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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999
Commission file number: 0-27778
PTEK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-3074176
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3399 Peachtree Road, N.E., The Lenox Building, Suite 600, Atlanta, Georgia
30326
(address of principal executive office)
(Registrant's telephone number, including area code): (404) 262-8400
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based upon the closing sale price of common stock on March 29,
2000 as reported by The Nasdaq Stock Market's National Market, was
approximately $336,357,756.
As of March 29, 2000 there were 47,625,877 shares of the registrant's common
stock outstanding.
List hereunder the documents incorporated by reference and the part of the
Form 10-K (e.g., Part I. Part II, etc.) into which the document is
incorporated: Portions of the registrant's Proxy Statement for its 2000
meeting of shareholders are incorporated by reference in Part III.
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INDEX
Page
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Part I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 18
Item 3. Legal Proceedings............................................. 19
Item 4. Submission of Matters to a Vote of Security Holders........... 21
Part II
Market for Registrant's Common Equity and Related Stockholder
Item 5. Matters....................................................... 22
Item 6. Selected Financial Data....................................... 22
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations..................................... 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 60
Item 8. Financial Statements and Supplementary Data................... 60
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure...................................... 98
Part III
Item 10. Directors and Executive Officers of the Registrant............ 99
Item 11. Executive Compensation........................................ 99
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................... 99
Item 13. Certain Relationships and Related Transactions................ 99
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K...................................................... 100
Signatures.............................................................. 108
Exhibits
FORWARD LOOKING STATEMENTS
When used in this Form 10-K and elsewhere by management or PTEK Holdings,
Inc. ("PTEK" or the "Company") from time to time, the words "believes,"
"anticipates," "expects," "will" "may," "should," "intends," "plans,"
"estimates," "predicts," "potential," "continue" and similar expressions are
intended to identify forward-looking statements concerning our operations,
economic performance and financial condition. These include, but are not
limited to, forward-looking statements about our business strategy and means
to implement the strategy, our objectives, the amount of future capital
expenditures, the likelihood of our success in developing and introducing new
products and services and expanding our business, and the timing of the
introduction of new and modified products and services. For those statements,
we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. These
statements are based on a number of assumptions and estimates that are
inherently subject to significant risks and uncertainties, many of which are
beyond our control, and reflect future business decisions which are subject to
change. A variety of factors could cause actual results to differ materially
from those anticipated in PTEK's forward-looking statements, including the
following factors:
. Factors described under the caption "Factors Affecting Future
Performance" in this Form 10-K;
. Factors described from time to time in our press releases, reports and
other filings made with the Securities and Exchange Commission;
. Competitive pressures among communications services providers, including
pricing pressures, may increase significantly;
. Our ability to respond to rapid technological change, the development of
alternatives to our products and services and the risk of obsolescence
of our products, services and technology;
. Market acceptance of new products and services;
. Strategic investments in early stage companies, which are subject to
significant risks, may not be successful and returns on such strategic
investments, if any, may not match historical levels;
. The value of our business may fluctuate because the value of some of our
strategic equity investments fluctuates;
. Our ability to manage our growth;
. Costs or difficulties related to the integration of businesses and
technologies, if any, acquired or that may be acquired by us may be
greater than expected;
. Expected cost savings from past or future mergers and acquisitions may
not be fully realized or realized within the expected time frame;
. Revenues following past or future mergers and acquisitions may be lower
than expected;
. Operating costs or customer loss and business disruption following past
or future mergers and acquisitions may be greater than expected;
. The success of our strategic relationships, including the amount of
business generated and the viability of the strategic partners, may not
meet expectations;
. Possible adverse results of pending or future litigation or adverse
results of current or future infringements claims;
. Risks associated with interruption in our services due to the failure of
the platforms and network infrastructure utilized in providing our
services;
. Risks associated with expansion of our international operations;
. General economic or business conditions, internationally, nationally or
in the local jurisdiction in which we are doing business, may be less
favorable than expected;
. Legislative or regulatory changes may adversely affect the business in
which we are engaged; and
. Changes in the securities markets may negatively impact us.
PTEK cautions that these factors are not exclusive. Consequently, all of the
forward-looking statements made in this Form 10-K and in documents
incorporated in this Form 10-K are qualified by these cautionary statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Form 10-K. PTEK takes on
no obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date of this Form 10-K, or the date of the statement, if a different
date.
All statements made herein regarding our state of readiness with respect to
the Year 2000 issue constitute "Year 2000 readiness disclosures" made pursuant
to the Year 2000 Information and Readiness Disclosure Act, Public Law
No. 105-271.
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PART I
Item 1. Business
Overview
PTEK Holdings, Inc. ("PTEK" or the "Company") is engaged in business-to-
business e-commerce and communications services through a network of companies
in which the Company has whole or partial ownership and for which it offers
capital, management advice, marketing and partnering support, and other
services. PTEK believes that businesses will increasingly rely on
communications networks, including the Internet, to access, exchange, store
and otherwise manage information to improve business processes and decision
making, to buy and sell goods and services, and to improve customer care. The
Internet and other improvements in information processing have spawned the
creation of on-line markets that enable more efficient economic exchange and
have created significant opportunities for infrastructure service providers
that enable and support this economic activity. PTEK's strategy is to create a
network of market makers and infrastructure service providers that offer
industry leading solutions to their respective business customers and that
complement and support the growth of other members of the network through
technology exchange, co-marketing and other partnering activities. PTEK will
seek to develop this economic network--or EcoNet--through the development,
acquisition and management of wholly or majority owned operating subsidiaries
and by making investments in promising, early stage Internet companies through
its affiliated investment arm, PTEKVentures.
To effect its EcoNet strategy, the Company embarked on a series of
initiatives beginning in the latter half of 1999.
