies for
Orchestrate(SM). In addition to utilizing the four distribution channels
described above, Premiere plans to market Orchestrate(SM) through Internet
service providers, on-line service providers, on-line content providers and
direct Internet marketing companies. Premiere will generally compensate such
companies through commissions or revenue sharing arrangements.
Direct. Premiere markets its services directly to potential subscribers.
Premiere has supported this marketing effort by implementing a feature on the
system allowing automated account activation, thereby making it easier for
consumers to establish service with Premiere.
Premiere WorldLink. Premiere markets its services under the name
"Premiere WorldLink" through a variety of traditional direct channels,
including advertisements in publications primarily directed at travelers.
In its marketing efforts, Premiere emphasizes the attractive pricing, the
variety of features, the integrated nature and the ease of use of its
service.
AFCOM. Premiere markets its services under the name "AFCOM"
primarily to United States military personnel. Premiere generally markets
the AFCOM service through financial institutions located on military bases.
These financial institutions assist Premiere in marketing its services in
exchange for subscriber and usage based fees paid by the Company to the
financial institutions.
Co-branded Relationships. Premiere has entered into relationships with a
number of other companies, including First of America Bank Corporation, First
National Bank of Chicago, First USA Bank, First Union
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National Bank, KeyBank USA and the Royal Bank of Scotland PLC, under which
Premiere provides its services to customers of those companies. The other
company generally offers its customers access to the Premiere platform via a co-
branded communications card, and Premiere pays subscriber and usage based fees
to the other company with respect to each subscriber who is issued a co-branded
communications card. Premiere believes that companies which enter into co-
branded 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. Communications cards are generally issued under the Premiere
WorldLink name, with the other company also placing its logo on the face of the
card.
Strategic Partners. The Company also markets its services by establishing
strategic relationships with parties whose existing customers have an
anticipated need for the telecommunications and information 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 its subscribers. In
connection with these strategic relationships, communications cards are
generally issued in the name of Premiere's strategic partner and bear a logo and
design of the strategic partner's choosing. The reverse side of the card
generally states that services are provided by Premiere.
Licensing Relationships. Companies such as WorldCom, Unidial Incorporated
and Touch 1 Communications, Inc. have chosen to outsource part or all of their
communications card services to Premiere. Premiere licenses use of its platform
to these companies, which enables them to provide enhanced services to their
customers and to generate additional revenue without developing or investing in
their own infrastructure. The platform's open architecture allows customization
of services for the licensees. For example, licensees generally customize voice
prompts and may choose to offer their users only selected services available on
the platform. Premiere provides licensees with on-line access to the database
containing their customer information and transaction records, thus enabling
licensees to add and delete subscribers and services remotely and control fraud
and credit exposure. Licensees generally provide their own transmission services
and therefore remain responsible for transmitting calls to and from Premiere's
platform. Licensees currently sell the enhanced services via communications
cards issued in their names. Premiere formats the billing records for licensees
and sends the records to licensees electronically. Licensees bill their
customers for the services, and Premiere bills the licensees monthly for access
to the platform based on licensee customer usage. Services to licensees are
generally provided under agreements with 30 to 60 month terms which require the
payment of a minimum monthly fee if specified usage minimums are not met.
STRATEGIC PARTNERS AND ALLIANCES
DeltaTel. Premiere and DeltaTel have entered into an agreement pursuant to
which Premiere provides information and telecommunications services to DeltaTel
subscribers. DeltaTel subscribers receive a communications card, known as the
"DeltaTel Card," that allows them to access services on Premiere's platform.
Premiere has developed certain travel related features in connection with the
Company's relationship with DeltaTel. DeltaTel is marketing the DeltaTel program
by distributing marketing materials to passengers on Delta's flights, sending
information to Delta frequent fliers, placing advertisements in Delta's Crown
Rooms and other means.
CompuServe. Premiere and CompuServe have entered into an agreement for
Premiere to provide information and telecommunications services to parties who
subscribe to Premiere's services through CompuServe, and for CompuServe to make
certain of its services available to Premiere's existing subscribers, strategic
partners and licensees. In connection with the CompuServe agreement, Premiere
developed a feature which allows subscribers to listen to e-mail messages over
the telephone and to send e-mail messages to any fax machine. This feature is
being marketed to CompuServe's subscribers on-line and through direct mailing.
In addition,
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CompuServe Interactive (United Kingdom) is marketing the combined services to
its members in the U.K., which now number in excess of 400,000.
Others. Premiere's other strategic partners include Checkfree, Arch
Nationwide Paging, a division of Arch Communications Group, Inc. ("Arch"),
MobileComm, a wholly owned subsidiary of MobileMedia Corporation ("MobileComm"),
and Paging Network, Inc. ("PageNet").
WorldCom. In November 1996, Premiere entered into a 25-year strategic
alliance agreement with WorldCom which enables WorldCom to couple its voice and
data network with Premiere's advanced, feature-rich platform, which should lead
to new incremental business opportunities for both companies. WorldCom is the
fourth largest long distance carrier in the United States. This agreement
positions Premiere as a preferred provider to WorldCom of network-based computer
telephony technology. In addition, Premiere and WorldCom intend to jointly
market a comprehensive package of services that neither could previously offer
independently.
CALL CENTER RELATIONSHIPS
Premiere intends to market its call center technology to financial
institutions and other large corporations. Premiere has been selected by
NationsBanc Services as its outsource solution for its customer service centers,
which currently receive in excess of 100 million calls per year.
PREMIERE'S COMPUTER TELEPHONY PLATFORM
Premiere designed its computer telephony platform to provide its
subscribers with efficient and reliable service and to be easily expandable as
network usage increases. The modular and scalable 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.
Software. The system is controlled by proprietary application and database
access software that was developed by the Company. Premiere's software is
designed to be versatile and adaptable and to allow the system to be configured
to meet the demands of strategic partners, licensees or individual subscribers.
The Company's software is written in the "C" programming language in
accordance with the Company's open systems development strategy and supports the
Company's modular and scalable network architecture. 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.
Communications and Information Systems Architecture. The platform consists
of a digital telecommunications switch which interfaces with a high speed
client/server network of personal computers. Clients on the network (called
"Telnodes") are controlled by PCs utilizing the Company's proprietary software
(called a "Network Manager"). Servers on the network are responsible for
performing functions requested by the Telnodes and Network Managers and 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 its
services from any PC connected to the Internet. The network architecture is
designed to be modular and scalable. To increase the capacity of the network,
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.
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Incoming calls to Premiere's platform are answered by a Telnode, which
hosts an automated voice response unit operator. Resident on each Telnode is the
specialized software and hardware necessary to allow the Telnode to interact
with, and accept input from, users. For communications card applications, the
system initially prompts subscribers for their access number and personal
identification number. The Network Manager instantly verifies this information
for accuracy by querying the database of subscribers and also verifies that only
one subscriber is connected to the platform using this access number. Once the
subscriber has been identified, the Network Manager instructs the Telnode to
present the subscriber with various options, which the subscriber can access by
responding to voice prompts. If the subscriber chooses one of the enhanced
services, the system software processes the request by directing it to the
appropriate server on the network for fulfillment. If the subscriber chooses to
place an outbound telephone call, the Telnode transmits the call through the
digital central office switch, which is designed to select the least expensive
available routing for the call.
Transmission. Incoming and outgoing communications 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 service 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 will be 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 new point-of-presence ("POP") site in London, England. The London
POP allows Premiere to offer even more competitive rates to customers in the
U.K. and western Europe.
ELECTRONIC BILLING AND INFORMATION SYSTEM
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. 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.
Premiere believes the advantages of its billing system are that it (i)
avoids the delay in payment inherent in paper invoices sent through the mail,
(ii) reduces billing and collection costs, and (iii) helps reduce fraud and bad
debt expense by establishing preset spending maximums for subscribers. The
system architecture of Premiere's EBIS is based on the same modular and scalable
design philosophy used by Premiere in implementing its platform.
During a subscriber's initial session on the Premiere network, the
subscriber is routed to Premiere's service activation center. The subscriber is
then asked by the customer service representative or the system (if the
subscriber's service is being activated by the Company's automated service
activation system) to choose an authorization number (usually subscribers choose
their existing business or home telephone number) and a personal identification
number. The subscriber is also asked to provide a credit card number. The
subscriber is then assigned a preset spending limit. When a subscriber's usage
reaches the preset limit, the EBIS, operating in the background and without
interrupting the subscriber's transaction, attempts to charge this amount to the
subscriber's credit card. If the charge is successful, the EBIS updates the
threshold to a zero balance, and the subscriber may continue the transaction
uninterrupted. If the attempted charge fails, the system suspends service
temporarily, and upon the subscriber's next attempt to access the system, the
system directs the subscriber to customer service. Billing for AFCOM subscribers
operates in a similar manner, except that Premiere establishes an initial
balance, which the EBIS bills against as usage charges are incurred. Once the
initial draft is substantially depleted, the EBIS electronically schedules an
additional draft from the subscriber's bank account on scheduled intervals
(generally coinciding with pay periods).
-8-
RESEARCH AND DEVELOPMENT
Premiere's research and development and engineering personnel are
responsible for developing and supporting Premiere's proprietary software and
enhanced system features. Premiere's research and development strategy is to
focus its efforts on enhancing its proprietary software and to integrate 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, 1996, Premiere employed 29 people in research and
development and engineering positions. Premiere's research and development team
continuously monitors the operation of the computer telephony platform and the
EBIS 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.
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. As of December 31, 1996,
Premiere employed a staff of approximately 69 people in its customer service
department, which is staffed 24 hours per day, seven days per week and is
accessible by a toll-free call. Each member of Premiere's customer service
department is trained in all aspects of customer service in order to enable them
to respond to any service related question raised by a subscriber.
Premiere's platform provides customer service representatives with detailed
information regarding each subscriber and the subscriber's transaction history.
This information is instantly accessible by customer service representatives
from their computer terminals. The real-time monitoring capabilities of the
system assure that subscribers' transaction records retrieved by customer
service representatives are current, even if a subscriber completed a
transaction only moments before contacting the customer service department.
Premiere employs separate personnel who are responsible for technical
support functions. These employees are generally responsible for consulting with
Premiere's strategic partners and licensees regarding technical issues and for
resolving technical issues brought to their attention by the customer service
department.
COMPETITION
The information and telecommunications service industries are 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. Such competition could materially adversely affect the Company's
business, operating results or financial condition.
The Company's competitive strategy is to seek to gain a competitive
advantage by being among the first companies to offer an integrated information
and telecommunications services solution, by being an innovator in the
integrated information and telecommunications services market and by offering
unique and innovative services to its subscribers. The Company intends to
capitalize on strategic relationships with WorldCom, DeltaTel, CompuServe 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 telecommunications and information 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.
-9-
As noted, the Company attempts to differentiate itself from its competitors
in part by offering an integrated suite of information and communications
services accessible from multiple devices. Other providers currently offer each
of the individual services and certain combinations of such services offered by
the Company. The Company's worldwide long distance services and features such as
conference calling compete with services provided by companies such as AT&T, MCI
and Sprint, as well as smaller interexchange long distance providers. The
Company's voice mail services compete with voice mail services provided by
certain regional Bell operating companies ("RBOCs") as well as by independent
voice mail vendors such as Octel Communications Corporation ("Octel"). The
Company's electronic 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.
Although the Company is aware of several companies that are marketing
enhanced calling cards, it is not aware of any major competitor that is
marketing an integrated information and 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 information and telecommunications market
and to attempt to integrate information and telecommunications services,
resulting in greater competition for the Company. In particular, legislation was
signed into law on February 8, 1996 that will allow local exchange carriers,
including the RBOCs, to provide inter-LATA long distance telephone service,
which will likely significantly increase competition for long distance services.
The new legislation also grants the Federal Communications Commission ("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,
operating results or financial condition.
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 local exchange carriers into the long distance market, would not
have a material adverse effect on the Company's business, operating results or
financial condition.
With respect to Orchestrate(SM), Premiere is aware of a number of companies
offering "unified messaging." For example, Octel and Microsoft Corp.
("Microsoft") recently announced "Unified Messenger," which places all voice
mail, e-mail and fax messages in a single mailbox accessible by phone and
computer. Unlike Premiere's network-based solution, many of these companies
offer a premise-based solution whereby vendors integrate equipment with local
area networks and PBX equipment. In addition, over the past few years, the
number of companies offering call center technology has grown dramatically,
primarily in response to major outsource initiatives as well as significantly
lower technology costs. Such increased competition could have a material
adverse effect on the Company's business, operating results or financial
condition.
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 Company's technology. The Company does not have the
contractual right 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.
GOVERNMENT REGULATION
The Company provides both telecommunications and information services. The
terms and conditions under which the Company provides its services are
potentially subject to regulation by the state and federal governments of the
United States. Various international authorities may also seek to regulate the
services provided or to be provided by the Company. With regard to the
Company's telecommunications services, federal laws and
-10-
FCC regulations generally apply to interstate telecommunications, while state
regulatory authorities generally have jurisdiction over telecommunications that
originate and terminate within the same state.
Federal. On February 8, 1996, the President signed into law the
Telecommunications Act of 1996, as amended (the "1996 Act"), which will allow
local exchange carriers, including the RBOCs, to provide inter-LATA long
distance telephone service and which also grants the FCC the authority to
deregulate other aspects of the telecommunications industry. The new
legislation may result in increased competition to the Company from others,
including the RBOCs, and increased transmission costs in the future. The
Company is classified by the FCC as a non-dominant carrier for its common
carrier telecommunications services. The FCC has jurisdiction to act upon
complaints against any common carrier for failure to comply with its statutory
obligations. The FCC also has the authority to impose more stringent regulatory
requirements on the Company and change its regulatory classification. The
Company has applied for and received all necessary authority from the FCC to
provide domestic interstate and international telecommunications service. The
Company has been granted authority by the FCC to provide international
telecommunication services through the resale of switched services of United
States facilities-based carriers. The FCC reserves the right to condition,
modify or revoke such international authority for violations of the Federal
Communications Act or its rules.
Both domestic and international non-dominant carriers must maintain tariffs
on file with the FCC. Although the tariffs of non-dominant carriers and the
rates and charges they specify are subject to FCC review, they are presumed to
be lawful and are seldom contested. In reliance on the FCC's past practice of
allowing relaxed tariff filing requirements for non-dominant domestic carriers,
the Company at one time did not maintain detailed rate schedules for domestic
offerings in its tariffs. The two-year statute of limitations on claims
relating to these tariffs has expired. The FCC recently decided to "forbear"
from requiring that non-dominant interchange carriers file tariffs for their
domestic services. The United States Court of Appeals for the District of
Columbia Circuit, however, has stayed the FCC's decision pending court review.
As an international non-dominant carrier, the Company has always been required
to include, and has included, detailed rate schedules in its international
tariffs. Resale carriers are also subject to a variety of miscellaneous
regulations that, for instance, govern the documentation and verifications
necessary to change a consumer's long distance carrier, limit the use of "800"
numbers for pay-per-call services, require disclosure of operator services and
restrict interlocking directors and management.
As a result of changes made by the 1996 Act, the Company may be subject to
additional regulatory requirements pertaining to its telecommunications and
information services. Although the Company does not believe that these changes
will have a material effect on its business, no assurance can be given at this
time regarding the extent or impact of such changes.
Most importantly, as a non-dominant carrier, the Company will be deemed to
be a "telecommunications carrier" for FCC purposes. As a telecommunications
carrier, the Company will likely be required to contribute to universal service
funds established by the FCC, the states or both. The FCC and the states are in
the process of determining what universal service contribution requirements to
adopt. Further, telecommunications carriers are subject to some minimal
interconnection and network access requirements under the 1996 Act. These
requirements generally require telecommunications carriers to interconnect their
facilities directly or indirectly with the facilities and equipment of other
telecommunications carriers upon request and prohibit them from installing
network features, functions or capabilities that are not accessible to and
usable by persons with disabilities, unless access for persons with disabilities
is not readily achievable.
Moreover, information service providers traditionally have been treated by
the FCC as providing an "enhanced" computer processing service, rather than a
"basic" telecommunications transmission service and, as a result, were thought
to be beyond the FCC's regulatory authority. Most of the Company's business
involves such unregulated enhanced services. Although the 1996 Act continues to
distinguish between unregulated information or enhanced and regulated
telecommunication or basic services, the changes made by the 1996 Act may have
important implications for the providers of unregulated enhanced services.
-11-
The 1996 Act did not directly address the FCC's "access charge" system,
which governs the fees paid by long distance carriers to local telephone
companies to terminate calls over the local telephone network. However, it is
widely agreed that this system must be revised as part of the overall effort to
create competition in the local telephone market, as envisioned by the 1996 Act.
The FCC, therefore, has underway a comprehensive review of its access charge
system. Although the FCC tentatively has concluded not to require enhanced
service providers to pay access charges, this conclusion is somewhat
controversial and the FCC has indicated that it will reconsider it in the
future.
Current proposals to change the universal service support system do not
entail the imposition of universal service fees on enhanced service providers.
However, there can be no guarantee that such fees will not be assessed in the
future. Similarly, individual states may determine that enhanced services
providers should be required to contribute to state universal service funding
mechanisms.
State. The intrastate long distance telecommunications operations of
Premiere are subject to various state laws and regulations, including prior
certification, notification and registration requirements. In certain states,
prior regulatory approval may be required for changes in control of
telecommunications operations. The Company is currently subject to varying
levels of regulation in the states in which it provides "0+" service and "1+"
and card services (which are both generally considered "1+" services by the
states). The vast majority of states require Premiere to apply for
certification to provide telecommunications services, or at least to register or
to be found exempt from regulation, before commencing intrastate service. The
vast majority of the states require Premiere to file and maintain detailed
tariffs listing rates for intrastate service. Many states also impose various
reporting requirements and/or require prior approval for transfers of control of
certified carriers, assignments of carrier assets, including customer bases,
carrier stock offerings and incurrence by carriers of significant debt
obligations. Certificates of authority can generally be conditioned, modified,
canceled, terminated or revoked by state regulatory authorities for failure to
comply with state law and/or the rules, regulations and policies of the state
regulatory authorities. Fines and other penalties, including the return of all
monies received for intrastate traffic from residents of a state, may be imposed
for such violations.
Premiere has made the filings and taken the actions it believes are
necessary to become certified or tariffed to provide intrastate card services to
customers throughout the United States, except in two states. The Company has
received authorization to provide intrastate card services in 44 states and has
applications to provide intrastate card service pending in 4 states. With the
exception of one state in which the Company's application to provide "0+"
service is pending, the Company has received authorization to provide "0+"
service in each state where the Company provides such service. There can be no
assurance that the Company's provision of services in states where it is not
licensed or tariffed to provide such services will not have a material adverse
effect on the Company's business, operating results or financial condition.