First, the Company realigned its traditional businesses into independent
operating units. This allowed for the elimination of costly administrative
functions and was designed to create more focused, innovative and responsive
service providers. The three wholly owned operating units resulting from this
reorganization are: Xpedite, a global leader in electronic information
distribution; Voicecom, with one of the world's largest private, local-access
messaging networks; and Premiere Conferencing, a leading conferencing
provider. In the process, PTEK decided to dispose of its retail calling card
unit, which was more consumer-oriented and not core to the Company's future
operating strategy.
Second, the Company utilized the proceeds from the partial disposition of
its interest in an early PTEKVentures network company to extinguish
approximately $145 million in relatively high cost short-term debt. This
allowed for greater operating flexibility and eliminated a significant
interest cost drag on the Company's operating cash flow. Combined with the
operating efficiencies achieved from the corporate reorganization, this move
greatly increased the amount of cash flow available for growing the EcoNet.
Finally, the Company began an aggressive expansion of its PTEKVentures
activities and investments in companies that complement the Company's
business-to-business e-commerce and communications services. It began
recruiting a dedicated PTEKVentures management team to identify investment
opportunities, evaluate and close investments, and support those investments
with management and business development resources. It started developing an
alliance network with other Internet investment, incubation and support
organizations to accelerate the flow of investment opportunities and share
economic risk. And it started developing internal and external support
resources, including or to include technical assessment and development,
marketing, human resources and real estate services, to add value to the
members of the EcoNet.
PTEK, a Georgia corporation, was incorporated in 1991, and its principal
executive offices are located at 3399 Peachtree Road, N.E., Lenox Building,
Suite 600, Atlanta, Georgia 30326, telephone number (404) 262-8400.
PTEK Strategy
PTEK believes that the creation of the EcoNet will result in greater revenue
growth for existing products and services in the PTEK operating companies,
while allowing it to capitalize on the rapid growth and dynamic nature of the
new Internet economy. PTEK's goal is to build the Southeast's most profitable
and effective EcoNet
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of Internet companies. This goal leverages one of the Company's most valuable
assets--a powerful investment strategy--that supports the successful growth of
leading Internet companies, while increasing the revenue and technology
exchange opportunities for all of the companies in the EcoNet, including
PTEK's operating units.
This strategy allows the Company to seek opportunities and realize gains
through the positive cash flow of its operating units and the selective sale
of its investments in the EcoNet. The PTEK strategy consists of four key
elements, which the Company believes will add shareholder value:
. Operate PTEK business units independently and develop Internet assets
that can become stand-alone companies within the PTEK network.
. Create or identify and invest in Internet companies that will become
industry leaders.
. Provide strategic guidance and operational support to our network of
companies.
. Promote synergies within our network of companies.
These key elements are described below.
Operate PTEK business units independently and develop Internet assets that
can become stand-alone companies within the PTEK network. The PTEK operating
units--Xpedite, Voicecom and Premiere Conferencing--will continue to focus on
the following operational strategies:
Offer innovative applications and solutions. The operating units plan to
continue to enhance their line of services and to introduce Internet-based
services in 2000 and beyond. Xpedite, one of the market leaders in
electronic information distribution, has developed new Internet managed e-
mail service applications branded MessageREACHSM. These new services are
designed to meet the needs of Xpedite's current customer base and to
attract new users. Voicecom plans to expand its product offerings under the
Orchestrate(R) brand name beyond unified messaging to include personal
communications portal services. Premiere Conferencing is expanding its
conferencing services internationally and is establishing a separate
division offering Internet-based conferencing to its existing client base
and new users.
Leverage the Company's existing customer base. The PTEK operating units
serve a corporate customer base that includes 40% of the Fortune 500
companies. The operating units plan to leverage these long-term
relationships by expanding with clients internationally and by adding new
Internet-based solutions to meet these customers' communications needs.
Continue international expansion. The Company presently maintains
international points-of-presence in more than 60 cities in 25 countries,
and the Company plans to expand its geographical presence in 2000 and
beyond.
Create or identify and invest in companies that will become industry
leaders. PTEKVentures, the Company's investment arm, has acquired and will
continue to acquire equity ownership positions in promising early-stage
Internet companies to complement the Company's operating units and to add
value to its EcoNet.
Provide strategic guidance and operational support to our network of
companies. PTEK intends to play an active role in the business of companies in
which it invests.
Promote synergies within our network of companies. PTEK intends to maximize
the knowledge and experience of its EcoNet through its EcoNet companies and
strategic partners. This strategy includes leveraging our collaborative
network and sharing knowledge and resources.
Operating Units
The Company provides its innovative solutions for simplifying communications
through three business units: Xpedite, Premiere Conferencing and Voicecom.
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Xpedite
Xpedite provides customers with an array of services that manage and
facilitate the electronic distribution of information in multiple formats. The
services are all accessible over the Internet, as well as other
telecommunications protocols. Xpedite provides proprietary software that
supports database (list) management, file format translations and connectivity
to the Xpedite system. Xpedite's services are described below.
Description
Feature -----------
Xpedite Broadcast Service...... This service provides for the broadcast of
information to a list of electronic
addresses via e-mail, fax, X400, telex and
cablegram.
Xpedite Transactional Service.. This service provides for the message
preparation and distribution of information
generated from a computer based application
program to electronic addresses via e-mail,
fax, X400 and telex.
Xpedite MailMERGE.............. Customers can create and distribute
documents to fax addresses with unlimited
fields of variable data in a wide array of
fonts. Graphics and clip art are also
supported.
Fax on Demand.................. Information is selected using a touch-tone
phone and directly delivered to the
requestor's fax machine.
Xpedite also offers discounted international services. These services allow a
customer to use an automatic dialing device to direct international faxes to
the Xpedite network for delivery at a discount from standard international
prices. Xpedite's discounted international service includes "store-and-forward"
service, in which a fax is transmitted and stored for subsequent delivery, and
"real-time" service in which the sender's fax machine is connected directly to
the recipient's fax machine.
Xpedite has created a new division, MessageREACHSM, with a value-added set of
service offerings focusing on the high-volume Internet e-messaging market.
MessageREACHSM provides a Web-based service for the processing and delivery of
enhanced e-mail applications, with extensive tracking and reporting
capabilities. Messages can be sent in e-mail text or html, with or without
personalized inserts, attachments and unique URLs. Outsourcing the delivery and
management of mass e-mail communications using the MessageREACHSM delivery
engine and infrastructure provides a professional, reliable and secure
interactive solution with anti-spam "opt-out" protection. This proprietary
infrastructure, designed and custom built on top of state-of-the-art Internet
technology by Xpedite's technical team, operates solely for the support of
MessageREACHSM customers worldwide.
Xpedite believes that effective customer care is essential to attracting and
retaining its customers. Xpedite's customer care group is responsible for
educating and assisting customers in using Xpedite's services, for resolving
billing and related issues and, in consultation with its technical support
associates, for resolving technical problems customers may have in using
Xpedite services. A customer care call center is located in Eatontown, New
Jersey, and Xpedite also has regionally deployed customer care representatives.
Customer care services are provided 24 hours per day, seven days per week in
the United States, Europe and Asia/Pacific regions.
Xpedite employs separate associates who are responsible for technical support
functions. These employees perform more technically demanding support
activities, such as list and feature management, consulting with strategic
partners regarding technical issues and resolving technical issues brought to
their attention by the customer care department.
Xpedite headquarters are located in Eatontown, New Jersey and it has 10
operations centers in North America, Europe and Asia/Pacific. Xpedite markets
its services through a direct sales force principally based in 50 sales offices
in 16 countries and a significant network of third-party distributors.
5
Premiere Conferencing
Premiere Conferencing offers a full range of traditional and Internet-based
conferencing services for real-time business communications worldwide.
Premiere Conferencing offers three levels of conferencing services:
Service Level Description
------------- -----------
Dialog Services... These automated conferencing services allow users to
begin and conduct their conference without the assistance
of an operator. Security features include passcodes and
tones to introduce the arrival and departure of each
participant. Premiere Conferencing offers automated,
reservation-less conferencing services 24 hours per day,
7 days per week. This service was developed using
proprietary conferencing hardware and software. These
automated conferencing services were designed based on
customers' needs and requirements to give our customers
direct control of the conference call process. Dialog
toll and toll-free services are ideal for a variety of
meetings, including any meeting requiring instant access
to a group of participants.
Legend Services... These conference call services include assistance from
operators and other Premiere Conferencing team members.
Legend services are ideal for sales meetings, strategic
planning sessions, staff meetings and board meetings.
Paragon Services.. This collection of event management services is
customized for each customer through consultation with
Premiere Conferencing team members. These services are
ideal for high profile events such as press conferences,
customer seminars and quarterly earnings releases.
Premiere Conferencing also offers VisionCastSM, a Web-enhanced service that
allows real-time sharing of presentations over the Internet in conjunction
with a conference call (Web-based data collaboration). In addition, Premiere
Conferencing offers a variety of enhanced services, including translation
services, transcription services, consulting services, fulfillment services to
assemble and mail conference materials, invitation design, RSVP and reminder
services, and electronic question-and-answer and electronic survey services.
Premiere Conferencing is currently developing an Internet conferencing
division, which we believe will provide a suite of Internet-based services to
enable customers to schedule, host and conduct meetings and Internet
presentations with streaming media. This should allow the customer to have
complete control of their conferencing services through innovative Web design
and features not available with traditional conferencing service providers.
Internet services will be incorporated to facilitate ease of use, distribution
of services and delivery cost reduction. In addition, Premiere Conferencing
plans to bring a unique value-added feature to high-end services by enhancing
the customer's presentation with TV studio-like production capability. The
goal of this new division is to become the premier application service
provider (ASP) of conferencing and ancillary Internet-based tools to conduct
meetings and other events.
Premiere Conferencing has its own direct sales force, which has a regional
reporting structure and a centrally managed national and international
accounts program. The Premiere Conferencing sales force targets primarily
larger companies. The centrally managed national accounts program focuses on
multi-location businesses that are better served by dedicated representatives
with ultimate responsibility across different geographic regions. Premiere
Conferencing markets its services through its full-time direct sales force and
a significant network of third-party distributors.
Premiere Conferencing believes that effective customer care is essential to
attracting and retaining its customers. Premiere Conferencing is responsible
for educating and assisting customers in using its services, for resolving
billing and related issues and, in consultation with its technical support
associates, for resolving technical problems customers may have in using its
services. Customer call centers are located in Colorado
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Springs, Colorado and Lenexa, Kansas, and Premiere Conferencing also has
regionally deployed customer care representatives. In the United States,
customer care services are provided 24 hours per day, seven days per week.
Premiere Conferencing employs dedicated associates who are responsible for
multiple support functions. These employees perform more demanding support
activities, such as list and feature management, consulting with strategic
partners and resolving technical issues brought to their attention by the
customer.
Premiere Conferencing has headquarters and operations centers in Colorado
Springs, Colorado and Lenexa, Kansas, and international operations centers in
Canada, the UK, Australia, Hong Kong, Singapore and Japan. With a client base
of more than 31,000 domestic and international clients, Premiere Conferencing
works with organizations in various industries including high tech,
pharmaceutical, investor relations, public relations and market research.