Miscellaneous. In conducting its business, the Company is subject to
various laws and regulations relating to commercial transactions, 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"). Because of growth in the
electronic commerce market, it is possible that Congress or individual states
could enact laws regulating the electronic commerce market, or that the Federal
Reserve might revise Regulation E or adopt new rules regarding electronic funds
transfer. It is impossible to predict what effect such new or revised laws,
rules and regulations would have on the Company's business, operating results or
financial condition. 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
The Company's ability to compete is dependent in part upon its proprietary
technology. The Company relies on confidentiality agreements with its employees
and copyright and trade secret laws to protect its technology. Despite these
actions, 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
-12-
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. The Company has one
patent application pending and 13 trademark or copyright registrations pending.
However, the Company currently has no registered trademarks or copyrights.
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.
No assurance can be given that actions or claims alleging trademark, patent
or copyright infringement will not be brought against the Company with respect
to current or future products or services, or that, if such actions 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 services, require the Company to enter into royalty or licensing
agreements, or cause the Company to discontinue use of the challenged tradename
or technology at potential 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.
See the discussion of the AudioFAX litigation under ITEM 3 - LEGAL PROCEEDINGS.
EMPLOYEES
As of December 31, 1996, the Company employed 170 persons on a full-time
basis and two persons on a part-time basis. None of the Company's employees are
members of a labor union or are covered by a collective bargaining agreement.
ITEM 2. PROPERTIES
Premiere leases approximately 30,750 square feet of office space in
Atlanta, Georgia under a lease expiring August 30, 1997. The Company leases an
additional 7,300 square feet of space in Atlanta, Georgia, for the facility that
serves as the Company's primary data and communications center. This lease
expires on December 31, 1998. The Company also leases approximately 7,000
square feet of space in Dallas, Texas for an additional data and communications
center. This lease expires July 31, 2001. In addition, the Company maintains a
single person sales office in Tulsa, Oklahoma and space in London, England for
an additional data and communications center.
-13-
ITEM 3. LEGAL PROCEEDINGS
On January 30, 1996, Eric Bott, E.B. Elliott and Cost Recovery Systems,
Inc. ("CRS") filed a complaint against the Company's wholly-owned subsidiary,
Premiere Communications, Inc. ("PCI" or "Premiere Communications") and the
Company's President, Boland T. Jones, in the Superior Court of Fulton County,
Georgia. In the complaint, the plaintiffs allege that: (i) Mr. Bott, a former
Company employee, is entitled to options to purchase 10,000 shares of common
stock of PCI at $5.00 per share; (ii) Mr. Bott is entitled to a commission equal
to 10% of all revenues that have been and in the future are collected as a
result of the Company's licensing arrangement with one of its customers; (iii)
Mr. Bott is entitled to $7,000 for consulting work allegedly performed for the
Company; (iv) Mr. Bott is entitled to unspecified damages resulting from his
sale in June 1995 of 750 shares of common stock of PCI to an unrelated third
party for an unspecified amount; (v) Mr. Elliott or CRS, an affiliate of Mr.
Elliott, is entitled to options to purchase 5,000 or 10,000 shares of common
stock of PCI at an unspecified exercise price arising out of work allegedly
performed by CRS for the Company; and (vi) CRS is owed an unspecified amount of
commissions from the Company relating to sales of the Company's
telecommunications services by CRS. Subsequent to the filing of the complaint,
the plaintiffs dismissed without prejudice count (iv) above. The plaintiffs
also seek attorneys' fees and unspecified amounts of punitive damages. The
Company filed an answer and counterclaim denying all allegations of the
complaint and asserting various affirmative defenses. Assuming that the
allegations concerning stock options and stock sales relate to the common stock
of Premiere Technologies, Inc., rather than PCI, as alleged, the Company
believes that the share numbers and exercise prices have not been adjusted for
the 24-to-1 stock split effected in December 1995. In this regard, the
plaintiffs filed a motion to add the Company as a defendant and to amend their
complaint to assert their claims against the Company. Adjusting the share
numbers and exercise prices of these options to reflect the 24-to-1 stock split,
the plaintiffs' claims relate to options to purchase up to a total of 480,000
shares of common stock and the alleged exercise price of $5.00 per share with
regard to a portion of such options becomes approximately $0.21 per share. The
plaintiffs' motion was denied on December 17, 1996, and the plaintiffs dismissed
the case without prejudice on January 13, 1997. The plaintiffs filed a new
complaint against the Company on January 21, 1997 setting forth the same
allegations as described above. The Company has filed an answer and
counterclaim denying all allegations of the complaint and asserting various
affirmative defenses and a motion to dismiss with respect to all counts of the
complaint. The Company believes it has meritorious defenses to the plaintiffs'
allegations, but due to the inherent uncertainties of the judicial system, 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, operating results or financial condition.
On June 28, 1996, AudioFAX IP LLC ("AudioFAX") filed a complaint against
the Company and PCI in the United States District Court for the Northern
District of Georgia. In the complaint, AudioFAX alleged that the Company
manufactures, uses, sells and/or distributes certain enhanced facsimile products
which infringe three United States patents and one Canadian patent allegedly
held by AudioFAX. 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. On February 11, 1997, the Company entered into a
long term, non-exclusive license agreement with AudioFAX settling the
litigation.
On August 6, 1996, Communication Network Corporation ("CNC"), a licensing
customer of the Company, was placed into bankruptcy 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 court has not ruled on CNC's request. Based upon
the bankruptcy examiner's findings, the bankruptcy trustee, who has been
substituted for CNC in this action, is investigating the merits of any potential
actions directed at PCI. No actions or suits have been filed by the trustee
against PCI, but the trustee has notified PCI that as one of the potential
claims he is investigating, he intends to assert an avoidable preference claim
under the Bankruptcy Code of an amount up to approximately $800,000. Due to the
inherent uncertainties of the judicial system, the Company is unable to predict
with certainty the outcome of the trustee's investigation and the potential
-14-
litigation. If the outcome of any such litigation is adverse to the Company, 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. In the
complaint, Lucina alleges, among other things, that: (i) in November 1995 he
sold 1,563 shares of the Company common stock to Gasgarth, a former director of
the Company, for $31,260; (ii) Jones offered to "facilitate" the sale; (iii) in
December 1995 the Company filed a registration statement relating to the initial
public offering of its common stock; (iv) prior to his sale of stock to
Gasgarth, neither Gasgarth nor Jones told Lucina that the Company planned an
initial public offering; and (v) the 1,563 shares sold to Gasgarth, adjusted for
the 24-to-1 stock split subsequently effected, was worth $675,216 based on the
Company's initial public offering at $18 per share in March, 1996. In his
complaint, Lucina asserts violations of the Securities Exchange Act of 1934 and
the rules promulgated thereunder, the Illinois Consumer Fraud and Deceptive
Business Practices Act and common law fraud. Lucina seeks the return of 37,512
shares of common stock of the Company, or in the alternative, compensatory
damages in the amount of $975,312 with interest thereon, punitive damages in the
amount of $1 million and costs of the suit, including reasonable attorneys' fees
and other associated costs. The Company has filed an answer to the complaint
denying allegations of the complaint and asserting various defenses. Discovery
is in its initial stages, and no trial date has been set. The Company believes
that it has meritorious defenses to the Lucina complaint; however, due to the
inherent uncertainties of the judicial system, 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,
operating results or financial condition.
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's 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:
1996 HIGH LOW
---- ---- ---
First Quarter (from March 5, 1996)......................... $27.750 $18.000
Second Quarter............................................. 50.000 23.625
Third Quarter.............................................. 35.750 16.000
Fourth Quarter............................................. 31.250 14.500
As of March 17, 1997, there were approximately 148 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.
-15-
On September 18, 1996, the Company issued 498,187 shares of common stock in
connection with the acquisition by the Company of TeleT. 75,000 of such shares
were placed in escrow to secure certain indemnification obligations of the
members of TeleT. The issuance of such shares was exempt from registration
pursuant to Section 4(2) and Regulation D of the Securities Act of 1933, as
amended (the "Securities Act").
On November 13, 1996, the Company issued 2,050,000 shares of common stock
to WorldCom in connection with the Company's entering into of a strategic
alliance agreement with WorldCom. This agreement provides for, among other
things, a long term relationship between the parties under which the Company
became a preferred platform services provider for WorldCom and its subsidiaries
with respect to enhanced calling programs. The issuance of such shares was
exempt from registration pursuant to Section 4(2) and Regulation D of the
Securities Act.
During the year ended December 31, 1996, certain current and former
employees, directors and investors exercised options and warrants to purchase an
aggregate of 1,246,818 shares of common stock at prices ranging from $0.00042
to $1.61 per share in transactions exempt from registration pursuant to Section
4(2) and Rule 701 of the Securities Act.
-16-
ITEM 6. SELECTED FINANCIAL DATA
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
--------------------- ------------- ------------------------------------------
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1994(1) 1994(2) 1995 1996
---------- ---------- ------------- ------------ ------------ ------------
(UNAUDITED)
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Subscriber services....................... $ 844 $ 3,812 $ 5,391 $ 6,592 $ 15,085 $ 36,557
License fees.............................. 0 314 1,748 1,935 5,935 13,777
Other revenues............................ 1,093 1,296 1,181 1,468 1,306 1,745
--------- ---------- --------- --------- ----------- ----------
Total revenues......................... 1,937 5,422 8,320 9,995 22,326 52,079
Cost of Services.............................. 676 2,261 2,796 3,516 7,603 16,711
--------- ---------- --------- --------- ----------- ----------
Gross Margin.................................. 1,261 3,161 5,524 6,479 14,723 35,368
--------- ---------- --------- --------- ----------- ----------
Operating Expenses:
Selling and marketing..................... 1,232 2,116 3,022 3,750 7,267 16,985
General and administrative................ 944 1,486 1,818 2,342 4,460 8,781
Depreciation and amortization............. 91 319 246 420 697 2,255
Charge for purchased research
and development......................... 0 0 0 0 0 11,030
Accrued litigation costs.................. 0 0 0 0 0 1,250
--------- ---------- --------- --------- ----------- ----------
Total operating expenses............... 2,267 3,921 5,086 6,512 12,424 40,301
Operating Income (Loss)....................... (1,006) (760) 438 (33) 2,299 (4,933)
--------- ---------- --------- --------- ----------- ----------
Other Income (Expense):
Interest income........................... 16 27 127 149 283 2,529
Interest expense.......................... (166) (250) (242) (291) (366) (188)
Other, net................................ 0 0 43 43 32 68
--------- ---------- --------- --------- ----------- ----------
Total other income (expense)........... (150) (223) (72) (99) (51) 2,409
--------- ---------- --------- --------- ----------- ----------
Net Income (Loss) Before Income Taxes
and Extraordinary Loss....................... (1,156) (983) 366 (132) 2,248
Provision For (Benefit From) Income Taxes..... 0 0 48 48 330 (1,627)
--------- ---------- --------- --------- ----------- ----------
Net Income (Loss) Before Extraordinary Loss...... (1,156) (983) 318 (180) 1,918 (897)
Extraordinary Loss on Early Extinguishment
of Debt, Net of Tax Effect of $37,880......... 0 0 0 0 0 59
--------- ---------- --------- --------- ----------- ----------
Net Income (Loss)............................. (1,156) (983) 318 (180) 1,918 (956)
Preferred Stock Dividends..................... 0 64 256 320 309 29
--------- ---------- --------- --------- ----------- ----------
Net Income (Loss) Attributable to Common
Shareholders.................................. $ (1,156) $ (1,047) $ 62 $ (500) $ 1,609 $ (985)
========= ========== ========= ========= =========== ==========
Pro Forma Income (Loss) Attributable
to Common Shareholders For Primary
Earnings Per Share(3)......................... $ (1,156) $ (1,047) $ 226 $ (500) $ 1,807 $ (985)
========= ========== ========= ========= =========== ==========
Pro Forma Income (Loss) Per Common
and Common Equivalent Shares(4)
Primary....................................... $ (0.16) $ (0.13) $ 0.01 $ (0.05) $ 0.10 $ (0.05)
========= ========== ========= ========= =========== ==========
Shares Used In Computing Earnings
Per Common and Common Equivalent
Shares(4) (in thousands): Primary............ 7,293 8,164 19,147 10,804 17,529 20,170
========= ========== ========= ========= =========== ==========
BALANCE SHEET DATA (AT PERIOD END):
Working capital............................... $ 482 $ 4,469 $ 4,275 $ 4,275 $ 5,535 $ 69,551
Total assets.................................. 1,574 6,573 7,623 7,623 16,988 140,051
Long term liabilities......................... 1,623 2,112 2,448 2,448 2,513 584
Shareholders' equity (deficit)................ (435) 3,502 3,603 3,603 8,193 124,158
________________
(1) Effective December 31, 1994, the Company changed its fiscal year end from
March 31 to December 31.
(2) Year ended December 31, 1994 data was derived from the nine months ended
December 31, 1994 data and the unaudited interim data for the three months
ended March 31, 1994. The data is presented for comparative purposes and
additional analysis.
(3) Supplementary pro forma earnings per share assuming the conversion of
Series A Preferred Stock and the retirement of notes payable for the year
ended December 31, 1995 are not presented because the effect of the pro
forma adjustments is immaterial.
(4) Pro forma 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 (using the if-converted
method) and from stock options (using the modified treasury stock method).
In addition, common stock and common stock equivalents issued at prices
below the initial public offering price of $18.00 per share within one year
prior to this offering have been included in the calculation (using the
treasury stock method) as if they were outstanding for all periods prior to
this offering, regardless of whether they are dilutive. See Note 2 of
Notes to Consolidated Financial Statements. Fully diluted data is not
presented as the effect is anti-dilutive or immaterial for all periods
presented.
-17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in connection with the Company's
consolidated financial statements and the related notes thereto included
elsewhere herein. Effective December 31, 1994, the Company changed its fiscal
year end from March 31 to December 31.
OVERVIEW
Premiere is a network-based computer telephony company specializing in the
integration of information and telecommunications services. The Company
delivers its services through its advanced computer telephony platform, which is
accessible from, and provides access to, a variety of devices including the
telephone, fax machine, pager and computer. The platform is modular and
scalable, with an open-systems design which allows the Company to quickly
customize its services to meet the needs of its subscribers and business
partners and to easily expand system capacity.
Premiere's revenues consist of: (i) subscriber services from information
and telecommunications services; (ii) license fees from use of its computer
telephony platform by customers of companies that have licensing relationships
with Premiere; and, to a lesser extent, (iii) other revenues, primarily long
distance charges from hospitality services. Subscriber services revenues from
information and telecommunications services, including Premiere WorldLink, AFCOM
and co-branded services, are based primarily on a per minute charge. License
fees are contracted on a long term basis and are generally based on a per minute
charge and, in certain circumstances, a per usage charge. Other revenue charges
are based on long distance rates established by the Company depending upon the
originating location of the call, and other various methods.
Cost of services consists primarily of transmission costs. Licensees
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 the subscriber services, the gross margin from license
arrangements is considerably higher than for subscriber services.
Selling and marketing expenses include commissions to co-branded partners,
strategic partners, financial institutions that promote the Company's AFCOM
services and businesses participating in the hospitality program, the cost of
print advertisements, direct sales force salaries and commissions, travel and
entertainment expenses, bad debt expense and other operating costs related to
the selling and marketing functions.
General and administrative expenses include salaries and benefits (except
for selling and marketing salaries), rent and facility expense, accounting and
audit fees, legal fees, property taxes and other administrative expenses.
Depreciation and amortization includes depreciation of computer and network
operations 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 and the WorldCom strategic alliance contract
intangible, which are amortized over five years and 25 years, respectively.
Premiere electronically bills most subscriber services revenue directly to
the subscriber's credit card or bank account using the EBIS. The Company bills
subscribers at least monthly and in certain instances more frequently if a
particular subscriber exceeds pre-set spending limits. Because substantially
all of the Company's subscriber services are billed electronically through the
EBIS, the Company believes it has shortened the collection
-18-
cycle compared to a traditional 30-day non-electronic billing arrangement.
License fees are generally billed and invoiced on a 30-day basis.
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 Company
periodically reviews the values assigned to long-lived assets, such as property
and equipment and software costs, to determine if any impairments are other than
temporary. Management believes that the long-lived assets in the accompanying
balance sheets are appropriately valued.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship of certain statements of operations items to total revenues.
NINE MONTHS
ENDED YEAR ENDED
--------------- -----------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1994(1) 1995 1996
--------------- --------------- ------------- ---------------
(UNAUDITED)
REVENUES:
Subscriber services.................. 64.8% 66.0% 67.6% 70.2%
License fees......................... 21.0 19.4 26.6 26.5
Other revenues....................... 14.2 14.6 5.8 3.3
----- ----- ----- -----
Total revenues.................... 100.0 100.0 100.0 100.0
COST OF SERVICES......................... 33.6 35.2 34.1 32.1
----- ----- ----- -----
GROSS MARGIN............................. 66.4 64.8 65.9 67.9
----- ----- ----- -----
OPERATING EXPENSES:
Selling and marketing................ 36.3 37.5 32.5 32.6
General and administrative........... 21.9 23.4 20.0 16.9
Depreciation and amortization........ 3.0 4.2 3.1 4.3
Charge for purchased research
and development................... 0.0 0.0 0.0 21.2
Accrued litigation costs............. 0.0 0.0 0.0 2.4
----- ----- ----- -----
Total operating expenses.......... 61.2 65.1 55.6 77.4
OPERATING INCOME (LOSS).................. 5.2 (0.3) 10.3 (9.5)
----- ----- ----- -----
OTHER INCOME (EXPENSE):
Interest income...................... 1.5 1.5 1.3 4.9
Interest expense..................... (2.9) (2.9) (1.6) (0.4)
Other, net........................... 0.5 0.4 0.1 0.2
----- ----- ----- -----
Total other income (expense)...... (0.9) (1.0) (0.2) 4.7
----- ----- ----- -----
NET INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY LOSS............... 4.3 (1.3) 10.1 (4.8)
PROVISION FOR (BENEFIT FROM)
INCOME TAXES............................... 0.6 0.5 1.5 (3.1)
----- ----- ----- -----
NET INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS......................... 3.7 (1.8) 8.6 (1.7)
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET OF
TAX EFFECT OF $37,880...................... 0.0 0.0 0.0 0.1
----- ----- ----- -----
NET INCOME (LOSS)........................... 3.7% (1.8)% 8.6% (1.8)%
===== ===== ===== =====
_____________
(1) Year ended December 31, 1994 data was derived from the nine months ended
December 31, 1994 data and the unaudited interim data for the three months
ended March 31, 1994. The data is presented for comparative purposes and
additional analysis.
-19-
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues increased 133.6% from $22.3 million in the year
ended December 31, 1995 to $52.1 million in the year ended December 31, 1996.