Voicecom
Voicecom develops and markets a wide array of communications services to its
customers through its private data network, the Internet and leased fixed
facilities. Voicecom's services are offered both domestically and
internationally. Through its Voice and Data Messaging division, Voicecom
provides communications services including voice messaging, calling cards, 800-
based services, enhanced fax, conference calling, long distance and interactive
voice response ("IVR") applications. Through its Orchestrate.com(R) division,
Voicecom will provide Internet-based communications services and personalized
content delivery. The Voice and Data Messaging division and Orchestrate.com(R)
division are described below.
Voice and Data Messaging Division of Voicecom
The Voice and Data Messaging division's services include:
Service Description
------- -----------
Voice Messaging...... Voicecom's private data network allows Voicecom
customers access to one of the largest "voice
intranets" in the world. Voicecom's intelligent data
network offers voice mail customers functionality
similar to e-mail and the ability to easily
communicate inside the voice intranet with a touch of
a button. Customers can use Voicecom's voice intranet
to record and send messages to hundreds of recipients
by entering their mailbox numbers or sending to a pre-
established distribution list; answer messages simply
by pressing a number on the telephone keypad; and copy
and route received messages to anyone else on the
network.
Corporate Messaging.. Voicecom offers centralized 800-based voice messaging
services to large corporate clients through four
operations centers. Voicecom also offers local access
voice messaging services to large corporate clients
through its worldwide private data network. Both
services offer customers functionality similar to e-
mail and the ability to easily communicate with the
touch of a button. Voicecom Corporate Messaging
services allow customers to record and send messages
to hundreds of recipients by entering their mailbox
numbers or sending to a pre-established distribution
list; answer messages simply by pressing a number on
the telephone keypad; and copy and route received
messages to anyone else on the system or network.
Voicecom Corporate Messaging also includes facilities
management services where the voice messaging
equipment is located on the customer's premises and
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Service Description
------- -----------
Voicecom provides all voice messaging services
to that customer, including equipment
maintenance and end-user service and support.
All of the Voicecom Corporate Messaging
services include end-user support services,
such as the development and distribution of
voice mail directories, the generation and
maintenance of large voice mail distribution
lists, administration services (adds, deletes
and changes), and customer or end-user
training.
Interactive Voice Response.. Voicecom provides various IVR applications
using custom voice prompts and commands from a
caller's telephone keypad to retrieve, process
or route certain information or telephone
calls. This IVR service is used by, among
others, financial institutions (such as Bank of
America), where Voicecom's platform is used to
enhance call processing for checking, savings
and other account information.
Call Greeter................ Voicecom also markets a group of simple IVR
products, branded as "greeter" products, to
certain vertical markets including banks and
retail outlets (including wireless retailers).
The greeter products act as an automated
attendant for companies that want to reduce the
number of calls handled by live staff. An
incoming caller is presented with a simple menu
of options and, depending upon the option
selected, may be asked to leave a message or
may be transferred to a live attendant.
Enhanced Calling Services... Enhanced Calling Services include calling
cards, long distance and enhanced 800-based
communications services, which are offered
directly to consumers and corporate accounts
and on a wholesale basis. During 1999, the
Company decided to sell its retail calling card
service and focus on more core business to
business services.
Voicecom markets its Voice and Data Messaging services through multiple
distribution channels that encompass: (i) direct sales through Voicecom's own
dedicated sales force; (ii) direct marketing efforts where Voicecom is
responsible for lead generation and sales; (iii) co-brand relationships in
which Voicecom offers its services to the customers of other companies, such as
financial institutions, that are seeking to increase their revenue from, and
goodwill with, their customer base by offering value-added services; (iv)
private-label relationships where Voicecom may develop custom applications for
its platforms and market its services jointly with its strategic partners; and
(v) licensing and wholesale relationships where other companies market and sell
Voicecom's services under their names without significant assistance from
Voicecom.
The direct sales force for Voicecom vertically targets companies in the
legal, insurance, medical, property management and banking industries. Voicecom
believes it is currently the messaging market leader in the multilevel
marketing sector, selling its services to the hundreds of thousands of
multilevel marketing representatives in organizations such as Amway, Mary Kay
and Excel Communications.
Voicecom believes that effective customer care is essential to attracting and
retaining its customers. The Voice and Data Messaging customer care group is
responsible for educating and assisting customers in using Voice and Data
Messaging services, for resolving billing and related issues and, in
consultation with its technical support associates, for resolving technical
problems. A customer care call center is located in Atlanta, Georgia, and
Voicecom also has regionally deployed customer care representatives. In the
United States, Voice and Data Messaging customer care services are provided 24
hours per day, seven days per week. In addition, Voice and Data Messaging
customers are supported in centers in Europe, Asia, Canada and Australia during
their business hours.
8
Voicecom employs separate associates who are responsible for technical
support functions. These employees perform more technically demanding support
activities, such as list and feature management, consulting with strategic
partners and licensees regarding technical issues and resolving technical
issues brought to their attention by the customer care department.
Orchestrate.com(R) Division
Orchestrate.com(R) is a division of Voicecom that focuses on the development
and marketing of Orchestrate(R) branded services. Voicecom intends to
establish Orchestrate(R) as a strong, globally-recognized brand associated
with Internet-based communications services and personalized content delivery.
Orchestrate(R) subscribers are able to access a suite of communications tools
and personalized information from a single Web site or any telephone,
combining unified communications with Web content. The term unified messaging
is typically used to describe services that allow a user to access voice, fax
and e-mail messages from multiple devices (such as a computer or a telephone).