Subscriber services revenues increased 142.4% from $15.1 million in the year
ended December 31, 1995 to $36.6 million in the year ended December 31, 1996,
due primarily to increased revenues from Premiere WorldLink subscriber services.
Revenues from Premiere WorldLink subscriber services increased principally as a
result of response to the Company's print advertising campaign, which was
substantially expanded starting in January 1996, as well as the Company's
entering into additional co-branded relationships. Revenues from AFCOM
subscriber services decreased 11.5% from $8.7 million in the year ended December
31, 1995 to $7.7 million in the year ended December 31, 1996, primarily due to
certain branches of the military modifying their payroll practices to require
direct deposit upon entering active duty. This requirement has resulted in a
reduction in the level of banking activity at certain military financial
institutions with which the Company has marketing arrangements. The Company has
revised its AFCOM marketing strategy to attempt to address this situation.
License fees increased 133.9% from $5.9 million in the year ended December 31,
1995 to $13.8 million in the year ended December 31, 1996, due to both the
establishment of additional licensing relationships and increased revenues from
existing licensees. Other revenues increased 30.8% from $1.3 million for the
year ended December 31, 1995 to $1.7 million for the year ended December 31,
1996. This increase was attributable primarily to non-recurring system design
and development revenues.
On August 6, 1996, CNC, a licensing customer of the Company, was placed
into bankruptcy under Chapter 11 of the Bankruptcy Code. CNC accounted for
19.6% and 5.2% the Company's licensing revenues and total revenues,
respectively, during the year ended December 31, 1996. CNC owed the Company
approximately $627,000 as of December 31, 1996. However, CNC's transmission
provider, WorldCom Network Services, Inc. d/b/a/ WilTel ("WilTel"), is also
obligated to pay this amount to the Company. 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.
Cost of Services. Cost of services increased 119.7% from $7.6 million in
the year ended December 31, 1995 to $16.7 million in the year ended December 31,
1996, but decreased as a percentage of revenues from 34.1% in the year ended
December 31, 1995 to 32.1% for the same period of 1996. The decrease in cost of
services as a percentage of revenues reflects higher margins resulting from
relatively lower per minute transmission costs and the relative increase in
contribution from license fees, which have a lower cost of services because the
licensees bear the cost of call transmission.
Selling and Marketing Expenses. Selling and marketing expenses increased
132.9% from $7.3 million in the year ended December 31, 1995 to $17.0 million in
the year ended December 31, 1996, and decreased as a percentage of revenues from
32.7% to 32.6%. The increase in selling and marketing expenses was due primarily
to greater expenditures on print advertising and other selling and marketing
costs related to the increase in subscribers and revenues, and an increase in
bad debt expense during the fourth quarter of 1996. Despite the increase in bad
debt expense, the Company was still able to maintain selling and marketing costs
as a percentage of revenues consistent with the prior year.
General and Administrative Expenses. General and administrative expenses
increased 95.6% from $4.5 million in the year ended December 31, 1995 to $8.8
million in the year ended December 31, 1996, due primarily to an increased
number of employees and related expenses to support the Company's growth. These
expenses decreased as a percentage of revenues from 20.2% in the year ended
December 31, 1995 to 16.9% for the same period in 1996. This decrease was
attributable primarily to increased operating leverage resulting from higher
revenues.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 230.0% from $697,000 in the year ended December 31, 1995 to
$2.3 million in the year ended December 31, 1996. This increase
-20-
was due to depreciation of additional equipment acquired during the period and
the amortization of the strategic alliance contract intangible.
Charge for Purchased Research and Development. This is a one-time charge
in an amount equal to the estimated value of in-process research and development
projects acquired in the acquisition of TeleT. See Note 3 of Notes to
Consolidated Financial Statements.
Accrued Litigation Costs. This is a one-time charge for the estimated
legal fees and other costs that the Company expected to incur to resolve the
patent infringement suit filed by AudioFAX. On February 11, 1997, the Company
entered into a long term, non-exclusive license agreement with AudioFAX settling
the litigation. The one-time charge was adequate to cover the actual costs of
litigation and the cost of the license agreement is not expected to have a
material effect on the Company's earnings. See Note 11 of Notes to Consolidated
Financial Statements.
Income Taxes. Income taxes decreased from a provision of $330,000 in the
year ended December 31, 1995 to a benefit of $1.6 million in the year ended
December 31, 1996. In the year ended December 31, 1995, the Company's effective
income tax rate was less than the statutory rate due to the use of net operating
loss carryforwards. At December 31, 1996, the Company had a total deferred tax
asset of $11.1 million, principally due to net operating losses for tax purposes
generated upon the exercise by employees of non-qualified stock options which
generated compensation expense for tax purposes in excess of compensation
expense as recorded by the Company in accordance with GAAP. In accordance with
GAAP, the related tax benefit of this deduction was credited to additional paid-
in-capital and accordingly, did not reduce operating tax expense recognized by
the Company.
Net Income (Loss). The Company recognized net income of $1.9 million in
the year ended December 31, 1995 and a net loss of $956,000 in the year ended
December 31, 1996. Excluding the one-time charges for in-process research and
development and accrued litigation costs and the related tax effect, net income
would have increased 242.1% from $1.9 million in the year ended December 31,
1995 to $6.5 million in the year ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
General. Year ended December 31, 1994 data was derived from the nine
months ended December 31, 1994 data and the unaudited interim data for the three
months ended March 31, 1994.
Revenues. Total revenues increased 123.0% from $10.0 million in the year
ended December 31, 1994 to $22.3 million in the year ended December 31, 1995.
Subscriber services revenues increased 128.8% from $6.6 million in the year
ended December 31, 1994 to $15.1 million in the year ended December 31, 1995,
due primarily to increased revenues from both Premiere WorldLink and AFCOM
subscriber services. Revenues from Premiere WorldLink subscriber services
increased principally as a result of response to the Company's print advertising
campaign and additional co-branded relationships. Revenues from AFCOM subscriber
services increased principally due to additional AFCOM marketing relationships
and response to the Company's AFCOM direct mail advertising campaign. License
fees increased 210.5% from $1.9 million in the year ended December 31, 1994 to
$5.9 million in the year ended December 31, 1995, due to both the establishment
of additional licensing relationships and increased revenues from existing
licensees. A marked portion of this increase was due to the Company's
relationship with CNC which accounted for approximately $1.5 million of the
increase in license fees from the year ended December 31, 1995 compared to year
ended December 31, 1994. Other revenues decreased 13.3% from $1.5 million for
the year ended December 31, 1994 to $1.3 million for the year ended December 31,
1995.
Cost of Services. Cost of services increased 117.1% from $3.5 million in
the year ended December 31, 1994 to $7.6 million in the year ended December 31,
1995, but decreased as a percentage of revenues from 35.0% in the year ended
December 31, 1994 to 34.1% for the same period of 1995. The decrease in cost of
services as a percentage of revenues reflects higher margins resulting from
relatively lower per minute transmission costs and
-21-
the relative increase in contribution from license fees, which have a lower cost
of services because the licensees bear the cost of call transmission.
Selling and Marketing Expenses. Selling and marketing expenses increased
92.1% from $3.8 million in the year ended December 31, 1994 to $7.3 million in
the year ended December 31, 1995, and decreased as a percentage of revenues from
38.0% to 32.7%. The increase in selling and marketing expenses was due primarily
to greater expenditures on print advertising and other selling and marketing
costs related to the increase in subscribers and revenues.
General and Administrative Expenses. General and administrative expenses
increased 95.7% from $2.3 million in the year ended December 31, 1994 to $4.5
million in the year ended December 31, 1995 due primarily to an increased number
of employees and related expenses to support the Company's growth. These
expenses decreased as a percentage of revenues from 23.0% in the year ended
December 31, 1994 to 20.2% for the same period in 1995. This decrease was
attributable primarily to increased operating leverage resulting from higher
revenues.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 66.0% from $420,000 in the year ended December 31, 1994 to
$697,000 in the year ended December 31, 1995. This increase was due to
depreciation of additional equipment acquired during the period.
Income Taxes. Income taxes increased from $48,000 in the year ended
December 31, 1994 to $330,000 in the year ended December 31, 1995, reflecting
income taxes payable on the Company's net income in the year ended December 31,
1995, as compared to the Company's net loss in the year ended December 31, 1994.
The Company's effective income tax rate was less than the statutory rate due to
the use of net operating loss carry forwards. At December 31, 1995, the Company
had a deferred tax asset of $2.5 million, principally due to net operating
losses for tax purposes generated upon the exercise by employees of non-
qualified stock options which generated compensation expense for tax purposes in
excess of compensation expense as recorded by the Company in accordance with
GAAP. In accordance with GAAP, the related tax benefit of this deduction was
credited to additional paid-in-capital and accordingly, did not reduce operating
tax expense recognized by the Company.
Net Income (Loss). The Company recognized a net loss of $180,000 in the
year ended December 31, 1994 and net income of $1.9 million in the year ended
December 31, 1995. This increase reflects higher revenues achieved in the year
ended December 31, 1995 for all of the Company's services and the increased
gross margin contribution of license fees compared to the year ended December
31, 1994.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 1994
General. Each of these variations reflect only nine months of operations
in the period ended December 31, 1994, compared to the twelve months ended
December 31, 1995.
Revenues. Total revenues increased 168.7% from $8.3 million in the nine
months ended December 31, 1994, to $22.3 million in the twelve months ended
December 31, 1995. Subscriber services revenues increased 179.6% from $5.4
million in the nine months ended December 31, 1994 to $15.1 million in the
twelve months ended December 31, 1995, primarily as a result of increased
revenues from both Premiere WorldLink and AFCOM subscriber services. Revenues
from Premiere WorldLink subscriber services increased principally as a result of
response to the Company's print advertising campaign and additional co-branded
relationships. Revenues from AFCOM subscriber services increased principally
due to additional AFCOM marketing relationships and response to the Company's
AFCOM direct mail advertising campaign. License fees increased 247.1% from $1.7
million in the nine months ended December 31, 1994 to $5.9 million in the twelve
months ended December 31, 1995 due to both the establishment of additional
licensing relationships and increased revenues from existing licensees. Other
services revenues increased 8.3% from $1.2 million in the nine months ended
December 31, 1994 to $1.3 million in the twelve months ended December 31, 1995.
-22-
Cost of Services. Cost of services increased 171.4% from $2.8 million in
the nine months ended December 31, 1994 to $7.6 million in the twelve months
ended December 31, 1995. As a percentage of revenues, these costs were 33.7% in
the nine months ended December 31, 1994 and 34.1% in the twelve months ended
December 31, 1995. Cost of services remained stable as a percentage of
revenues.
Selling and Marketing Expenses. Selling and marketing expenses increased
143.3% from $3.0 million in the nine months ended December 31, 1994 to $7.3
million in the twelve months ended December 31, 1995, due primarily to
additional expenditures on print advertising. As a percentage of revenues,
selling and marketing expenses were 36.1% in the nine months ended December 31,
1994 and 32.7% in the twelve months ended December 31, 1995.
General and Administrative Expenses. General and administrative expenses
increased 150.0% from $1.8 million in the nine months ended December 31, 1994 to
$4.5 million in the twelve months ended December 31, 1995. As a percentage of
revenues, these expenses were 21.7% in the nine months ended December 30, 1994,
and 20.2% in the twelve months ended December 31, 1995 as a result of increased
operating leverage due to higher revenues.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 183.3% from $246,000 in the nine months ended December 31,
1994 to $697,000 in the twelve months ended December 31, 1995. The increase in
depreciation and amortization expense reflects the shorter period in the nine
months ended December 31, 1994, compared to the twelve months ended December 31,
1995. As a percentage of revenues, depreciation and amortization expense
increased from 3.0% in the nine months ended December 31, 1994 to 3.1% in the
twelve months ended December 31, 1995.
Income Taxes. Income taxes increased 587.5% from $48,000 in the nine
months ended December 31, 1994 to $330,000 in the twelve months ended December
31, 1995, reflecting state income taxes payable on the Company's income in the
nine months ended December 31, 1994. The company's net income for the nine
months ended December 31, 1994 was entirely offset by the Company's net
operating loss carry forward. The Company had an unused net operating loss carry
forward at December 31, 1994 of $1.4 million.
Net Income (Loss). Net income increased 497.5% from $318,000 for the nine
months ended December 31, 1994 to $1.9 million for the twelve months ended
December 31, 1995. This $1.6 million increase in net income reflects the
combination of the Company's increased subscriber services revenues and license
fees, stable gross margins and increased leverage from selling and marketing and
general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $919,000 in the nine
months ended December 31, 1994, provided cash of $730,000 in the year ended
December 31, 1994, $3.1 million in the year ended December 31, 1995 and $12.4
million in the year ended December 31, 1996. Cash provided by operating
activities for the nine months ended December 31, 1994 and the year ended
December 31, 1994, reflects the Company's attainment of a level of operating
revenues sufficient to cover its operating costs due to increased subscribers to
the Company's AFCOM and Premiere WorldLink services and increased revenues from
license fees. The increase in cash provided by operating activities in the year
ended December 31, 1995, as compared to earlier periods, reflects the
acceleration of the growth of the Company's subscriber base during that period
and the relatively greater contribution from license fees with their associated
higher gross margin. The increase in cash provided by operating activities in
the year ended December 31, 1996 reflects the acceleration of the growth of the
Company's subscriber base during the period and increased income from the
investment of the net proceeds from the Company's initial public offering.
The Company's investing activities used cash of $4.3 million in the nine
months ended December 31, 1994, $4.4 million for the year ended December 31,
1994, $2.9 million for the year ended December 31, 1995 and $84.6 million for
the year ended December 31, 1996. The Company's investing activities for the
nine months ended December 31, 1994 and the year ended December 31, 1994
consisted primarily of the investment of $3.5
-23-
million of the proceeds of the Company's sale of Series 1994 Preferred Stock
(which was converted into Series A Preferred Stock in December 1995) and
$819,000 in purchases of property and equipment. Cash used in investing
activities for the year ended December 31, 1995, consisted primarily of
purchases of property and equipment. The Company's investing activities for the
year ended December 31, 1996 consisted primarily of purchases of investments in
the amount of $63.8 million. Additionally, the Company purchased property and
equipment of $13.7 million. The Company also used cash to partially fund certain
acquisitions and strategic alliances during the year ended December 31, 1996.
See Notes 2 and 3 of Notes to Consolidated Financial Statements.
The Company's financing activities used $12,000 in cash in the nine months
ended December 31, 1994, and provided cash of $3.9 million in the year ended
December 31, 1994, $223,000 for the year ended December 31, 1995 and $77.0
million for the year ended December 31, 1996. Cash used in financing activities
for the nine months ended December 31, 1994 reflects principal payments under
capital leases offset by proceeds from subscriptions for common stock. Cash
provided by financing activities for the year ended December 31, 1995 reflects
proceeds from exercises of stock options. Cash provided in the year ended
December 31, 1996 was primarily from the net proceeds of the Company's initial
public offering in March 1996. Additionally, proceeds from the repayment of the
above mentioned subscriptions for common stock also provided cash of $2.4
million in 1996. These sources of cash were partially offset in 1996 by the
repayment of notes payable outstanding at December 31, 1995 as well as payment
of dividends on Preferred Stock. See Notes 2, 4 and 6 of Notes to Consolidated
Financial Statements.
The Company has financed its cash requirements through a combination of
equity and debt financing and, beginning in the nine months ended December 31,
1994, through cash flows from operating activities. In May 1992, the Company
borrowed $1.0 million (the "First Sirrom Note") from Sirrom Capital Corporation
("Sirrom"), an independent lender unaffiliated with the Company, which was used
to fund the Company's operations and for capital expenditures. In December
1993, the Company borrowed an additional $1.0 million from Sirrom (the "Second
Sirrom Note") (the First Sirrom Note and Second Sirrom Note are referred to as
the "Notes"). In connection with entering into the Notes, the Company granted
Sirrom warrants to purchase an aggregate of 568,392 shares of common stock at
$0.042 per share, the terms of which do not require the cancellation or exercise
of the warrants upon repayment of the Notes. The Company used $2.0 million of
the net proceeds of its initial public offering to retire the Notes in March
1996. In January 1994, the Company issued 8% cumulative Series A Preferred
Stock to NationsBanc Capital Corporation ("NationsBanc"), from which it realized
net proceeds of $3.9 million. In connection with the issuance of the Company's
Series A Preferred Stock, all of the Company's outstanding 1993 Preferred Stock
and Debentures were converted into common stock. A portion of the net proceeds
of the Second Sirrom Note and the issuance of the Series A Preferred Stock was
used to fund operations. The Company invested the remainder of the proceeds of
the Second Sirrom Note and the Series A Preferred Stock, amounting to $3.5
million, in short-term interest-bearing securities. On January 19, 1996, the
Company exercised its right to redeem the Series A Preferred Stock from
NationsBanc. On February 1, 1996, NationsBanc elected to convert all of the
Series A Preferred Stock into common stock. Thus, effective February 1, 1996,
all outstanding shares of Series A Preferred Stock were converted into 3,095,592
shares of common stock. In connection with the conversion, the Company paid
NationsBanc $677,000 in accrued but unpaid dividends and interest on the Series
A Preferred Stock during the year ended December 31, 1996. In connection with
the Company's initial public offering, the Company issued 4,570,000 shares of
its $0.01 par value common stock in March 1996. The Company received net
proceeds of $74.6 million after the underwriting discount and expenses of the
offering.
At December 31, 1996, the Company had working capital of $69.6 million.
At December 31, 1995, the Company had working capital of $5.5 million. In
October 1996, the Company established a $5 million line-of-credit with
NationsBank, N.A. to facilitate interim capital equipment financing needs. As
of March 17, 1997, the Company had total borrowings of $4.1 million under the
line-of-credit.
The Company's principal commitments consist of an obligation under a
capital lease for switching equipment, which amounted to $524,000 at December
31, 1996 and $528,000 at December 31, 1995, and the line-of-credit, which had a
balance of $4.1 million as of March 17, 1997. The Company believes that its
current cash balances, other working capital and cash flows from operations will
be sufficient to meet its capital requirements for at least the next 12 months
and for the currently foreseeable future.
-24-
FORWARD-LOOKING STATEMENTS
The Company may from time to time make written or oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission (the "Commission") and its reports to
shareholders. Statements made in this Annual Report, other than those
concerning historical information, should be considered forward-looking and
subject to various risks and uncertainties. Such forward-looking statements are
made based on management's belief as well as assumptions made by, and
information currently available to, management pursuant to "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual results may differ materially from the results anticipated in
these forward-looking statements due to, among other things:
Factors Affecting Operating Results; Seasonality; 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 the unique nature
of strategic relationships into which the Company may enter in the future,
changes in operating expenses resulting from such strategic relationships and
other factors, the continued acceptance of the Company's licensing program, the
financial performance of the Company's licensees, the timing of new service
announcements, market acceptance of new and enhanced versions of the Company's
services, potential acquisitions, changes in legislation and regulation that may
affect the competitive environment for the Company's communications services and
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 information and telecommunications 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 adversely affected.
Intense Competition. The information and telecommunications services
industries are 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. Such competition could materially
adversely affect the Company's business, operating results or financial
condition.
The Company attempts to differentiate itself from its competitors by
offering an integrated suite of information and telecommunications services.
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 such as conference calling compete with
services provided by companies such as AT&T, MCI and Sprint, as well as smaller
interexchange long distance providers. The Company's voice mail services
compete with voice mail services provided by certain RBOCs as well as by
independent voice mail vendors such as Octel. The Company's enhanced travel
services, concierge services, news services and electronic mail services are
competing with services provided by America Online, Prodigy and numerous
Internet service providers. When implemented, the Company's Orchestrate(SM)
product will compete with companies such as Octel, Microsoft, Novell, Inc. and
Lucent Technologies Inc. ("Lucent"). The Company's call center technology will
compete with companies such as AT&T, MCI and Lucent. The Company expects that
other parties will develop and implement information and
-25-
telecommunications service platforms similar to its platform, thereby increasing
competition for the Company's services.
In addition, on February 8, 1996, the President signed into law the 1996
Act that will allow local exchange carriers, including the RBOCs, to provide
inter-LATA long distance telephone service, which will likely significantly
increase competition for long distance services. The new legislation also
grants 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, operating results or financial
condition.
Telecommunication 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 local exchange carriers into the long distance market, would not
have a material adverse effect on the Company's business, operating results or
financial condition.
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 Company's technology. The Company does not have the
contractual right 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.
Ability to Manage Growth; Acquisition Risks. The Company has experienced
substantial growth in recent years. This growth has placed significant demands
on all aspects of the Company's business, including its administrative,
technical and financial personnel and systems. Additional expansion by the
Company may further strain the Company's management, financial and other
resources. There can be no assurance that the Company's systems, procedures,
controls and existing space will be adequate to support expansion of the
Company's operations. The Company'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 technical, administrative,
financial control and reporting systems. If the Company is unable to respond to
and manage changing business conditions, then the quality of the Company'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, the Company is required to add capacity to its computer telephony
platform and its digital central office switch, thus requiring the Company
continuously to attempt to predict growth in its network usage and add capacity
to its switch accordingly. Difficulties in managing continued growth, including
difficulties in predicting the growth in network usage, could have a material
adverse effect on the Company. The Company has grown, and intends to grow, in
substantial part through acquisitions of complementary services, products,
technologies or businesses. The Company acquired substantially all of the
assets and business operations of TeleT in September 1996. There can be no
assurance that the Company will be able to successfully integrate TeleT's
products, technologies, operations, personnel or business, or that once
integrated TeleT's operations will achieve comparable levels of revenue,
profitability or productivity as the Company's operations existing at the time
of the acquisition or otherwise perform as expected. Future acquisitions may
result in potentially dilutive issuances of equity securities, the incurrence of
additional debt, 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 the Company's business, operating
results or financial condition. Future acquisitions also involve numerous
additional risks, including difficulties in the assimilation of the operations,
services, products and personnel of the acquired company, the diversion of
management's attention from other business concerns, entering markets in which
the Company has little or no direct prior experience and the potential loss of
key employees of the acquired company. The Company is unable to predict whether
or when any prospective acquisition candidate will become available or the
likelihood that any acquisition will be completed.
-26-
Technological Change; Dependence on New Services. The computer telephony
market 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 on a timely basis, enhance its software and
its computer telephony platform and successfully compete with products and
services based on evolving or new technology. 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 that the Company expects to
compete for the services offered by the Company are notebook computers equipped
with sound cards, fax modems and cellular modems, portable Internet appliances
which would allow connection to the Internet over wireless networks and personal
digital assistants with enhanced communications features. The Company is also
aware that products currently exist which allow text-to-voice e-mail conversion
and provide "meet me" services, and that several communications companies are
developing or have developed services that would compete with the Company's
proposed "follow me" service by allowing users to have a single telephone number
for all of their communications devices. The Company currently intends to
introduce and market new and enhanced services in 1997, including
Orchestrate(SM) and network-based call center technology. Development of these
services will require the implementation of new technologies and the integration
of these technologies into the Company's platform. There can be no assurance
that 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, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of its services, or that its new services and the
enhancements thereto, 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, operating results or financial condition.
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 has entered into or initiated new strategic relationships with
several companies, including WorldCom, CompuServe Interactive (United Kingdom),
MobileComm and PageNet. 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
effectively market the Company's services. 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 due to the possibility of more costly direct
marketing expenditures by the Company and other factors.
In November 1996 the Company entered into a strategic alliance agreement
with WorldCom, the fourth largest long-distance carrier in the United States, in
which WorldCom is required, among other things, to provide the Company with the
right of first opportunity to provide 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.
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
-27-
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 communication and
information services or canceling their contracts with the Company, any of which
could have a material adverse impact on the Company.
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 26.5% of Premiere's 1996 revenues. One licensee, CNC, accounted
for approximately 19.6% of Premiere's 1996 license fees and approximately 5.2%
of the Company's total 1996 revenues. On August 6, 1996, CNC was placed into
bankruptcy under Chapter 11 of the Bankruptcy Code. CNC owed the Company
approximately $627,000 as of December 31, 1996. However, CNC's transmission
provider, WilTel, is also obligated to pay this amount to the Company. In
addition, WorldCom accounted for approximately 43.5% of Premiere's 1996 license
fees and approximately 11.5% of Premiere's total 1996 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. During
the past 12 months, one licensee, in addition to CNC, ceased doing business with
the Company primarily due to financial difficulties. 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, 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, operating results or financial condition.
Potential Adverse Impact of Pending Litigation. The Company has several
litigation matters pending, which the Company is defending vigorously. See Note
11 of Notes to Consolidated Financial Statements. Due to the inherent
uncertainties of 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, operating results or financial condition.
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, D.
Gregory Smith, Executive Vice President, Gregg S. Freishtat, Senior Vice
President, and Leonard A. DeNittis, Vice President of Engineering and
Operations, and certain other key executives. The loss of services of any of
these individuals could have a material adverse effect upon the Company. Messrs.
Jones, Smith and DeNittis have entered into employment agreements with the
Company which expire in December 1999, and the Company maintains key man life
insurance on each of these persons in the amounts of $3.0 million, $2.0 million
and $2.0 million, respectively.
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
-28-
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.
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 and Dallas,
Texas, and a POP site in 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 designed to be sufficient to continue
operation of the Company's network in the event of a power outage for
approximately four days, upgraded backup hardware and chemical 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, 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 facilities as a whole, thereby resulting in an outage of the
Company's services. Such an outage could have a material adverse effect on the
Company. While the Company has not experienced any downtime of its network due
to natural disasters or similar events, on occasion the Company has experienced
downtime due to various technical failures. When such failures have occurred,
the Company has worked to remedy the failure as soon as possible. The Company
believes that these technical failures have been infrequent. 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 would continue to be available at reasonable
prices, that such insurance would cover all such losses or that such insurance
would be sufficient to compensate the Company for losses it experiences due to
the Company's inability to provide services to its subscribers.
Limited Protection of Proprietary Technology; Risks of Infringement. The
Company relies primarily on a combination of copyright and trade secret laws and
contractual confidentiality provisions to protect its proprietary rights. These
laws and contractual provisions provide only limited protection of the Company's
proprietary rights. The Company has one patent application pending and 13
trademark or copyright registrations pending. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's software or services or to obtain and use information that the
Company regards as proprietary. Although the Company is not aware of any
current or previous infringement on its proprietary rights, there can be no
assurance that the Company's means of protecting its proprietary rights 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 United States.
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 "Premiere 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 a 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. No assurance can be given that actions or claims alleging
trademark, patent or copyright infringement will not be brought against the
Company with respect to current or future products or services, or that, if such
actions 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 services, require the Company to enter into royalty or licensing
agreements or cause the Company to discontinue use of the challenged tradename,
service mark or technology at potential significant expense to the Company
associated with the marketing of a new name
-29-
or the development or purchase of replacement technology, all of which could
have a material adverse effect on the Company.
On June 28, 1996, AudioFAX filed a complaint against the Company and PCI in
the United States District Court for the Northern District of Georgia. In the
complaint, AudioFAX alleged that the Company manufactures, uses, sells and/or
distributes certain enhanced facsimile products which infringe three United
States patents and one Canadian patent allegedly held by AudioFAX. 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. On
February 11, 1997, the Company entered into a long term, non-exclusive license
agreement with AudioFAX settling the litigation.
Dependence Upon Software. The software developed and utilized by the
Company in providing its services may contain undetected errors. Although the
Company 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 software after commencement of use of such software. 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 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.
Dependence Upon Telecommunication Providers; No Guaranteed Supply. The
Company does not own a transmission network and, accordingly, depends on WilTel,
Corporate Telemanagement, Inc. ("CTG"), Cherry Communications, Incorporated
("Cherry"), Sprint and other facilities-based and non-facilities based carriers
for transmission of its subscribers' long distance calls. For the year ended
December 31, 1996, WilTel, CTG, Cherry and MCI were responsible for carrying
traffic representing approximately 38%, 29%, 13% and 2%, respectively, of the
minutes of long distance transmissions billed to the Company. Further, the
Company is dependent upon local exchange carriers for call origination and
termination. In October 1995, a carrier utilized by the Company to originate
calls experienced a regional network outage due to Hurricane Opal. The Company's
losses due to this outage were approximately $37,000, all of which, less a
$5,000 deductible, was reimbursed by the Company's insurance carrier. In
September 1995, a provider utilized by the Company to originate calls
experienced a regional network outage due to a technical malfunction caused by a
third party vendor performing software maintenance on the provider's network.
The Company estimated its losses at approximately $17,000 due to this outage.
This loss was not covered by the Company's insurance. Although the Company's
originating providers are generally able to reroute the Company's inbound calls
within several hours of an outage, rerouting was not possible in these instances
due to the widespread nature of the outages. 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 because of
interruptions of service at terminating carriers, but no assurance can be made
in this regard with respect to 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 local exchange carriers in originating
and terminating service for its subscribers in a timely manner. A partial or
total failure of the Company's 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.
Regulation. Various regulatory factors may have an impact on the Company's
ability to compete and on its financial performance. The Company is subject to
regulation by the FCC and by various state public service and public utility
commissions. Federal and state regulations and regulatory trends have had, and
may have in the future, both positive and negative effects on the Company and on
the information and telecommunications service industries as a whole. FCC
policy currently requires interexchange carriers to provide resale of the use of
their transmission facilities. The FCC also requires local exchange carriers to
provide all interexchange carriers with equal access to the origination and
termination of calls. If either or both of these requirements were removed, the
Company could be adversely affected. These carriers may experience disruptions
in service due to factors outside the Company's control, which may cause the
Company to lose the ability to complete its subscribers' long distance
-30-
calls. The Company has made all filings with the FCC necessary to allow the
Company to provide interstate and international long distance service. In order
to provide intrastate long distance service, the Company is generally required
to obtain certification to provide telecommunications services from the public
service or public utility commissions of each state, or to register or be found
exempt from registration by such commissions. Premiere has made the filings and
taken the actions it believes are necessary to become certified or tariffed to
provide intrastate card services to customers throughout the United States,
except in two states, Alaska and Hawaii, which have historically had
restrictions making the cost prohibitive in light of the immaterial amount of
intrastate traffic the Company handles in those states. This, however, has
recently changed and the Company anticipates authorization to occur in 1997. To
date, the Company has not been denied any licenses or tariffs. The Company has
received authorization to provide intrastate card services in 44 states, and its
applications to provide intrastate card services are pending in 4 states. With
the exception of one state, New Mexico, in which the Company's application to
provide "0+" service is pending, the Company has received authorization to
provide "0+" service in each state where the Company provides such service. The
Company's platform does not prevent subscribers from using the platform to make
intrastate long distance calls in any state, including states in which the
Company has not received approval to provide intrastate long distance services.
There can be no assurance that the Company's provision of intrastate card
services and "0+" service in states where it is not certified or tariffed to
provide such services will not have a material adverse effect on the Company's
business, operating results or financial condition.
On February 8, 1996, the President signed into law the 1996 Act which will
allow local exchange carriers, including the RBOCs, to provide inter-LATA long
distance telephone service and which also grants the FCC authority to deregulate
other aspects of the telecommunications industry. The new legislation may result
in increased competition to the Company from others, including the RBOCs and
increased transmission costs in the future. In addition, the Company may be
subject to additional regulatory requirements and fees as a result of changes
made by the 1996 Act.
In conducting various aspects of 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. Given the expansion of the electronic commerce
market, the Federal Reserve might revise Regulation E or adopt new rules for
electronic funds transfer affecting users other than consumers. Congress has
held hearings on whether to regulate providers of services and transactions in
the electronic commerce market, and it is possible that Congress or individual
states could enact laws regulating the electronic commerce market. 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,
operating results or financial condition.
Risks Associated with International Expansion. A key component of the
Company's strategy is its planned expansion into international markets. In
1996, the Company opened a POP site in London, England and the Company intends
to pursue long term strategic relationships with European partners. The Company
also intends to establish Telnodes and Network Managers in New Zealand, Canada
and potentially other countries in 1997. If international revenues are not
adequate to offset the expense of establishing and maintaining these
international operations, the Company's business, operating results or financial
condition could be materially adversely affected. To date, the Company has only
limited experience in marketing and distributing its services internationally.
There can be no assurance that the Company will be able to successfully
establish the proposed international Telnodes and Network Managers, or to
market, sell and deliver its services in these markets. In addition to the
uncertainty as to the Company'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, which could have a material adverse effect on the performance of
the Company's international operations. There can be no assurance that one or
more of such factors will not have a material adverse effect on the Company's
future international operations and, consequently, on the Company's business,
operating results or financial condition.
-31-
Risk of Loss From Returned Transactions; Fraud; Bad Debt; Theft of
Services. The Company utilizes two principal financial payment clearance
systems: the Federal Reserve's Automated Clearing House ("ACH") for electronic
fund transfers and the national credit card systems for electronic credit card
settlement. In its use of these established payment clearance systems, the
Company generally bears credit risks similar to that 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 the Company's network and obtained services without rendering payment
to the Company by unlawfully utilizing the access numbers and PINs of authorized
users. No assurance can be given that future losses due to unauthorized use of
access numbers and PINs will not be material. The Company attempts to manage
these risks through its internal controls and proprietary billing system. The
Company's computer telephony platform prohibits a single access number and PIN
from establishing multiple simultaneous connections to the platform, and the
Company establishes preset spending limits for each subscriber. Past experience
in estimating and establishing reserves, and the Company's historical losses are
not necessarily accurate indications of the Company's future losses or the
adequacy of the reserves established by the Company in the future. Although the
Company believes that its risk management and bad debt reserve practices are
adequate, there can be no assurance that the Company's risk management practices
or reserves will be sufficient to protect the Company from unauthorized or
returned transactions or thefts of services which could have a material adverse
effect on the Company's business, operating results or financial condition.
Volatility of Stock Price. There may be significant volatility in the
market price for the common stock. The Company believes factors such as actual
or anticipated quarterly fluctuations in financial results, changes in earnings
estimates by securities analysts and announcements of material events by the
Company, its major strategic partners or licensees or its competitors may cause
the market price for the common stock to fluctuate, perhaps substantially.
These fluctuations, as well as general economic conditions, may have a material
adverse effect on the market price of the common stock. In addition, in recent
years the stock market in general, and technology-related stocks in particular,
have experienced price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of companies.
The Company cautions that such factors are not exclusive. The Company does
not undertake to update any forward-looking statement that may be made from time
to time by, or on behalf of, the Company.
-32-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Public Accountants.............................................................. 34
Consolidated Balance Sheets as of December 31, 1995 and 1996.......................................... 35
Consolidated Statements of Operations for the nine months ended December 31, 1994
and for the years ended December 31, 1995 and 1996.................................................. 36
Consolidated Statements of Shareholders' Equity for the nine months ended
December 31, 1994 and for the years ended December 31, 1995 and 1996................................ 37
Consolidated Statements of Cash Flows for the nine months ended December 31, 1994
and for the years ended December 31, 1995 and 1996.................................................. 38
Notes to Consolidated Financial Statements............................................................ 39
-33-
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,
1995 and 1996 and the related consolidated statements of operations,
shareholders' equity and cash flows for the nine months ended December 31, 1994
and for the years ended December 31, 1995 and 1996. 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, 1995 and 1996 and the results of their
operations and their cash flows for the nine months ended December 31, 1994 and
for the years ended December 31, 1995 and 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 11, 1997
-34-
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
ASSETS 1995 1996
------------- --------------
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 1,981,144 $ 6,800,057
Investments......................................................................... 3,515,782 67,333,688
Accounts receivable (less allowance for doubtful accounts
of $107,613 and $609,769, respectively)......................................... 3,013,185 4,743,304
Due from related parties............................................................ 276,477 127,444
Prepaid expenses and other.......................................................... 497,746 2,283,944
Deferred tax asset.................................................................. 2,533,403 3,571,938
------------- --------------
Total current assets.......................................................... 11,817,737 84,860,375
------------- --------------
PROPERTY AND EQUIPMENT................................................................. 5,734,992 19,775,141
Less: accumulated depreciation..................................................... (980,943) (3,001,941)
------------- --------------
Net property and equipment.................................................... 4,754,049 16,773,200
------------- --------------
OTHER ASSETS:
Deferred software development costs, net............................................ 78,105 507,221
Due from related parties............................................................ 100,672 189,618
Deferred tax asset.................................................................. 0 7,566,401
Strategic alliance contract intangible, net (Note 2)................................ 0 29,814,143
Other............................................................................... 237,099 340,151
------------- --------------
$16,987,662 $140,051,109
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................... $ 849,584 $ 4,172,542
Accrued payroll..................................................................... 357,345 1,036,866
Accrued transmission................................................................ 1,325,094 496,210
Accrued sales taxes................................................................. 780,661 993,829
Accrued bonuses..................................................................... 15,000 138,671
Accrued construction costs.......................................................... 883,850 1,445,517
Other accrued expenses.............................................................. 887,726 3,725,470
Unearned revenue.................................................................... 352,541 452,618
Current portion of capital lease obligation......................................... 172,422 286,642
Dividends payable on preferred stock................................................ 647,644 0
Notes payable....................................................................... 10,500 2,560,500
------------- --------------
Total current liabilities..................................................... 6,282,367 15,308,865
------------- --------------
LONG TERM LIABILITIES:
Notes payable....................................................................... 1,915,192 11,543
Obligation under capital lease...................................................... 355,160 237,692
Deferred tax liability.............................................................. 242,216 334,520
------------- --------------
Total long term liabilities................................................... 2,512,568 583,755
------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Series A convertible, redeemable 8% cumulative preferred stock, $0.01 par value;
5,000,000 shares authorized, 128,983 and 0 shares issued and outstanding,
respectively, converted to common stock......................................... 3,906,500 0
Common stock, $0.01 par value; 150,000,000 shares authorized, 12,367,920 and
24,011,777 shares issued and outstanding, respectively........................ 123,679 240,118
Additional paid-in-capital.......................................................... 7,237,795 125,785,798
Subscriptions receivable............................................................ (2,436,703) 0
Stock warrants outstanding.......................................................... 243,760 0
Accumulated deficit................................................................. (882,304) (1,867,427)
------------- --------------
Total shareholders' equity.................................................... 8,192,727 124,158,489
------------- --------------
$16,987,662 $140,051,109
============= ==============
The accompanying notes are an integral part of these consolidated balance
sheets.