The term unified communications is typically used to describe services that
encompass unified messaging and a variety of additional features such as Web-
initiated conference calling and one number / follow me features. Some of the
functions and features currently provided, or that we expect to provide in the
future, under the Orchestrate(R) brand include:
. Web Message Center (voice, fax and e-mail in a single inbox);
. My Orchestrate(R) Web Portal (Web page with communications and content
"channels");
. Web Call & Conference (initiate calls and conference calls with a few
mouse clicks);
. Web Contact Manager (address book that simplifies message addressing and
initiation of calls);
. Web Tasks and Calendar (daily, weekly and monthly views);
. E-Mail by Phone (listen and respond to e-mail with any telephone);
. Web Info by Phone (upcoming feature that converts personalized news,
weather and stock quotes from Web text to voice, so the subscriber can
listen to the information with any telephone); and
. Telephone Locator (one number / follow me service that forwards incoming
calls to up to three numbers simultaneously and allows the subscriber to
hear the name of the incoming caller prior to taking the call).
Orchestrate(R) branded services are or will be marketed through several
distribution channels that include:
Strategic Partnerships. In these arrangements, services are marketed on
a co-branded basis to the customers of the strategic partner. For its
marketing efforts, the strategic partner receives a commission or shares in
the revenues generated by the services. Potential strategic partners
include multilevel marketing organizations, Internet service providers
("ISPs") and various Web portals. For example, Healtheon/WebMD, a leading
end-to-end Internet healthcare company, offers a co-branded version of an
earlier Orchestrate(R) service that allows healthcare professionals to
manage their critical flow of communications.
Wholesale Relationships. In these arrangements, the wholesale partner
markets and sells Orchestrate(R) services without significant assistance
from Orchestrate.com(R). The wholesale partner determines the retail rates
charged to its customers and pays Orchestrate.com(R) at agreed wholesale
rates. Potential wholesale partners include interexchange carriers,
incumbent and competitive local exchange carriers, and wireless carriers.
Affiliate Marketing. Orchestrate(R) services will be advertised on the
Websites of partners ("Affiliates") in exchange for a fee or bounty.
Affiliates will include a link to Orchestrate.com(R) on their Web site. For
example, Orchestrate.com(R) has entered into a contract with Be Free, an
Internet marketing firm that acts like an advertising agency. Be Free has a
large affiliate network and operates software that tracks all signups. Be
Free will receive a portion of the fees or bounties paid to the Affiliates.
9
Orchestrate(R) believes that excellent customer service is essential to its
success in retaining and attracting new subscribers. We currently provide
customer service through our call center located in Atlanta, Georgia. Our
customer service staff handles all questions regarding a subscriber's account
and are available 24 hours a day, seven days a week. Subscribers can call the
Orchestrate(R) call center facility for customer service through a toll-free
800 number or they can e-mail their questions directly to a customer service
address at Orchestrate(R).
PTEKVentures
PTEKVentures is the Company's Internet investment and strategic networking
arm. PTEKVentures' strategy is to identify and invest in promising early-stage
Internet companies.
As of February 29, 2000, PTEK Venture's portfolio included equity positions
in the following companies:
Heatheon/WebMD. Healtheon/WebMD (Nasdq:HLTH) is a leading end-to-end
Internet healthcare company connecting physicians and consumers to the entire
healthcare industry. Healtheon/WebMD is using the
Internet to facilitate a new system for the delivery of healthcare, resulting
in a single, secure environment for all communications and transactions that
will enable a more efficient and cost effective healthcare system. The company
was formed in November 1999 as a result of the merger of Healtheon
Corporation, WebMD, Inc., MEDE America and Medcast.
S1 Corporation. S1 (Nasdaq:SONE), the pioneer of Internet banking, is one of
the leading global providers of innovative Internet-based financial services
solutions. S1 offers a broad range of applications that empower financial
organizations to increase revenue, strengthen customer relationships and gain
competitive advantage by meeting the evolving needs of their customers across
various lines of business, market segments and delivery channels. Through its
professional services organization, S1's applications can be implemented in-
house or outsourced to the S1 Data Center.
Derivion. Derivion is a leading e-billing application service provider that
leverages the flexibility and power of the Internet to automate the bill
delivery and payment process for companies driven by recurring billing, such
as telecommunications, utility, insurance, and financial services companies.
Derivion's inetBillerSM service provides complete e-billing implementation,
including electronic bill design, email notification, bill presentment,
payment processing, enrollment marketing, and customer care. These
capabilities provide billers with a competitive advantage, enabling them to
make bill delivery and bill payment simple and convenient for their customers
and providing a path to electronic bill consolidation at customer access
points, as needed.
USA.NET. USA.NET, one of the world's largest e-mail outsourcing companies,
delivers industry-leading e-mail services to more than 3,000 businesses--
including American Express, United Airlines, Hewlett-Packard and Mail Boxes
Etc.--and for more than 15 million mailboxes worldwide. Designed to meet the
needs of all audiences, USA.NET's e-mail outsourcing solutions eliminate the
difficulty and expense of installing, upgrading and supporting an in-house e-
mail system. USA. NET launched its Web-based e-mail service in 1996, and
introduced e-mail outsourcing for businesses in 1997. USA.NET received what it
believes is the industry's first patent for its Web-based e-mail filtering and
forwarding technology in 1999.
Webforia. Webforia creates online business communities where business
professionals from a variety of industries can access and exchange specialized
information and services, participate in industry communities and conduct
electronic business.
i2Go.com. i2Go.com is a provider of personalized Internet audio content for
businesses and consumers on the go. The company enables users to select and
customize audio programming from a broad array of content players that is
delivered to mobile Internet appliances. By combining its Web site, its unique
MP3AgentTM media manager desktop application, and its eGo interactive portable
Internet appliance, i2Go.com empowers consumers to personalize their listening
experience by choosing from a wide range of digital audio content such as
news, sports, weather, entertainment and music from the Internet and listen to
it on the go.
10
BuyTrek. BuyTrek is developing a turnkey infrastructure solution that allows
destination Web-sites to generate revenues from their site visitors. The
BuyTrek solution is a technology platform that will be coupled with a network
of tens of thousands of cataloged e-commerce sites across numerous product and
service categories for business to business e-commerce.
Platforms and Network Infrastructure
The Company, through its three operating units, operates global Internet and
telecom-based networks that allow customers to combine the power of the
Internet with the reach of the telephone. Customers can access the Company's
various services through the Internet and through local and/or 800 telephone
numbers.
Xpedite. Xpedite services are provided primarily through a document
distribution platform that uses servers to perform all primary processing and
switching functions. This platform supports multiple input methods including,
but not limited to, fax-to-fax, priority PC based software, e-mail gateways and
high speed IP based interconnects. Outgoing faxes are delivered through line
group controllers, which are deployed in a decentralized fashion to exploit
local delivery costs. The remote line group controllers are connected to the
servers over a wide area network via either private lines or Xpedite's global
TCP/IP based network. Messages are transported in bulk from one location domain
to another using MCP to MCP protocol. The current domains include Sydney,
Australia; Hong Kong; Tokyo, Japan; Seoul, Korea; Singapore; Basel,
Switzerland; York, UK; Leeds, UK; Eatontown, New Jersey; Munich, Germany; and
Paris, France. Remote nodes on the network are located in Belgium, Canada,
Denmark, Italy, Malaysia, Netherlands, New Zealand and Taiwan.
Voicecom. Voicecom offers advanced voice messaging services through platforms
located in more than 240 sites in the United States, Canada, Australia, New
Zealand, UK, Hong Kong, Korea and Japan. The telephony service platforms are
distributed globally and are interconnected via Voicecom's highly available,
global frame relay network infrastructure. This network transports the
subscriber messages between the distributed systems. Voicecom also offers out-
sourced voice messaging services to large corporate clients via tollfree access
to multiple voice messaging platforms located in Atlanta, Georgia; Reno,
Nevada; Arlington, Virginia; and Oakbrook, Illinois.
Voicecom's Corporate Card services are provided through a platform located in
Atlanta, Georgia that consists of Unix-based telephony front-end processors
connected via a network to a Tandem computer database server for subscriber
authentication and billing.
Most of Voicecom's enhanced calling services and IVR services are provisioned
on platforms located in Atlanta, Georgia and Dallas, Texas that include
Dialogic-based telephony nodes, fax nodes and conference nodes. These platforms
are connected to the public switched telephone network via large tandem
switches that are used primarily for least-cost routing functions.
Voicecom's Orchestrate(R) services are provided on a highly available and
highly scaleable platform that includes servers and third-party software
integrated and enhanced with Orchestrate.com(R)'s unified communications
middleware. The core services in the Orchestrate(R) platform are provided by
Sun Microsystems / Netscape, Microsoft, Lucent, Real Audio, Centigram
Communications and LHS Priority Call. The primary Orchestrate(R) service hubs
are located in telecommunications central offices in Atlanta, Georgia, Dallas,
Texas and Toronto, Canada.
Premiere Conferencing. Premiere Conferencing services are provided from
centers in Colorado Springs, Colorado and Lenexa, Kansas on commercially
available conferencing bridges. Complex, operator-assisted calls are supported
on these bridges. Internally developed Dialog conference bridges utilizing
Dialogic hardware and Premiere software are used to support unattended (no
operator assistance) conference calls. These conferences are both scheduled and
reservationless. Customers access the conferencing platform through direct
inward dialing, 800 numbers, Internet and virtual network access. Additional
automated bridges are located in Canada, Australia, China, Singpore, Japan and
the UK.
11
Research and Development
Each PTEK operating unit includes research, development and engineering
personnel who are responsible for developing, testing and supporting
proprietary software applications, as well as creating and improving enhanced
system features and services. The Company's research and development strategy
is to focus its efforts on enhancing its proprietary software and integrating
its software with readily available industry standard software and hardware
when feasible. Research, development and engineering personnel also engage in
joint development efforts with the Company's strategic partners and vendors.
Competition
The PTEK strategy is to gain a competitive advantage for its operating units
by being among the first companies to offer network-based integrated
communications solutions, being an innovator in this market and offering unique
services to its customers. The Company's business units intend to seek to
capitalize on strategic relationships with key technology development and
distribution partners, in order to build its customer base and to maintain and
increase customer loyalty.
The markets for the Company's services are intensely competitive, quickly
evolving and subject to rapid technological change. The Company expects
competition to increase in the future. Many of the Company's
current and potential competitors have longer operating histories, greater name
recognition, larger customer bases and substantially greater financial,
personnel, marketing, engineering, technical and other resources than the
Company. The Company believes that existing competitors are likely to expand
their product and service offerings and that new competitors are likely to
enter the Company's markets. Such competition could materially adversely affect
the Company's business, financial condition and results of operations.
12
Examples of competitors in the markets for our products and services are
shown in the following chart:
Product or Service Example Competitors
- --------------------------------------------------------------------------------------
Electronic Document Distribution AT&T Corporation
(Xpedite) MCI WorldCom, Inc.
Sprint Corporation
International postal telephone and
telegraph companies
- --------------------------------------------------------------------------------------
Voice and Data Messaging AT&T Corporation
(Voicecom) Regional Bell operating companies
Octel Communications Corporation (owned
by Lucent Technologies, Inc.)
Nortel Networks Corporation
Seimens Information and Communications
Networks, Inc.
Centigram Communications Corporation
Boston Technology Inc.
Pulsepoint Communications
- --------------------------------------------------------------------------------------
Interactive Voice Response AT&T Corporation
(Voicecom) MCI WorldCom, Inc.