-35-
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1994 1995 1996
------------- ------------- -------------
REVENUES:
Subscriber services............................. $5,391,184 $15,084,985 $36,556,688
License fees.................................... 1,747,942 5,934,587 13,777,335
Other revenues.................................. 1,181,014 1,306,366 1,745,315
------------- ------------- -------------
Total revenues............................... 8,320,140 22,325,938 52,079,338
COST OF SERVICES.................................... 2,796,332 7,602,511 16,710,820
------------- ------------- -------------
GROSS MARGIN........................................ 5,523,808 14,723,427 35,368,518
------------- ------------- -------------
OPERATING EXPENSES:
Selling and marketing........................... 3,022,203 7,266,998 16,985,235
General and administrative...................... 1,817,708 4,460,561 8,780,604
Depreciation and amortization................... 245,687 696,898 2,255,253
Charge for purchased research and development... 0 0 11,030,000
Accrued litigation costs........................ 0 0 1,250,000
------------- ------------- -------------
Total operating expenses..................... 5,085,598 12,424,457 40,301,092
OPERATING INCOME (LOSS)............................. 438,210 2,298,970 (4,932,574)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income................................. 127,177 283,082 2,529,197
Interest expense................................ (242,561) (366,034) (188,340)
Other, net...................................... 42,750 32,062 68,641
------------- ------------- -------------
Total other income (expense)................. (72,634) (50,890) 2,409,498
------------- ------------- -------------
NET INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY LOSS.................... 365,576 2,248,080 (2,523,076)
PROVISION FOR (BENEFIT FROM) INCOME
TAXES........................................... 47,529 330,486 (1,626,541)
------------- ------------- -------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS............................................ 318,047 1,917,594 (896,535)
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT,
NET OF TAX EFFECT OF $37,880.................... 0 0 59,251
------------- ------------- -------------
NET INCOME (LOSS)................................... 318,047 1,917,594 (955,786)
PREFERRED STOCK DIVIDENDS........................... 256,000 308,419 29,337
------------- ------------- -------------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS............................. $ 62,047 $ 1,609,175 $ (985,123)
============= ============= =============
PRO FORMA INCOME (LOSS) ATTRIBUTABLE
TO COMMON SHAREHOLDERS FOR
PRIMARY EARNINGS PER SHARE...................... $ 225,614 $ 1,807,382 $ (985,123)
============= ============= =============
PRO FORMA INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARES:
Primary......................................... $0.01 $0.10 $(0.05)
============= ============= =============
SHARES USED IN COMPUTING EARNINGS PER
COMMON AND COMMON EQUIVALENT
SHARES (in thousands): Primary................. 19,147 17,529 20,170
============= ============= =============
The accompanying notes are an integral part of these consolidated statements.
-36-
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
SERIES A
(FORMERLY
SERIES STOCK TOTAL
1994) ADDITIONAL SUBSCRIP- WARRANTS ACCUMU- SHARE-
PREFERRED COMMON PAID-IN TIONS OUT- LATED HOLDERS'
STOCK STOCK CAPITAL RECEIVABLE STANDING DEFICIT EQUITY
------------ --------- ------------- ------------ ------------ ------------ -------------
BALANCE, March 31, 1994........... $ 3,906,500 $ 59,678 $ 1,959,717 $ (114,110) $ 243,760 $(2,553,526) $ 3,502,019
Subscriptions receivable
payments received............... 0 0 0 39,359 0 0 39,359
Dividends on preferred stock...... 0 0 0 0 0 (256,000) (256,000)
Net income........................ 0 0 0 0 0 318,047 318,047
------------ --------- ------------- ------------ ------------ ------------ -------------
BALANCE, December 31, 1994........ 3,906,500 59,678 1,959,717 (74,751) 243,760 (2,491,479) 3,603,425
Subscriptions receivable
on loans to shareholders........ 0 55,523 2,306,429 (2,361,952) 0 0 0
Issuance of common stock.......... 0 8,478 349,976 0 0 0 358,454
Income tax benefit from
exercise of stock options....... 0 0 2,621,673 0 0 0 2,621,673
Dividends on preferred stock...... 0 0 0 0 0 (308,419) (308,419)
Net income........................ 0 0 0 0 0 1,917,594 1,917,594
------------ --------- ------------- ------------ ------------ ------------ -------------
BALANCE, December 31, 1995........ 3,906,500 123,679 7,237,795 (2,436,703) 243,760 (882,304) 8,192,727
Conversion of Series A
Preferred Stock to common
stock........................... (3,906,500) 30,956 3,875,544 0 0 0 0
Conversion of stock warrants
to common stock................. 0 6,265 237,520 0 (243,760) 0 25
Subscriptions receivable on
loans to shareholders........... 0 0 0 2,436,703 0 0 2,436,703
Issuance of common stock:
Initial public offering......... 0 45,700 74,571,348 0 0 0 74,617,048
TeleT Communications LLC........ 0 4,982 7,495,018 0 0 0 7,500,000
Strategic alliance contract
intangible...................... 0 20,500 25,174,000 0 0 0 25,194,500
Income tax benefit from
exercise of stock options....... 0 0 6,886,091 0 0 0 6,886,091
Exercise of stock options......... 0 8,036 308,482 0 0 0 316,518
Dividends on preferred stock...... 0 0 0 0 0 (29,337) (29,337)
Net loss.......................... 0 0 0 0 0 (955,786) (955,786)
------------ --------- ------------- ------------ ------------ ------------ -------------
BALANCE, December 31, 1996........ $ 0 $240,118 $125,785,798 $ 0 $ 0 $(1,867,427) $124,158,489
============ ========= ============= ============ ============ ============ =============
The accompanying notes are an integral part of these consolidated statements.
-37-
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1994 1995 1996
-------------- ------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $ 318,047 $ 1,917,594 $ (955,786)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................................... 245,687 696,898 2,255,253
Amortization of note discount.................................... 30,779 47,369 8,677
Non-recurring charges............................................ 0 0 12,280,000
(Loss) gain on sale of assets.................................... (47,729) 6,180 17,672
Provision for (benefit from) income taxes........................ 0 330,486 (1,626,541)
Loss on early extinguishment of debt............................. 0 0 97,131
Changes in assets and liabilities:
Accounts receivable, net..................................... (233,738) (2,387,451) (1,730,119)
Prepaid expenses and other................................... 5,917 (597,513) (1,981,554)
Accounts payable............................................. (378,893) 653,940 3,222,958
Accrued expenses............................................. 976,234 2,320,441 680,299
Unearned revenue............................................. 2,879 123,381 100,077
-------------- ------------- ---------------
Total adjustments........................................ 601,136 1,193,731 13,323,853
-------------- ------------- ---------------
Net cash provided by operating activities................ 919,183 3,111,325 12,368,067
-------------- ------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments, net............................................ (3,510,963) (14,819) (63,817,906)
Purchase of property and equipment, net................................. (819,207) (3,503,771) (13,705,386)
Acquisition of TeleT Communications LLC................................. 0 0 (2,870,000)
Strategic alliance contract intangible.................................. 0 0 (4,777,303)
Increase in accrued construction costs.................................. 0 883,850 561,667
Due from related parties, net........................................... (58,597) (231,647) 60,087
Software development costs.............................................. (7,431) 0 0
Proceeds from sale of equity securities................................. 97,729 0 0
-------------- ------------- ---------------
Net cash used in investing activities.................... (4,298,469) (2,866,387) (84,548,841)
-------------- ------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net............................. 0 0 74,617,048
Proceeds from payments of subscriptions receivable...................... 39,359 0 2,436,703
Proceeds from exercises of stock options................................ 0 358,454 316,542
Payment of dividends on preferred stock................................. 0 0 (676,981)
Principal payments under capital lease obligation....................... (51,608) (135,776) (234,168)
Principal payments on notes payable..................................... 0 0 (9,457)
Proceeds from issuance of line-of-credit................................ 0 0 2,550,000
Early extinguishment of debt............................................ 0 0 (2,000,000)
-------------- ------------- ---------------
Net cash (used in) provided by financing activities...... (12,249) 222,678 76,999,687
-------------- ------------- ---------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS......................................................... (3,391,535) 467,616 4,818,913
CASH AND CASH EQUIVALENTS, beginning of period............................. 4,905,063 1,513,528 1,981,144
-------------- ------------- ---------------
CASH AND CASH EQUIVALENTS, end of period................................... $ 1,513,528 $ 1,981,144 $ 6,800,057
============== ============= ===============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................................. $ 211,782 $ 299,465 $ 178,463
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Property purchased under a capitalized lease............................ $ 132,512 $ 299,586 $ 230,920
Stock issued for subscriptions receivable............................... $ 0 $ 2,361,952 $ 0
Equity issued for TeleT Communications LLC.............................. $ 0 $ 0 $ 7,500,000
Equity issued for strategic alliance contract intangible................ $ 0 $ 0 $ 25,194,500
NON-CASH TRANSACTIONS:
Assets acquired with TeleT Communications LLC acquisition............... $ 0 $ 0 $ 627,225
Liabilities assumed with TeleT Communications LLC acquisition........... $ 0 $ 0 $ 100,000
The accompanying notes are an integral part of these consolidated statements.
-38-
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
1. ORGANIZATION AND NATURE OF BUSINESS
Premiere Technologies, Inc. (the "Company" or "Premiere") was incorporated
in Florida in July 1991. On December 18, 1995, Premiere merged into a wholly
owned Georgia subsidiary in order to effect a reincorporation from Florida to
Georgia (the "Reincorporation Merger"). The Company's principal business
operations are carried out through its wholly owned subsidiary, Premiere
Communications, Inc. ("PCI" or "Premiere Communications"), which was organized
in October 1991 and began operations in January 1992. Through Premiere
Communications, the Company provides a comprehensive, integrated suite of
information and telecommunications services to a wide range of users. The
Company delivers its services through its computer telephony platform, which
provides users with a single, user-friendly point of access to the Company's
services. The platform is accessible from virtually any telephone in the world
and is also designed to communicate with PCs, facsimile machines and pagers.
The Company's proprietary software, together with the modular and scalable
architecture and open-systems design of the platform, enables the Company to
customize its services at the individual subscriber level and to easily expand
system capacity.
The Company acquired substantially all of the assets and business
operations of TeleT Communications LLC ("TeleT") on September 18, 1996 through
its wholly owned subsidiary, PTEK Acquisition Corporation (the "Sub"), which was
formed in 1996. The Sub was subsequently merged into Premiere Communications on
December 31, 1996. Additionally, on November 13, 1996 the Company acquired all
of the outstanding shares of EBIS Communications, Inc. that it did not already
own. See Note 3 - Acquisitions.
The Company issued 4,570,000 shares of its $0.01 par value common stock in
an initial public offering in March 1996. Proceeds to the Company, net of the
underwriting discount and expenses of the offering, were $74,617,048.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
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
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.
PRESENTATION
Certain prior years' data presented in the consolidated financial
statements have been reclassified to conform with the current year presentation.
The Company declared a 24-to-1 stock split through the declaration of a stock
dividend for each share of common stock outstanding on December 18, 1995. All
references to the number of common shares and per share amounts have been
restated to reflect the effect of the split.
In connection with the Reincorporation Merger, the designation of the
Series 1994 preferred stock was changed to Series A preferred stock.
-39-
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 CASH EQUIVALENTS
For financial reporting purposes, cash and cash equivalents includes cash
on hand and highly liquid money market investments.
INVESTMENTS
The Company follows the Financial Accounting Standards Board 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, 1995 and 1996, investments consisted
of commercial paper, United States Treasury bills with maturities within 90
days, municipal bonds, coupon municipals, auction rate preferred investments
with various maturities and other 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, 1995 or 1996.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciation is provided
for using 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 years for computer 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. Accrued construction costs consist of payables
and accruals related to property, equipment and leasehold improvements under
construction.
DEFERRED CHARGES
The Company has capitalized costs related to the development of proprietary
software which is licensed to other long-distance carriers and which is used
internally for processing communications card calls. 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 capitalized software costs
by the greater of (a) the ratio that current gross revenues for a product bear
to the total of current and anticipated future gross revenues for that product
or (b) the straight-line method over the remaining estimated life of the
product, including the period being reported on. It is reasonably possible that
those estimates of anticipated future gross revenues, the remaining economic
life of the product or both will be reduced significantly in the near term due
to competitive pressures. Additionally, as part of the TeleT acquisition, the
Company recorded software development costs for technologically feasible in-
process research and development. The valuation of this acquired developed
software was $500,000 as of the date of the acquisition, based on an independent
appraisal. The total accumulated amortization for all capitalized software
development was $109,652 and $180,536 at December 31, 1995 and 1996,
respectively.
-40-
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LONG-LIVED ASSETS
In 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. The effect of adopting SFAS No. 121 was not material.
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment, software costs and intangibles, to determine
whether any impairments are other than temporary. Management believes that the
long-lived assets in the accompanying balance sheets are appropriately valued.
In November 1996 the Company entered into a strategic alliance agreement
with WorldCom, the fourth largest long-distance carrier in the United States, in
which WorldCom is required, among other things, to provide the Company with the
right of first opportunity to provide 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. As required by SFAS No. 121, this intangible has been reviewed
for possible impairment based on events or changes in circumstances that
indicate the carrying value may not be recoverable. Based on such review,
management believes that this intangible asset is appropriately valued. This
intangible will be reviewed periodically, and there can be no assurance that
future reviews will not require a write down of this asset.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB" No. 25"). Effective in 1995, the Company adopted the
disclosure option of SFAS No. 123, "Accounting for Stock-based Compensation."
SFAS No. 123 requires that companies which do not choose to account for stock-
based compensation as prescribed by the statement, shall disclose the pro forma
effects on earnings and earnings per share as if SFAS No. 123 had been adopted.
Additionally, certain other disclosures are required with respect to stock
compensation and the assumptions used to determine the pro forma effects of SFAS
No. 123. See Note 9 - Stock Options, Warrants and Benefit Plans.
REVENUE RECOGNITION
The Company recognizes revenues when services are provided. Subscriber
services revenues consist of services related to the Company's communications
cards, including Premiere WorldLink, AFCOM and co-branded cards. Subscriber
services revenues are based primarily on per minute charges. License fees
represent charges to companies which have license relationships with the Company
for the use of the Company's computer telephony platform. License fees are
contracted on a long term basis with each licensee and are generally based on a
per minute charge and, in certain circumstances, a per service charge.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." In accordance with this statement, deferred income taxes are
recorded using enacted tax laws and rates for the years in which the taxes are
expected to be paid. Deferred income taxes are provided for items when there is
a temporary difference in recording such items for financial reporting and
income tax reporting. See Note 12 - Income Taxes.
-41-
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PRO FORMA NET INCOME (LOSS) PER SHARE
Primary net income (loss) per share is computed under the modified treasury
stock method using the weighted average number of shares of common stock and
dilutive common stock equivalent shares ("CSEs") from stock options outstanding
during the period, at the weighted average market value of stock prices during
the period. For periods prior to the Company's initial public offering,
earnings per share was calculated pursuant to Securities and Exchange Commission
Staff Accounting Bulletins. Under the modified treasury stock method, proceeds
from the exercise of CSEs consist of the exercise price of the CSEs, as well as
the related income tax benefit to the Company. CSE proceeds are assumed to be
applied first to repurchase up to 20% of the Company's common stock and then to
repay outstanding long term indebtedness. Any remaining CSE proceeds are
assumed to be invested in United States government securities.
In determining the Company's primary net income (loss) per share under the
modified treasury stock method, net income (loss) per share applicable to common
shareholders has been adjusted on a pro forma basis to reflect the decrease in
interest expense related to a capitalized lease obligation and to notes payable
outstanding during the period. To the extent that excess proceeds from the
assumed exercise of outstanding options and tax benefits from the assumed
exercise were in excess of the capitalized lease obligation and the notes
payable, an increase in interest income related to the investment of such excess
proceeds in United States government securities is reflected in adjusted net
income per share applicable to common shareholders. The pro forma net interest
adjustment to primary net income (loss) per share under the modified treasury
stock method was $198,207 for the year ended December 31, 1995. For the year
ended December 31, 1996, earnings per share was not calculated under the
modified treasury stock method as the results were anti-dilutive.
Fully diluted net income per common and common equivalent shares is
computed by including convertible instruments which are not CSEs in the weighted
average per share calculation (using the modified treasury stock method) at
period-end market value of stock prices. To the extent that the convertible
securities are anti-dilutive, they are not included in the fully diluted net
income (loss) per common and common equivalent shares. To the extent that
period-end market value of stock prices is less than the average market value
for the period, then the average market value is used for fully diluted net
income (loss) per common and common equivalent shares. For all periods
presented, the inclusion of convertible securities in the fully diluted
calculation are anti-dilutive. Accordingly, fully diluted earnings per share
data is not presented.
REGULATION
The Company is subject to regulation by the FCC and by various state public
service and public utility commissions. As an international presence is
established, the Company will be subject to regulation by various other
regulatory agencies.
SOURCE OF SUPPLIES
The Company does not own a transmission network and, accordingly, relies on
both facilities-based and non-facilities based long distance carriers and other
companies to provide transmission of its subscribers' long-distance calls.
Although management feels that alternative telecommunications facilities could
be found in a timely manner, disruption of these services for more than a brief
period would have an adverse effect on operating results. During 1995 and 1996,
certain carriers utilized by the Company experience regional network outages.
The effect of these outages on the Company was not material.
-42-
PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DEPENDENCE ON LICENSING 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 26.6% and 26.5% of Premiere's 1995 and
1996 revenues, respectively. One licensee, Communications Network Corporation
("CNC"), accounted for approximately 25.3% of Premiere's year ended 1995 license
fees and approximately 6.7% of the Company's total 1995 revenues. CNC accounted
for approximately 19.6% of Premiere's 1996 license fees and approximately 5.2%
of the Company's total 1996 revenues. On August 6, 1996, CNC was placed into
bankruptcy under Chapter 11 of the Bankruptcy Code. CNC owed the Company
approximately $627,000 as of December 31, 1996. However, CNC's transmission
provider, WorldCom Network Services, d/b/a WilTel ("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 11.5%
of the Company's total 1996 revenues.
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. During
the past 12 months, one licensee, in addition to CNC, ceased doing business with
the Company primarily due to financial difficulties. Licensees that ceased
doing business with the Company 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 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, operating results or 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 and Dallas, Texas, and a point-of-presence ("POP")
site in 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 sufficient to continue operation of the Company's
network in the event of a power outage for four days, upgraded backup hardware
and chemical 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, 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 the facilities as a whole, thereby
resulting in an outage of the Company's services and having a material adverse
effect on the Company.
FACTORS IMPACTING FUTURE SUCCESS
The future success of the Company is dependent upon a number of factors,
including the effect of rapid technological changes affecting the markets for
Premiere's products and services and management's ability to effectively respond
to those changes, including the development, implementation, marketing and
support of new or improved products and services to respond to the changing
environment; the success of Premiere's marketing arrangements, including its
strategic and licensing relationships with various parties including WorldCom;
the effects of intense competition in information and telecommunications
services markets, including, among other things, the consequent effects on the
prices that Premiere may charge for its products and services; the outcome of
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PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
pending litigation; the risks of potential claims of trademark, patent or
copyright infringement from competitors and other parties, including the expense
of defending claims that Premiere may consider unmeritorious; management's
ability to integrate the operations of TeleT, which was acquired in September
1996, or the operations of any other entity that Premiere may acquire in the
future without, among other things, incurring unexpected obligations or
experiencing unexpected management distractions; the effects in connection with
any potential acquisition of the write-off of acquisition expenses, the write-
off of software development costs and the amortization of expenses related to
goodwill and other intangible assets; Premiere's ability to expand successfully
internationally; the effect of regulatory changes in the telecommunications
industry; and the risk of dependence on key managerial personnel. In addition,
the market price of Premiere's stock may from time to time be significantly
volatile as a result of, among other things: Premiere's operating results; the
operating results of other information and telecommunications companies; future
issuances by Premiere of securities, including options to purchase its stock;
and changes in the performance of the stock market in general.
3. ACQUISITIONS
On September 18, 1996, the Company, through the Sub, acquired substantially
all of the assets and business operations of TeleT for: (i) 498,187 shares of
the Company's $0.01 par value common stock (the "Shares"), for which $4,982 was
recorded to common stock and $7,495,018 was recorded to additional paid-in-
capital, (ii) $2,870,000 in cash and (iii) the assumption of approximately
$100,000 in liabilities (the "Acquisition"). TeleT is an Internet-based
technology development company focused on applications that create an
interchange between telephone and computer resources. The Acquisition was made
pursuant to an Asset Purchase Agreement dated as of September 18, 1996 by and
among the Company, the Sub, TeleT and the Members of TeleT. The Company
financed the cash portion of the purchase price from working capital.
An aggregate of 75,000 of the Shares were placed in escrow pursuant to an
Escrow Agreement among the Company and the Members of TeleT to secure certain
indemnification obligations of those Members. All Shares issued are subject to
Lock-up Agreements prohibiting the sale of such Shares for a weighted average
period of one year following the closing of the Acquisition. Pursuant to the
Acquisition, the Company granted registration rights to the holder of 320,833 of
the Shares. The registration rights are subordinate to the lock-up restrictions
applicable to such Shares. Also pursuant to the Acquisition, Premiere entered
into Employment Agreements with the two senior executives of TeleT.
In connection with the Acquisition, the Company allocated $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. The
technology acquired in the acquisition of TeleT required substantial additional
development by the Company.
This Acquisition has been accounted for under the purchase method of
accounting and the results of TeleT's operations since the Acquisition date have
been included with those of the Company.
The table below reflects the historical results of the Company and the
historical results of the Company and TeleT, as adjusted for pro forma purchase
accounting adjustments to reflect additional depreciation and amortization of
acquired software, and the related pro forma income tax effects of the
adjustments. The charge for purchased research and development has been
excluded from the pro forma results of operations since it has no continuing
effect on operations. Pro forma results for fiscal year 1995 are not presented
as the pro forma results do not differ materially from the historical results of
the Company. These pro forma amounts are provided for informational purposes
only and are not necessarily indicative of what actually would have occurred if
the
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PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
acquisition had occurred at the beginning of the period presented. In addition,
they are not intended to be projections of future results and do not reflect any
synergies that might be achieved from combined operations.
For the Year Ended December 31, 1996
--------------------------------------
Historical As Adjusted
---------- -----------
Revenues $ 52,079 $ 2,330
Net income (loss) $ (956) $ 5,277
Earnings (loss) per share $ (0.05) $ 0.24
4. SUBSCRIPTIONS RECEIVABLE
The founders of the Company purchased their shares of common stock by
giving the Company a total of $150,000 in non-recourse, non-interest-bearing
notes, of which $50,000 were short term and $100,000 were due no later than June
30, 1999 (The "Founders Notes"). In addition, in November 1995, certain
officers gave to the Company full-recourse notes to finance the exercise of
stock options (the "1995 Notes"). See Note 11 - Commitments and Contingencies.
These notes were paid in full subsequent to the initial public offering in March
1996. The outstanding principal and accrued interest balance of $2,436,703 of
the Founders Notes and the 1995 Notes was reflected as a reduction to
shareholders' equity at December 31, 1995.
5. PROPERTY AND EQUIPMENT
Balances of major classes of property and equipment and the related
accumulated depreciation at December 31, 1995 and 1996 were as follows:
1995 1996
--------------- ----------------
Computer equipment $3,263,658 $ 8,046,543
Furniture and fixtures 247,283 1,053,036
Office equipment 147,778 1,057,785
Leasehold improvements 455,862 4,287,253
Construction in progress 883,850 1,450,329
--------------- ----------------
4,998,431 15,894,946
Less accumulated depreciation (725,603) (2,437,763)
--------------- ----------------
Property and equipment, net $4,272,828 $13,457,183
=============== ================
The assets under capital leases included in property and equipment in the
balance sheets at December 31, 1995 and 1996 were as follows:
1995 1996
--------------- ----------------
Telecommunications equipment $ 736,561 $3,880,195
Less accumulated depreciation (255,340) (564,178)
--------------- ----------------
Property and equipment, net $ 481,221 $3,316,017
=============== ================
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PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. NOTES PAYABLE
Pursuant to a loan agreement dated May 26, 1992, the Company borrowed
$1,000,000 from a small business investment company ("SBIC"). The loan was
scheduled to mature in May 1997, with interest accruing at 12.5%. On December
23, 1993, the Company borrowed an additional $1,000,000 from the same SBIC. The
additional loan was scheduled to mature in December 1998, with interest accruing
at 12%. The loans were secured by accounts receivable, contract rights, chattel
paper and general intangibles. In connection with the original loan, the
Company issued to the SBIC 424,392 stock warrants at $0.042 per share. The fair
value of the stock at the date of the transaction was estimated by the Board of
Directors to be $0.042 per share. Accordingly, the Company discounted the note
by $159,147 resulting in an effective interest rate of 17.3%, In December 1993,
the Company issued to the SBIC 144,000 stock warrants at $0.042 per share in
conjunction with the additional loan. The fair value of the stock at the date
of the transaction was estimated by the Board of Directors to be $0.54 per
share. The loan was discounted by $72,000 resulting in an effective interest
rate of 13.0%. Stock warrants of $231,147 are included in stock warrants
outstanding in the accompanying balance sheets at December 31, 1995. Both of
these loans were repaid subsequent to the Company's initial public offering.
The previously mentioned stock warrants were exercised during the year ended
December 31, 1996, thus the balance of the loans and the stock warrants at
December 31, 1996 was $0.
In October 1996, the Company established a $5 million unsecured revolving
line-of-credit (the "Facility") with NationsBank, N.A. to facilitate interim
long term capital equipment financing needs. The interest rate, at the option
of the Company, is prime, adjusted daily, or LIBOR plus 1.75%, adjusted every
30, 60 or 90 days. The Company elected the LIBOR option, for which the rate was
6.625% at December 31, 1996. Interest is payable monthly and principal at
maturity, which is September 30, 1997. Fees associated with the Facility were
$3,000. There is an additional commitment fee of 0.125% on the unused
availability of the Facility, which is payable quarterly. As of March 17, 1997,
the Company had total borrowings of $4.1 million under the Facility.
7. FINANCIAL INSTRUMENTS
In 1995, the Company adopted SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet.
The carrying amount of cash and investments approximates fair value because
their maturity is generally less than one year in duration.
The fair value of notes payable and capital lease obligations was
determined using valuation techniques that considered cash flows discounted at
current rates. The fair value of notes payable as of December 31, 1995 was
$1,933,187, as compared to the recorded value of $1,915,192. This note was paid
in full during 1996 thus the carrying value was $0 at December 31, 1996. During
the year ended December 31, 1996, a line-of-credit was established and the fair
value was $2,550,000 at the end of the year. The fair value of the line-of-
credit approximates its carrying value as of December 31, 1996. The fair value
of the capital lease obligation approximates its carrying value at December 31,
1995 and 1996.
8. SHAREHOLDERS' EQUITY
In connection with the Reincorporation Merger, each outstanding share of
common stock was converted into one share of $0.01 par value common stock of the
Georgia corporation, and each outstanding share of the Series 1994 Preferred
Stock was converted into one share of Series A Preferred Stock. Premiere
thereafter declared
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PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
a 24-to-1 stock split through the declaration of a 23 share common stock
dividend for each share of common stock outstanding on December 18, 1995.
On January 18, 1996, the Company notified the holder of the Series A
Preferred Stock of the Company's intention to redeem the preferred stock and the
holder elected to convert all of the shares of the Series A Preferred Stock into
3,095,592 shares of $0.01 par value common stock at $93 per share (pre-split).
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 year ended December 31, 1995 and 1996, respectively. The dividends were
payable annually on March 31, commencing on March 31, 1995. All accrued but
unpaid dividends accrue interest after each annual dividend date at a rate of
8%. No dividends were paid during the year ended December 31, 1995 and $676,981
in dividends were paid during the year ended December 31, 1996.
During 1995 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").
Accordingly, common stock and additional paid-in-capital increased from the
proceeds of the exercises totaling $64,001 and $2,656,405, respectively, for the
year ended December 31, 1995, and $8,035 and $308,481, respectively, for the
year ended December 31, 1996. Additionally, $2,621,673 and $6,886,091 were
recorded as an increase in additional paid-in-capital due to the tax benefit to
be realized by the Company as a result of the exercise of such options during
the years ended December 31, 1995 and 1996, respectively.
9. STOCK OPTIONS, WARRANTS AND BENEFIT PLANS
1994 STOCK OPTION PLAN
In March 1994, the Board of Directors adopted a stock option plan under
which 960,000 shares of common stock were available to be granted (the "1994
Stock Option Plan") to employees, consultants, and others rendering services to
the Company. Options for all of such shares had been granted as of December 31,
1995. Options granted under the 1994 Stock Option Plan are not incentive stock
options ("ISOs") as defined in Section 422 of the Code. The 1994 Stock Option
Plan is administered by a stock option plan committee (the "1994 Stock Option
Plan Committee") consisting of the president of the Company and two members of
the Board of Directors selected by the president.
The stock option agreements governing options granted under the 1994 Stock
Option Plan provide for an exercise price equal to the fair market value at the
date of the option grant as determined by the 1994 Stock Option Plan Committee
and generally vest ratably over the three years following the grant date.
Generally, the options are nontransferable.
The Company has granted nonqualified options and warrants to purchase
common stock to officers, directors and key employees of the Company as well as
to other individual third parties rendering services to the Company. The
exercise price of the options granted to date has been at the market value of
the shares on the date of grant, which prior to a public trading market for the
Company's common stock was determined by the Board of Directors based upon
arm's-length trade information and other analysis. Generally, the options vest
over three years and expire eight years from the date of grant.
1995 STOCK PLAN
The Board of Directors has adopted, and the Company's shareholders have
approved, the Premiere Technologies, Inc. 1995 Stock Plan (the "1995 Stock
Plan"), the primary focus of which is to provide an incentive to key employees
who are in a position to make significant contributions to the Company. Under
the 1995 Stock
-47-
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Plan, the stock plan committee of the Board (the "1995 Stock Plan Committee")
has discretion to award stock options, Stock Appreciation Rights ("SARs") and
restricted stock to employees. A total of 1,500,000 shares of common stock has
been reserved for issuance pursuant to the exercise of options or the grant of
restricted stock awards. Options may be either ISOs, which permits the deferral
of taxable income related to the exercise of such options, or nonqualified
options not entitled to such deferral.
The 1995 Stock Plan is administered by the 1995 Stock Plan Committee.
Subject to the provisions of the 1995 Stock Plan, this committee, at its
discretion, selects the recipients of awards and the number of shares or options
granted thereunder and determines other matters such as (i) vesting schedules,
(ii) the exercise price of options (which cannot be less than 100% of the fair
market value of the common stock on the date of grant for ISOs), (iii) the
duration of awards (which cannot exceed ten years), and (iv) the price of SARs.
DIRECTORS' COMPENSATION
Directors are reimbursed for reasonable expenses incurred by them in
connection with their attendance at Board meetings. Directors are also eligible
to receive options, SARs, and restricted stock grants under the 1995 Stock Plan.
Additionally, in December 1991, the Company's Board of Directors authorized the
issuance of warrants to acquire up to 419,328 shares of common stock for $0.42
per share, the fair value at the date of grant, to each of the Company's
nonmanagement directors. The warrants issued in 1991 vested over a three-year
period provided that the individual was serving on the Board of Directors on
such dates. Pursuant to this action of the Board of Directors, George W. Baker,
a current member of the Company's Board of Directors, was granted warrants to
acquire 86,832 shares of common stock and former members of the Board of
Directors were granted warrants to acquire 332,496 shares of common stock.
In May 1993, the Board of Directors issued warrants to acquire 72,000
shares of common stock at a price of $0.52 per share, the fair value at the date
of grant, to Buford H. Ortale who was at that time a member of the Company's
Board of Directors and is now a holder of approximately 3% of the Company's
outstanding common stock in consideration of his election to the Board of
Directors and his investment in the Company.
In December 1993, the Board of Directors granted options to acquire 240,000
and 84,000 shares of common stock at an exercise price of $0.52 per share, the
fair value at the date of grant, to Buford H. Ortale and George L. MacKay,
respectively, who were at the time members of the Company's Board of Directors.
In July 1995, the Board of Directors granted each director warrants to
acquire 24,000 shares of common stock for $0.71 per share, the fair value at the
date of grant, which vested in 1995, provided that the director was a member of
the Board of Directors on that date. In addition, Eduard Mayer was granted
warrants to acquire 86,400 shares of common stock at $0.71 per share, the fair
value at the date of grant, in recognition of his exemplary service on the Board
of Directors.
In July 1996, the Board of Directors granted each nonemployee director
warrants to acquire 10,000 shares of common stock for $18.50 per share, the fair
value at the date of grant, which vested at December 31, 1996, provided that the
director was a member of the Board of Directors on that date.
-48-
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
OPTION AND WARRANT ACTIVITY
In November 1995, Boland T. Jones, D. Gregory Smith, and Leonard A.
DeNittis exercised options to acquire 2,277,864, 2,277,864 and 996,552 shares of
common stock, respectively. Pursuant to the terms of each of their employment
agreements, the Company loaned such officers $825,000, $825,000 and $688,000,
respectively, to fund the exercise of these options. The 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 options. These
loans and accrued interest were repaid in full in 1996. Additionally, loans
were made as part of the exercise of these options to assist the officers in
paying the associated taxes. The loans to such officers for taxes totaled
$73,086, $73,086, and $22,048, respectively, and were also repaid in full in
1996.
In July 1995, the Board of Directors authorized the sale of warrants to
acquire 24,000 shares of common stock at $0.71 per share for $1,000 to an
individual who became the Company's Senior Vice President of Finance and Legal
in November 1995.
The Company accounts for its stock-based compensation plans under APB No.
25, under which no compensation expense has been recognized, as all options have
been granted with an exercise price equal to the fair value of the Company's
common stock on the date of grant. The Company adopted SFAS No. 123 for
disclosure purposes in January 1995. For SFAS No. 123 purposes, the fair value
of each option grant has been estimated as of the date of grant using the Black-
Scholes option pricing model with the following weighted average assumptions:
risk-free interest rate of 6.26 percent, expected life of 2.34 years, dividend
rate of zero percent, and expected volatility of 42 percent. Using these
assumptions, the fair value of the stock options granted in 1996 is $8,402,324,
which would be amortized as compensation expense over the vesting period of the
options. Options generally vest over three or four years. Had compensation
cost been determined consistent with SFAS No. 123, utilizing the assumptions
detailed above, the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
1995 1996
------------ ------------
Net Income (loss):
As Reported................................ $1,917,594 $ (955,786)
Pro forma.................................. $1,766,900 $(2,314,412)
Primary EPS:
As Reported................................ $0.10 $(0.05)
Pro forma.................................. $0.09 $(0.13)
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years.
A summary of the status of the Company's stock options plans at December
31, 1994, 1995 and 1996 and for the years then ended is presented in the table
and narrative below:
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PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNDER APB NO. 25:
OPTION PRICE
SHARES PER SHARE
----------- -------------
Options outstanding, March 31, 1994................... 8,578,464 $0.13 - 0.52
Granted............................................ 54,000 0.54 - 0.71
Exercised.......................................... 0 0
Forfeited.......................................... (240,000) 0.52
-----------
Options outstanding, December 31, 1994................ 8,392,464 $0.13 - 0.71
===========
In November 1995, the Company granted a total of 4,256,400 options to
employees at $1.61 per share, the fair market value on the grant dates. The
fair market value for the options granted in November 1995 was supported by an
independent appraisal. The remaining 1,009,200 options granted in 1995 were
granted at various dates throughout the year prior to November 1995.