Lucent Technologies, Inc.
West TeleServices Corporation
Call Interactive
Syntellect Inc.
- --------------------------------------------------------------------------------------
Conferencing AT&T Corporation
(Premiere Conferencing) MCI WorldCom, Inc.
Sprint Corporation
- --------------------------------------------------------------------------------------
Enhanced Calling Services AT&T Corporation
(Voicecom) MCI WorldCom, Inc.
Sprint Corporation
- --------------------------------------------------------------------------------------
Unified Messaging Microsoft Corporation
(Orchestrate(R)) Novell, Inc.
Sun Microsystems, Inc.
Motorola, Inc.
Octel Communications Corporation (owned
by Lucent Technologies , Inc.)
JFAX.com, Inc.
EFAX.com, Inc.
General Magic
Webley
Ureach
One Box
ThinkLink
In addition to the competition faced by PTEK's operating units, PTEK faces
competition in its investing and EcoNet development activities from numerous
other companies including, publically traded Internet companies such as CMGI
and Internet Capital Group, venture capital companies, large corporations with
internal venture units and others.
13
Financial Information About Reportable Segments and Geographic Areas
For financial information about the Company's reportable segments and
geographic areas for the years ended December 31, 1999, 1998 and 1997, see Note
20 to the Consolidated Financial Statements.
Legislative Matters
The Telecommunications Act of 1996 (the "1996 Act") was intended to increase
competition in the long distance and local telecommunications markets. The 1996
Act opens competition in the local services market and, at the same time,
contains provisions intended to protect competitive local telephone companies
from unfair competition by incumbent local exchange carriers ("LECs"),
including the RBOCs. The 1996 Act allows RBOCs to provide long distance service
outside of their local service territories but bars them from immediately
offering in-region, inter-LATA, long distance services until certain conditions
are satisfied. An RBOC must apply to the Federal Communications Commission
("FCC") to provide in-region inter-LATA long distance services and must satisfy
a set of pro-competitive criteria intended to ensure that RBOCs open their own
local markets to competition before the FCC will approve such application.
Further, while the FCC has final authority to grant or deny such RBOC
application, the FCC must consult with the Department of Justice to determine
if, among other things, the entry of the RBOC would be in the public interest,
and with the relevant state to determine if the pro-competitive criteria have
been satisfied. The timing of the various RBOCs' entry into their respective
in-region long distance service businesses is uncertain. In December 1999, Bell
Atlantic's application to provide in-region long distance services in New York
state was granted by the FCC. Given the precedent set by the FCC's grant of
Bell Atlantic's application, the FCC is likely to grant similar applications by
Bell Atlantic and the other RBOCs in other states. In January 2000,
Southwestern Bell Telephone Company filed its application for FCC approval to
provide in-region long distance service in Texas. The FCC is expected to act on
the application before May 2000. As a result of the RBOCs' gaining authority to
offer in-region long distance services, the Company may experience increased
competition from RBOCs in the long distance industry.
Government Regulation
Certain of the Company's subsidiaries, including Premiere Communications,
Inc. ("PCI") (which is part of its Voicecom operating unit), provide both
telecommunications and information services. Consequently, PCI is, and certain
other PTEK subsidiaries may be, subject to federal, state and local regulation
in the United States. Various international authorities may also seek to
regulate the services provided by PCI and possibly other Premiere subsidiaries.
The Company is currently reviewing whether and to what extent additional
regulatory compliance may be required in connection with the Company's
operations.
Tariffs and Detariffing. PCI is classified by the FCC as a non-dominant
carrier for its domestic interstate and international common carrier
telecommunications services. Common carriers that provide domestic interstate
and international telecommunications services must maintain tariffs on file
with the FCC describing rates, terms and conditions of service. While the
tariffs of non-dominant carriers, such as PCI, are subject to FCC review, they
are presumed to be lawful upon filing with the FCC. Currently, PCI has filed
tariffs with the FCC to provide domestic interstate and international
telecommunications services.
In October 1996, the FCC issued an order detariffing long distance services,
thereby prohibiting non-dominant long distance carriers from filing tariffs for
domestic, interstate, long distance services. The FCC's detariffing rules were
scheduled to become effective September 22, 1997. The detariffing rules were
appealed by several parties, and in February 1997, the U.S. Court of Appeals
for the District of Columbia Circuit issued a temporary stay preventing the
rules from taking effect pending judicial review. If the appeals are
unsuccessful and the FCC's detariffing rules become effective, PCI will be
required to obtain agreements with its customers regarding many of the terms
contained in its existing tariffs, thereby creating uncertainties regarding
such new contractual terms, and increasing the risk of customer claims against
either the Company or PCI. However, the Company and PCI are currently unable to
predict what impact the outcome of the FCC's detariffing proceeding will have
on the Company or PCI.
14
Local Interconnection and Resale. In August 1996, the FCC adopted an order
(the "Interconnection Order") which established a minimum set of rules relating
to the manner in which all telecommunications carriers would be able to
interconnect with the LECs' networks. The Interconnection Order addressed
several important interconnection issues, including the purchase of unbundled
network elements, resale of local services at wholesale discounts,
interconnection negotiation and arbitration procedures, and mutual compensation
arrangements for transporting and terminating local calls between competing
carriers.