UNDER SFAS NO. 123:
WEIGHTED AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
- - ----------------------------------------------------------- ----------------- -------------------
Options outstanding at December 31, 1994................... 8,392,464 $ 0.39
Granted................................................. 5,265,600 1.44
Exercised............................................... (5,831,688) 0.43
Forfeited............................................... (367,992) 0.45
----------------- -------------------
Options outstanding at December 31, 1995................... 7,458,384 1.07
Granted................................................. 1,299,799 18.89
Exercised............................................... (1,371,938) 0.51
Forfeited............................................... (44,800) 18.03
----------------- -------------------
Options outstanding at December 31, 1996................... 7,341,445 $ 4.27
================= ===================
Exercisable at end of year................................. 1,741,543 $ 1.51
================= ===================
Weighted average fair value of options granted in 1996..... $ 6.46
===================
Of the 7,341,445 employee and director options outstanding at December 31,
1996, (i) 146,016 options have an exercise price of $0.13, with a remaining
contractual life of 2.5 years, of which all are exercisable, (ii) 1,197,730
options have exercise prices between $0.42 and $0.52, with a weighted average
exercise price of $0.50 and a weighted average remaining contractual life of 4.5
years, of which all are exercisable, (iii) 750,320 options have an exercise
price of $0.71, with a weighted average remaining contractual life of 6.2 years,
of which 64,880 are exercisable, (iv) 3,987,580 options have an exercise price
of $1.61, with a weighted average remaining contractual life of 6.8 years, of
which 1,223,504 are exercisable, (v) 495,350 options have exercise prices
between $15.125 and $19.375, with a weighted average exercise price of $16.61
and a weighted average remaining contractual life of 8.1 years, of which 30,000
are exercisable, (vi) 764,449 options have exercise prices between $20.00 and
$25.25, with a weighted average exercise price of $20.31 and a weighted average
remaining contractual life of 6.7 years, of which 39,400 are exercisable.
In the year ended March 31, 1994, the Company entered into an agreement
with a hotel management company. The agreement, which expired June 30, 1995,
represented a variable stock option plan (with a measurement date upon vesting)
whereby the Company granted stock options to the hotel management company based
on the level of call traffic handled at certain properties. The options were
exercisable at $0.00042 per share and vested over three years. A total of
59,981 options were earned under the agreement. During the nine months
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PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ended December 31, 1994 and the year ended December 31, 1995, 19,752 and 16,925
options vested, respectively. All of the vested options under this agreement
were exercised in 1996.
EMPLOYEE BENEFITS
In 1995, the Company adopted a tax-qualified profit sharing plan for
eligible employees that also includes a 401(k) component (the "Profit Sharing
Plan"). All full-time employees are eligible to participate in the Profit
Sharing Plan upon the attainment of age 21 and completion of three months of
service. Under the Profit Sharing Plan, an employee may elect to defer up to
15% of his compensation and direct the Company to contribute such deferred
amounts to the Profit Sharing Plan. Each year the Company determines whether to
make a discretionary matching contribution equal to a percentage, determined by
the Company, of the employee's deferred compensation contribution. The Company
has not made any matching contributions to the Profit Sharing Plan.
Accordingly, no compensation expense related to the Profit Sharing Plan has been
recognized in the accompanying financial statements. All contributions to the
Profit Sharing Plan by or on behalf of employees are subject to annual limits
prescribed by the Code.
In July 1994, the Company began offering a medical and dental health plan
to its employees. The Company was self-insured for certain health and dental
benefits up to a maximum amount per month of approximately $10,000 based on
claims history and current employment levels through January 1996. The Company
accrued for estimated losses occurring from both asserted and unasserted claims.
The estimate of the liability for unasserted claims arising from unreported
incidents was based on an analysis of historical claims data. The cost of such
claims was approximately $35,000 and $135,000 for the periods December 31, 1994
and 1995, respectively. In February 1996, the Company changed its medical and
dental plan insurance provider and is no longer self-insured.
10. 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 adopted a policy requiring
that, in the future, all material transactions between the Company and its
officers, directors or other affiliates must (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 September 1993, the Company loaned a total of $65,000 to the three
principal officers of the Company to purchase 219,984 shares of stock and
175,992 stock purchase warrants exercisable at $0.125 per share from one of the
Company's Board members. The loans, which were interest free, were repaid
during 1996.
In prior years, the Company advanced $25,000 to certain officers and
shareholders of the Company to purchase the common stock and debentures of
another shareholder, and $5,000 was repaid during the year ended March 31, 1994.
The Board of Directors forgave $10,000 during the nine months ended December 31,
1994. The advances were repaid during 1996.
During the year ended March 31, 1994 and the nine months ended December 31,
1994, management made salary advances of $25,000 and $35,849, respectively, to
certain officers of the Company. During the year ended December 31, 1995,
$50,000 of these amounts were repaid. The balance was repaid during 1996.
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PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In November 1995, the Company loaned a certain officer $90,000 in
connection with the officer's transition from his previous employer to the
Company. This unsecured loan is evidenced by a promissory note bearing interest
at 6.11%, the interest on which is payable beginning in November 1997 and
continuing each year until November 1999. Principal is to be repaid in five
equal annual installments, with accrued interest, commencing in November 2000;
however, pursuant to the officer's employment agreement, the officer may be
required to make earlier payments from certain bonus compensation paid to the
officer under such employment agreement.
In November 1995, the Company loaned three officers a total of $2,338,000,
to fund the exercise of stock warrants and options which 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 a certain officer $75,000 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.
In October 1996, the Company loaned a certain officer $10,000. This
unsecured loan is evidenced by a promissory note bearing interest at 6.5%.
Principal and interest are to be repaid in one payment in October 1998.
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PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases central office switching equipment, office space and
other equipment under non-cancelable 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, 1996 are as follows:
OPERATING CAPITAL
LEASES LEASE
--------------- ---------------
1997...................................................... $ 667,610 $ 352,326
1998...................................................... 326,283 264,244
1999...................................................... 179,810 0
2000...................................................... 179,810 0
2001...................................................... 104,890 0
Thereafter................................................ 0 0
--------------- ---------------
$1,458,403 616,570
===============
Less amount representing taxes............................ (34,900)
---------------
Net minimum lease payments................................ 581,670
Less amount representing interest......................... (57,336)
---------------
Present value of net minimum lease payments............... 524,334
Less current portion...................................... (286,642)
---------------
Obligation under capital lease, net of current portion.... $ 237,692
===============
Rental expense under operating leases amounted to $206,563, $339,329 and
$734,321 for the nine months ended December 31, 1994, and the years ended
December 31, 1995 and 1996, respectively. During 1994, 1995 and 1996, additions
to the Company's switching equipment resulted in an increase to the capital
lease obligation of $132,512, $299,586 and $230,920, respectively.
SUPPLY AGREEMENTS
The Company obtains long distance telecommunications services pursuant to
supply agreements with suppliers of long distance telecommunications
transmission services. Although these contracts generally provide fixed
transmission prices for terms of three to five years, they are subject to
earlier 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
four long distance telecommunications services contracts that require the
Company to purchase a minimum amount of services each month. The first such
agreement which is with Company A, requires the Company to utilize 100,000
transmission minutes each month per transmission circuit and to incur a minimum
of $75,000 in charges. In the event of a shortfall in minute usage, the Company
would be required to pay Company A an amount equal to $0.015 multiplied by the
difference between 100,000 minutes and the number of minutes actually utilized
by the Company on each transmission circuit. In the event the Company uses less
than $75,000 in services, the Company would be required to pay the difference
between $75,000 and the actual charges incurred. The second such agreement
which is with Company B, requires the Company to use 75,000 transmission minutes
each month per transmission circuit from Company B. The Company is required to
use 100,000 minutes per month per transmission circuit in order to receive
discounts under this agreement. If the Company fails to utilize 75,000 minutes,
Company B may cancel the contract. The third such agreement requires the
Company to use 100,000 minutes per transmission circuit from Company C. In the
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PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
event of a shortfall, the Company would be required to pay an amount equal to
$0.03 multiplied by the difference between 100,000 minutes and the actual
minutes used. This agreement also requires the Company, from the period of
November 1, 1997 through October 31, 1998, to maintain at least the level of
monthly charges incurred by the Company in the October 1997 billing period and
grants Company C a right of first refusal to provide all telecommunications
service to the Company. The final agreement which is with Company D provides
for a minimum of 300,000 billable minutes per month beginning January 1996.
Subject to certain exceptions, if the Company does not meet the minimum
commitment, the Company will be required to pay $0.02 per billed minute below
the minimum. The minimum requirement is terminable by the Company after it pays
$576,000 to Company D under the agreement. The agreement provides Company D
with the right to be the exclusive service provider of terminating traffic in a
defined region. The Company has not failed to fulfill the minimum usage
requirement under any of these contracts in the past. The Company monitors its
transmission usage in an attempt to avoid any such shortfall. In the future the
Company may determine that it is desirable to enter into additional agreements
containing minimum purchase requirements. No assurance can be given that demand
for services in the areas covered by the Company's transmission suppliers will
exceed these minimum purchase requirements in the future.
RISK OF INFRINGEMENT
The Company is aware of other companies that utilize the term "WorldLink"
or "Premiere" in describing their products and services, including
telecommunications products and services. Certain of those companies hold
registered trademarks which incorporate the name "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 "Premiere 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 a 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. No actions other than the AudioFAX litigation have been
filed with respect to either the patent or trademark claims. See Litigation
below. However, no assurance can be given that actions or claims alleging
trademark, patent, or copyright infringement will not be brought by these or
other parties against the Company with respect to current or future products or
services or that, if such actions 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 services, require the Company to
enter into royalty or licensing agreements, or cause the Company to discontinue
use of the challenged trademark, service mark or technology at potential
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.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Employment
Agreements") with Boland T. Jones, Chairman of the Board of Directors and
President; D. Gregory Smith, Executive Vice President, Assistant Secretary, and
Director; and Leonard A. DeNittis, Vice President of Engineering and Operations
(the "Executives"). Each Employment Agreement provides for an employment term
expiring December 31, 1999. Under their respective Employment Agreements,
Boland T. Jones and D. Gregory Smith were each paid base salaries of $200,000
for the year ended December 31, 1996 and are each to be paid a base salary of
$210,000 beginning in 1997. Leonard A. DeNittis was paid a base annual salary
of $175,000 and is to be paid a base annual salary of $183,750 beginning in
1997. Patrick G. Jones, who joined the Company in November 1995 as the Senior
Vice President of Finance and Legal and Secretary, has entered into a similar
agreement. Mr. Jones was paid a base salary of $150,000 and is to be paid a
base annual salary of $157,500 beginning in 1997. Gregg S. Freishtat, who
joined the Company as Senior Vice President in September 1996 from TeleT, has
entered into a similar
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PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
agreement. Mr. Freishtat's base salary is $150,000 through 1997. Each of the
base salaries will increase 5% each year, with additional increases, if any, as
set by the Board of Directors.
Under the Employment Agreements, each of the Executives is eligible to
receive bonus compensation based on the financial performance of the Company.
The amount of bonus compensation is calculated based on operating revenues and
the Company's adjusted net income before interest and taxes as determined in
accordance with the Employment Agreements ("Adjusted EBIT"). Boland T. Jones
and D. Gregory Smith received as a bonus (i) 0.25% of the Company's operating
revenues and (ii) 2.5% of the Company's Adjusted EBIT for the year ended
December 31, 1995 which amounted to a bonus of $126,128 for both Mr. Jones and
Mr. Smith. Beginning in 1996, Boland T. Jones and D. Gregory Smith will receive
as a bonus 1.5% of the Company's Adjusted EBIT. Leonard A. DeNittis received a
bonus of 1.5% of the Company's Adjusted EBIT for the year ended December 31,
1995 which amounted to $42,217, and his bonus beginning in 1996 will be 0.5% of
the Adjusted EBIT. The changes in arrangement for Boland T. Jones, D. Gregory
Smith, Leonard A. DeNittis were affected in amendments to their Employment
Agreements entered into in November 1995. In conjunction with these amendments,
Boland T. Jones, D. Gregory Smith, Leonard A. DeNittis were granted options to
acquire 1,440,000, 1,400,000 and 720,000 shares of common stock respectively at
an exercise price of $1.61 per share, the fair value of the common stock at the
date of grant as determined by an independent appraisal. Beginning in 1996,
Patrick G. Jones was entitled to receive a bonus of 0.45% of the Company's
Adjusted EBIT, and beginning in 1997, Gregg S. Freishtat will be entitled to
receive a bonus of 0.45% of the Company's adjusted EBIT. Bonuses payable to the
Executives will be deferred if the net effect of the payment of the bonuses to
the Executives would cause the Company to recognize a net loss for the year.
The amount of any deferred bonus will be paid in the next succeeding year in
which the payment of the deferred bonus and the bonus for such year would not
cause the Company to recognize a net loss. To date no bonus amounts have been
deferred. In July 1996, Messrs. Boland Jones, Smith, DeNittis and Patrick Jones
each agreed to waive any rights to bonuses otherwise due under the Employment
Agreements for 1996. In connection with such waiver, Messrs. Boland Jones,
Smith, DeNittis and Patrick Jones were granted options to acquire an aggregate
of 50,000, 50,000, 20,000 and 15,000 shares of common stock, respectively, at an
exercise price of $18.50 per share, which was the fair market value of the
common stock on the date of grant as determined by the Board of Directors. The
options granted will vest on March 31, 1997.
LITIGATION
On January 30, 1996, Eric Bott, E.B. Elliott and Cost Recovery Systems,
Inc. ("CRS") filed a complaint against the Company's wholly-owned subsidiary,
Premiere Communications, Inc. ("PCI" or "Premiere Communications") and the
Company's President, Boland T. Jones, in the Superior Court of Fulton County,
Georgia. In the complaint, the plaintiffs allege that: (i) Mr. Bott, a former
Company employee, is entitled to options to purchase 10,000 shares of common
stock of PCI at $5.00 per share; (ii) Mr. Bott is entitled to a commission equal
to 10% of all revenues that have been and in the future are collected as a
result of the Company's licensing arrangement with one of its customers; (iii)
Mr. Bott is entitled to $7,000 for consulting work allegedly performed for the
Company; (iv) Mr. Bott is entitled to unspecified damages resulting from his
sale in June 1995 of 750 shares of common stock of PCI to an unrelated third
party for an unspecified amount; (v) Mr. Elliott or CRS, an affiliate of Mr.
Elliott, is entitled to options to purchase 5,000 or 10,000 shares of common
stock of PCI at an unspecified exercise price arising out of work allegedly
performed by CRS for the Company; and (vi) CRS is owed an unspecified amount of
commissions from the Company relating to sales of the Company's
telecommunications services by CRS. Subsequent to the filing of the complaint,
the plaintiffs dismissed without prejudice count (iv) above. The plaintiffs
also seek attorneys' fees and unspecified amounts of punitive damages. The
Company filed an answer and counterclaim denying all allegations of the
complaint and asserting various affirmative defenses. Assuming that the
allegations concerning stock options and stock sales relate to the common stock
of Premiere Technologies, Inc., rather than PCI, as alleged, the Company
believes that the share numbers and exercise prices have not been adjusted for
the 24-to-1 stock split effected in December 1995. In this regard, the
plaintiffs filed a motion to add the Company as a defendant and to amend their
complaint to assert their claims against the
-55-
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company. Adjusting the share numbers and exercise prices of these options to
reflect the 24-to-1 stock split, the plaintiffs' claims relate to options to
purchase up to a total of 480,000 shares of common stock and the alleged
exercise price of $5.00 per share with regard to a portion of such options
becomes approximately $0.21 per share. The plaintiffs' motion was denied on
December 17, 1996, and the plaintiffs dismissed the case without prejudice on
January 13, 1997. The plaintiffs filed a new complaint against the Company on
January 21, 1997 setting forth the same allegations as described above. The
Company has filed an answer and counterclaim denying all allegations of the
complaint and asserting various affirmative defenses and a motion to dismiss
with respect to all counts of the complaint. The Company believes it has
meritorious defenses to the plaintiffs' allegations, but due to the inherent
uncertainties of the judicial system, 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,
operating results or financial condition.
On June 28, 1996, AudioFAX IP LLC ("AudioFAX") filed a complaint against
the Company and PCI in the United States District Court for the Northern
District of Georgia. In the complaint, AudioFAX alleged that the Company
manufactures, uses, sells and/or distributes certain enhanced facsimile products
which infringe three United States patents and one Canadian patent allegedly
held by AudioFAX. 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. On February 11, 1997, the Company entered into a
long term, non-exclusive license agreement with AudioFAX settling the
litigation. The one-time charge was adequate to cover the actual costs of
litigation, and the cost of the license agreement is not expected to have a
material effect on the Company's earnings. See Note 13 - Subsequent Events.
On August 6, 1996, CNC, a licensing customer of the Company, was placed
into bankruptcy 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 court has not ruled on CNC's request. Based upon the bankruptcy examiner's
findings, the bankruptcy trustee, who has been substituted for CNC in this
action, is investigating the merits of any potential actions directed at PCI.
No actions or suits have been filed by the trustee against PCI, but the trustee
has notified PCI that as one of the potential claims he is investigating, he
intends to assert an avoidable preference claim under the Bankruptcy Code of an
amount up to approximately $800,000. Due to the inherent uncertainties of the
judicial system, the Company is unable to predict with certainty the outcome of
the trustee's investigation and the potential litigation. If the outcome of any
such litigation is adverse to the Company, 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. In the
complaint, Lucina alleges, among other things, that: (i) in November 1995 he
sold 1,563 shares of the Company common stock to Gasgarth, a former director of
the Company, for $31,260; (ii) Jones offered to "facilitate" the sale; (iii) in
December 1995 the Company filed a registration statement relating to the initial
public offering of its common stock; (iv) prior to his sale of stock to
Gasgarth, neither Gasgarth nor Jones told Lucina that the Company planned an
initial public offering; and (v) the 1,563 shares sold to Gasgarth, adjusted for
the 24-to-1 stock split subsequently effected, was worth $675,216 based on the
Company's initial public offering at $18 per share in March, 1996. In his
complaint, Lucina asserts violations of the Securities Exchange Act of 1934 and
the rules promulgated thereunder, the Illinois Consumer Fraud and Deceptive
Business Practices Act and common law fraud. Lucina seeks the return of 37,512
shares of common stock of the Company, or in the alternative, compensatory
damages in the amount of $975,312 with interest thereon, punitive damages in the
amount of $1 million and costs of the suit, including reasonable attorneys' fees
and other associated costs. The Company has filed an answer to the complaint
denying allegations of the complaint and asserting various defenses. Discovery
is
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PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
in its initial stages, and no trial date has been set. The Company believes
that it has meritorious defenses to the Lucina complaint; however, due to the
inherent uncertainties of the judicial system, the Company is unable to predict
the outcome of this litigation. If the outcome of any such litigation is
adverse to the Company, it could have a material adverse effect on the Company's
business, operating results or financial condition.
12. INCOME TAXES
The difference between the statutory federal income tax rate and the
Company's effective income tax rate applied to income before income taxes and
extraordinary loss was as follows for the nine months ended December 31, 1994
and for the years ended December 31, 1995 and 1996:
1994 1995 1996
------------- ------------- -------------
Income taxes at federal statutory rate $124,296 $ 844,401 $ (857,846)
State tax provision, net of federal benefit 14,623 124,176 (126,154)
Utilization of net operating loss (93,959) 0 0
Change in valuation allowance 0 (693,208) 0
Non-taxable investment income 0 0 (722,970)
Non-deductible expenses 2,569 55,117 80,429
------------- ------------- -------------
Income taxes at the Company's effective rate $ 47,529 $ 330,486 $(1,626,541)
============= ============= =============
1994 1995 1996
------------- ------------- -------------
Current:
Federal $ 0 $ 0 $ 2,733,717
Other 47,529 0 402,016
Deferred:
Federal 0 288,116 (4,151,726)
Other 0 42,370 (610,548)
During the year ended December 31, 1995, the Company reduced its valuation
reserve to zero based upon management's conclusion that it is more likely than
not that future taxable income will be sufficient to realize all net operating
loss carryforwards. At December 31, 1996, the remaining $5,959,202 of net
operating loss carryforwards relate primarily to non-qualified stock
compensation expense for tax purposes in excess of stock compensation for book
purposes, the benefit of which was credited directly to additional paid-in-
capital in accordance with APB No. 25 and SFAS No. 109.
-57-
PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The sources of differences between the financial accounting and tax bases
of assets and liabilities which give rise to the deferred tax assets and
liabilities are as follows at December 31, 1995 and 1996:
1995 1996
------------ ------------
Deferred tax asset:
Net operating loss $2,208,844 $ 5,959,202
In-process research and development 0 4,218,056
Unearned revenue 135,297 174,327
Accounts receivable reserve 41,969 237,810
Accrued expenses 147,293 548,944
------------ ------------
2,533,403 11,138,339
Deferred tax liability:
Depreciation (242,216) (334,520)
------------ ------------
Net deferred tax asset $2,291,187 $10,803,819
============ ============
The Company and its subsidiaries file a consolidated income tax return.
The Company has not paid income taxes for any of the years presented in the
accompanying financial statements. At December 31, 1996, the Company had net
operating loss carryforwards of approximately $15,280,004 expiring $439,587 in
2008, $955,846 in 2009 and $4,268,270 in 2010 and $9,616,301 in 2011.
13. SUBSEQUENT EVENTS
On February 11, 1997, the Company entered into a long term, non-exclusive
license agreement with AudioFAX settling the litigation. The one-time charge
was adequate to cover the actual costs of litigation, and the cost of the
license agreement is not expected to have a material effect on the Company's
earnings. See Note 11 - Commitments and Contingencies.
-58-
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 by reference to the
Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated 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 by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
-59-
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 between Premiere
Technologies, Inc. and Premiere Technologies
Reincorporation, Inc. (incorporated by reference to
Exhibit 2.1 to the Registrant's Registration
Statement on Form S-1 (No. 33-80547).
2.2 Asset Purchase Agreement, together with exhibits,
dated September 18, 1996 by and among the Registrant,
PTEK Acquisition Corporation, TeleT Communications
LLC and the Members of TeleT Communications LLC
(incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated
September 18, 1996).
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 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 and 3.2 for provisions of the
Articles of Incorporation and Bylaws defining the
rights of the holders of common stock of the
Registrant (incorporated by reference to Exhibit 4.1
to the Registrant's Registration Statement on Form S-
1 (No. 33-80547) .
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).
9.1 Form of Voting Trust Agreement to be entered into
under the Registrant's 1994 Stock Option Plan
(incorporated by reference to Exhibit 9.1 to the
Registrant's Registration Statement on Form S-1 (No.
33-80547).
10.1 Loan Agreement dated May 26, 1992 between the
Registrant and Sirrom Capital, L.P. n/k/a Sirrom
Capital Corporation ("Sirrom") (incorporated by
reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
10.2 Secured Promissory Note dated May 26, 1992 made by
the Registrant in favor of Sirrom (incorporated by
reference to Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
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10.3 Pledge and Security Agreement dated May 26, 1992
between the Registrant and Sirrom (incorporated by
reference to Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
10.4 Guaranty Agreement dated May 26, 1992 between
Premiere Communications, Inc. and Sirrom
(incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1 (No.
33-80547).
10.5 Security Agreement dated May 26, 1992 between
Premiere Communications, Inc. and Sirrom
(incorporated by reference to Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1 (No.
33-80547).
10.6 Stock Purchase Warrant dated May 26, 1992 between the
Registrant and Sirrom (incorporated by reference to
Exhibit 10.6 to the Registrant's Registration
Statement on Form S-1 (No. 33-80547).
10.7 First Amendment to Loan Agreement and Loan Documents
dated as of December 23, 1993 between the Registrant
and Sirrom (incorporated by reference to Exhibit 10.7
to the Registrant's Registration Statement on Form S-
1 (No. 33-80547).
10.8 Secured Promissory Note dated December 23, 1993 made
by the Registrant in favor of Sirrom (incorporated by
reference to Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
10.9 Stock Purchase Warrant dated December 23, 1993
between the Registrant and Sirrom (incorporated by
reference to Exhibit 10.9 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
10.10 Letter Agreement dated February 9, 1994 between the
Registrant and Sirrom regarding the date of certain
loan document and the exercise price of the Stock
Purchase Warrant dated December 23, 1993
(incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1 (No.
33-80547).
10.11 Stock Purchase Agreement dated January 18, 1994
between the Registrant and NationsBanc Capital
Corporation (incorporated by reference to Exhibit
10.11 to the Registrant's Registration Statement on
Form S-1 (No. 33-80547).
10.12 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).
10.13 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).
10.14 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).
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10.15 Amended and Restated Executive Employment 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 Promissory Note dated November 6, 1995 in favor of
the Registrant made by Leonard A. DeNittis
(incorporated by reference to Exhibit 10.21 to the
Registrant's Registration Statement on Form S-1 (No.
33-80547).
10.22 Stock Pledge Agreement dated November 6, 1995 between
the Registrant and Leonard A. DeNittis (incorporated
by reference to Exhibit 10.22 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
10.23 Promissory Note dated November 6, 1995 in favor of
the Registrant made by D. Gregory Smith (incorporated
by reference to Exhibit 10.23 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
10.24 Stock Pledge Agreement dated November 6, 1995 between
the Registrant and D. Gregory Smith (incorporated by
reference to Exhibit 10.24 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
10.25 Promissory Note dated November 6, 1995 in favor of
the Registrant made by Boland T. Jones (incorporated
by reference to Exhibit 10.25 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
10.26 Stock Pledge Agreement dated November 6, 1995 between
the Registrant and Boland T. Jones (incorporated by
reference to Exhibit 10.26 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
-62-
10.27 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).
10.28 Stock Option Plan dated March 18, 1994 (incorporated
by reference to Exhibit 10.28 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
10.29 Intentionally omitted.
10.30 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).
10.31 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).
10.32 Lease Agreement dated April 5, 1993 between Premiere
Communications, Inc. and Telecommunications Finance
Group, as amended (incorporated by reference to
Exhibit 10.32 to the Registrant's Registration
Statement on Form S-1 (No. 33-80547).
10.33 Sublease Agreement dated August 22, 1994 between
Premiere Communications, Inc. and Sales Technologies,
Inc., as amended by the First Amendment dated
September 28, 1995 and the Second Amendment dated
October 31, 1995 (incorporated by reference to
Exhibit 10.33 to the Registrant's Registration
Statement on Form S-1 (No. 33-80547).
10.34 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).
10.35 Office Lease Agreement dated April 7, 1995 between
Premiere Communications, Inc. and Boston Avenue
Management Company (incorporated by reference to
Exhibit 10.35 to the Registrant's Registration
Statement on Form S-1 (No. 33-80547).
10.36 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).
10.37 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).*
10.38 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).*
-63-
10.39 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).*
10.40 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).*
10.41 First Amendment to Stock Purchase Warrant dated
December 14, 1995 between Registrant and Sirrom
amending Stock Purchase Warrant dated May 26, 1992
(incorporated by reference to Exhibit 10.41 to the
Registrant's Registration Statement on Form S-1 (No.
33-80547).
10.42 First Amendment to Stock Purchase Warrant dated
December 14, 1995 between Registrant and Sirrom
amendment Stock Purchase Warrants dated December 23,
1993 (incorporated by reference to Exhibit 10.42 to
the Registrant's Registration Statement on Form S-1
(No. 33-80547).
10.43 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).*
10.44 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.)
10.45 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)).
10.46 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)).
10.47 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)).
10.48 Second Amended and Restated 1995 Stock Plan
(incorporated by reference to Exhibit 4.8 to the
Registrant's Registration Statement on Form S-8 (No.
333-17593)).
10.49 Second and Third Amendment to 55 Park Place Office
Lease dated November 5, 1996 between Premiere
Communications, Inc. and Mara-Met Venture.
10.50 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.
10.51 Promissory Note dated October 18, 1996 between
Premiere Communications, Inc. and NationsBank, N.A.
(South).
10.52 Continuing and Unconditional Guaranty Agreement dated
October 18, 1996, between Premiere Communications and
NationsBank, N.A. (South).
-64-
11.1 Statement re: Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant (incorporated by
reference to Exhibit 21.1 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
________________
* 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.
(b) Reports on Form 8-K
The Registrant has filed the following reports on Form 8-K during the
fourth quarter of 1996:
Current Report on Form 8-K dated September 18, 1996, filed on
October 1, 1996 pursuant to Item 2 of Form 8-K, reporting the
acquisition of TeleT Communications LLC.
Amended Current Report on Form 8-K/A dated September 18, 1996,
filed on December 2, 1996 pursuant to Item 7 of Form 8-K,
reporting the following financial statements of business acquired
and pro-forma financial information.
(1) Balance Sheet of Connect, Inc. (a predecessor of TeleT
Communications LLC) as of December 31, 1995
(2) Statement of Operations of Connect, Inc. for the period
from inception (March 3, 1995) to December 31, 1995
(3) Statement of Shareholders' Deficit of Connect, Inc. for
the period from inception (March 3, 1995) to December 31,
1995
(4) Statement of Cash Flows of Connect, Inc. for the period
from inception (March 3, 1995) to December 31, 1995
(5) Unaudited Pro Forma Consolidated Statements of Income
of Premiere Technologies, Inc. for the year ended December
31, 1995 to reflect the acquisition of TeleT Communications
LLC
(6) Unaudited Pro Forma Consolidated Statements of Income
of Premiere Technologies, Inc. for the nine months ended
September 30, 1996 to reflect the acquisition of TeleT
Communications LLC
Current Report on Form 8-K dated November 13, 1996, filed on
November 22, 1996 pursuant to Item 5 of Form 8-K, reporting the
entering into of a Strategic Alliance Agreement with WorldCom,
Inc.
Amended Current Report on Form 8-K/A dated November 13, 1996,
filed on February 25, 1997 pursuant to Item 7 of Form 8-K,
amending an exhibit.
-65-
(c) Exhibits
See Item 14(a) above.
(d) Financial Statement Schedule
See Item 14(a) above.
-66-
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 26, 1997
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 President March 26, 1997
- - ---------------------------- (principal executive officer)
Boland T. Jones
/s/ D. Gregory Smith Executive Vice President and Director March 26, 1997
- - ----------------------------
D. Gregory Smith
/s/ Patrick G. Jones Senior Vice President of Finance and March 26, 1997
- - ---------------------------- Legal and Secretary (principal
Patrick G. Jones financial and accounting officer)
/s/ George W. Baker, Sr. Director March 26, 1997
- - ----------------------------
George W. Baker, Sr.
/s/ Eduard J. Mayer Director March 26, 1997
- - ----------------------------
Eduard J. Mayer
/s/ Robert A. Jetmudsen Director March 26, 1997
- - ----------------------------
Robert A. Jetmudsen
-67-
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- - ------- ----------- ----
2.1 Agreement and Plan of Merger between Premiere Technologies, Inc.
and Premiere Technologies Reincorporation, Inc. (incorporated by
reference to Exhibit 2.1 to the Registrant's Registration
Statement on Form S-1 (No. 33-80547).
2.2 Asset Purchase Agreement, together with exhibits, dated September
18, 1996 by and among the Registrant, PTEK Acquisition
Corporation, TeleT Communications LLC and the Members of TeleT
Communications LLC (incorporated by reference to Exhibit 2.1 to
the Registrant's Current Report on Form 8-K dated September 18,
1996).
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 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 and 3.2 for provisions of the Articles of
Incorporation and Bylaws defining the rights of the holders of
common stock of the Registrant (incorporated by reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form
S-1 (No. 33-80547).
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).
9.1 Form of Voting Trust Agreement to be entered into under the
Registrant's 1994 Stock Option Plan (incorporated by reference to
Exhibit 9.1 to the Registrant's Registration Statement on Form
S-1 (No. 33-80547).
10.1 Loan Agreement dated May 26, 1992 between the Registrant and
Sirrom Capital, L.P. n/k/a Sirrom Capital Corporation ("Sirrom")
(incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
10.2 Secured Promissory Note dated May 26, 1992 made by the Registrant
in favor of Sirrom (incorporated by reference to Exhibit 10.2 to
the Registrant's Registration Statement on Form S-1 (No. 33-
80547).
10.3 Pledge and Security Agreement dated May 26, 1992 between the
Registrant and Sirrom (incorporated by reference to Exhibit 10.3
to the Registrant's Registration Statement on Form S-1 (No. 33-
80547).
10.4 Guaranty Agreement dated May 26, 1992 between Premiere
Communications, Inc. and Sirrom (incorporated by reference to
Exhibit 10.4 to the Registrant's Registration Statement on Form
S-1 (No. 33-80547).
10.5 Security Agreement dated May 26, 1992 between Premiere
Communications, Inc. and Sirrom (incorporated by reference to
Exhibit 10.5 to the Registrant's Registration Statement on Form
S-1 (No. 33-80547).
10.6 Stock Purchase Warrant dated May 26, 1992 between the Registrant
and Sirrom (incorporated by reference to Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1 (No. 33-80547).
10.7 First Amendment to Loan Agreement and Loan Documents dated as of
December 23, 1993 between the Registrant and Sirrom (incorporated
by reference to Exhibit 10.7 to the Registrant's Registration
Statement on Form S-1 (No. 33-80547).
10.8 Secured Promissory Note dated December 23, 1993 made by the
Registrant in favor of Sirrom (incorporated by reference to
Exhibit 10.8 to the Registrant's Registration Statement on Form
S-1 (No. 33-80547).
10.9 Stock Purchase Warrant dated December 23, 1993 between the
Registrant and Sirrom (incorporated by reference to Exhibit 10.9
to the Registrant's Registration Statement on Form S-1 (No. 33-
80547).
10.10 Letter Agreement dated February 9, 1994 between the Registrant
and Sirrom regarding the date of certain loan document and the
exercise price of the Stock Purchase Warrant dated December 23,
1993 (incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1 (No. 33-80547).
10.11 Stock Purchase Agreement dated January 18, 1994 between the
Registrant and NationsBanc Capital Corporation (incorporated by
reference to Exhibit 10.11 to the Registrant's Registration
Statement on Form S-1 (No. 33-80547).
10.12 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).
10.13 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).
10.14 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).
10.15 Amended and Restated Executive Employment 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 Promissory Note dated November 6, 1995 in favor of the Registrant
made by Leonard A. DeNittis (incorporated by reference to Exhibit
10.21 to the Registrant's Registration Statement on Form S-1 (No.
33-80547).
10.22 Stock Pledge Agreement dated November 6, 1995 between the
Registrant and Leonard A. DeNittis (incorporated by reference to
Exhibit 10.22 to the Registrant's Registration Statement on Form
S-1 (No. 33-80547).
10.23 Promissory Note dated November 6, 1995 in favor of the Registrant
made by D. Gregory Smith (incorporated by reference to Exhibit
10.23 to the Registrant's Registration Statement on Form S-1 (No.
33-80547).
10.24 Stock Pledge Agreement dated November 6, 1995 between the
Registrant and D. Gregory Smith (incorporated by reference to
Exhibit 10.24 to the Registrant's Registration Statement on Form
S-1 (No. 33-80547).
10.25 Promissory Note dated November 6, 1995 in favor of the Registrant
made by Boland T. Jones (incorporated by reference to Exhibit
10.25 to the Registrant's Registration Statement on Form S-1 (No.
33-80547).
10.26 Stock Pledge Agreement dated November 6, 1995 between the
Registrant and Boland T. Jones (incorporated by reference to
Exhibit 10.26 to the Registrant's Registration Statement on Form
S-1 (No. 33-80547).
10.27 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).
10.28 Stock Option Plan dated March 18, 1994 (incorporated by reference
to Exhibit 10.28 to the Registrant's Registration Statement on
Form S-1 (No. 33-80547).
10.29 Intentionally omitted.
10.30 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).
10.31 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).
10.32 Lease Agreement dated April 5, 1993 between Premiere
Communications, Inc. and Telecommunications Finance Group, as
amended (incorporated by reference to Exhibit 10.32 to the
Registrant's Registration Statement on Form S-1 (No. 33-80547).
10.33 Sublease Agreement dated August 22, 1994 between Premiere
Communications, Inc. and Sales Technologies, Inc., as amended by
the First Amendment dated September 28, 1995 and the Second
Amendment dated October 31, 1995 (incorporated by reference to
Exhibit 10.33 to the Registrant's Registration Statement on Form
S-1 (No. 33-80547).
10.34 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).
10.35 Office Lease Agreement dated April 7, 1995 between Premiere
Communications, Inc. and Boston Avenue Management Company
(incorporated by reference to Exhibit 10.35 to the Registrant's
Registration Statement on Form S-1 (No. 33-80547).
10.36 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).
10.37 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).*
10.38 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).*
10.39 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).*
10.40 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).*
10.41 First Amendment to Stock Purchase Warrant dated December 14, 1995
between Registrant and Sirrom amending Stock Purchase Warrant
dated May 26, 1992 (incorporated by reference to Exhibit 10.41 to
the Registrant's Registration Statement on Form S-1 (No. 33-
80547).
10.42 First Amendment to Stock Purchase Warrant dated December 14, 1995
between Registrant and Sirrom amendment Stock Purchase Warrants
dated December 23, 1993 (incorporated by reference to Exhibit
10.42 to the Registrant's Registration Statement on Form S-1 (No.
33-80547).
10.43 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).*
10.44 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.)
10.45 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)).
10.46 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)).
10.47 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)).
10.48 Second Amended and Restated 1995 Stock Plan (incorporated by
reference to Exhibit 4.8 to the Registrant's Registration
Statement on Form S-8 (No. 333-17593)).
10.49 Second and Third Amendment to 55 Park Place Office Lease dated
November 5, 1996 between Premiere Communications, Inc. and
Mara-Met Venture.
10.50 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.
10.51 Promissory Note dated October 18, 1996 between Premiere
Communications, Inc. and NationsBank, N.A. (South).
10.52 Continuing and Unconditional Guaranty Agreement dated October 18,
1996, between Premiere Communications, Inc. and NationsBank, N.A.
(South).
11.1 Statement re: Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 to the Registrant's Registration Statement on Form
S-1 (No. 33-80547).
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
_________________
* 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.