The RBOCs, several states, various carriers, associations and other entities
appealed the Interconnection Order. On July 18, 1997, the U.S. Court of Appeals
for the Eighth Circuit overturned many of the rules established by the FCC's
Interconnection Order governing, among other things, the pricing of
interconnection, resale and unbundled network elements. On October 14, 1997,
the court further overturned FCC rules requiring that LECs provide unbundled
network elements on a combined basis. In January 1999, the Supreme Court
reversed the Eighth Circuit's decisions, finding that the FCC had jurisdiction
to implement the pricing provisions of the 1996 Act. The Eighth Circuit,
however, is expected on remand to rule on the merits of the FCC's pricing
methodology. The Supreme Court also upheld the FCC's rule requiring LECs to
provide unbundled network elements on a combined basis. Competitors using such
combined network elements may conceivably be able to provide retail local
services entirely through the use of the LEC's facilities at discounts that may
be lower than those available through local resale. However, the Supreme Court
reversed in part the FCC's decision which specifically identified the
particular unbundled network elements that LECs must provide. In September
1999, the FCC, in response to the Supreme Court decision, released new
definitions of unbundled network elements. The Company has at times considered
entering the local exchange market as a so-called competitive local exchange
carrier ("CLEC"). If the Company becomes a CLEC, it will be faced with the
uncertainty of the FCC's interconnection rules and with related state PUC rules
that are likely to vary substantially from state to state. This patchwork of
federal and state regulations could make competitive entry by the Company in
some markets more difficult and expensive than in others and could increase the
costs of regulatory compliance associated with local entry.
Universal Service Reform. On May 8, 1997, the FCC released an order
establishing a significantly expanded federal telecommunications subsidy
regime. Providers of interstate telecommunications service, such as PCI, as
well as certain other entities, must pay for the federal programs. PCI's
contributions to the federal subsidy fund will be based on its share of total
interstate (and certain international) telecommunications services and on
certain defined telecommunications end user revenues. PCI may pass certain of
these costs on to its customers. However, no assurance can be given that the
FCC's universal service requirements will not have a material adverse effect on
the Company's business, financial condition and results of operations.
Payphone Compensation. In September 1996, the FCC issued an order adopting
rules to implement the 1996 Act's requirements establishing "a per call
compensation plan to ensure all payphone service providers are fairly
compensated for each and every completed call using their payphone." This order
included a specific fee to be paid to each payphone service provider by long
distance carriers and intra-LATA toll providers (including LECs) on all "dial
around" calls, including debit card and calling card calls. In decisions
released in July 1997, and September 1997, the U.S. Court of Appeals for the
D.C. Circuit vacated and remanded some of the FCC rules for the implementation
plan.
In response to these decisions, in October 1997, the FCC issued a second
order, revising the per-call, compensation amount to be paid to payphone
service providers. Specifically, the FCC decreased the compensation amount to
$0.284 per call. This compensation amount was to remain in effect until October
6, 1999, when a market-based rate would have become effective. In May 1998, the
U.S. Court of Appeals for the D.C. Circuit again remanded certain issues to the
FCC for further consideration.
In response, in January 1999, the FCC issued a third order in its payphone
compensation proceeding, revising the per-call compensation amount to be paid
to payphone service providers. Specifically, the FCC decreased the compensation
amount to $0.24 per call. In addition, the FCC extended the time period that
this compensation amount will be in effect until January 31, 2001. Portions of
the FCC's third order have been appealed to the U.S. Court of Appeals for the
D.C. Circuit.
15
Although PCI expects to incur additional costs to receive "dial around" calls
that originate from payphones, the FCC has thus far permitted long distance
carriers, such as PCI, to pass such costs through to its customers. However,
the Company is unable to predict what impact the payphone rules will have on
PCI's costs for such calls until the ultimate outcome of the FCC's and the
court's rulings with respect to these payphone compensation obligations.
Additional Requirements. The FCC imposes additional obligations on all
telecommunications carriers, such as PCI, including obligations: (i) to
interconnect with other carriers and not to install equipment that cannot be
connected with the facilities of other carriers; (ii) to ensure that their
services are accessible and usable by persons with disabilities; (iii) to
provide telecommunications relay service, either directly or through
arrangements with other carriers; (iv) to comply with verification procedures
in connection with changing a customer's carrier so as to prevent "slamming", a
practice by which a customer's chosen telecommunications service provider is
switched without the customer's consent; (v) to protect the confidentiality of
proprietary information obtained from other carriers, manufacturers and
customers; (vi) to pay annual regulatory fees; and (vii) to contribute to the
federal Telecommunications Relay Services Fund.
State Regulation. Most state public service and public utility commissions
("PUCs") subject carriers such as PCI that provide intrastate, common carrier
services to entry certification or authorization requirements, typically
requiring such carriers to obtain authority from the state PUC prior to
initiation of service. In most states, PCI is also required to file tariffs
setting forth the terms, conditions and prices for services that are classified
as intrastate. PCI is also required to update or amend its tariffs when it
adjusts its rates or adds new products or services.
PCI either has applied for and received, or is in the process of applying for
and receiving, all necessary certificates or authorizations to provide
intrastate, long distance services. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state PUCs for
failure to comply with state law or with state PUC rules, regulations and
policies. Fines or other penalties also may be imposed for such violations.
There can be no assurance that state PUCs or third parties will not raise
issues with regard to PCI's compliance with applicable laws or regulations.
PCI may be subject to additional regulatory burdens in some states, such as
compliance with quality of service requirements, periodic remittance of
contributions to support state sponsored universal service, or other reporting
requirements. PCI's ability to incur long-term indebtedness is subject to prior
PUC approval in some state jurisdictions. In addition, some state PUCs regulate
the issuance of securities and the transfer of control of entities subject to
their jurisdiction. Currently, the Company is reviewing whether and to what
extent these regulatory compliance requirements attach to its business
operations.
Local Regulation. The Company may be required to obtain various permits and
authorizations from municipalities in which it deploys and operates network
facilities. The issues of whether and to what extent actions of local
governments over the activities of telecommunications carriers, including
requiring payment of franchise fees or other surcharges, pose barriers to entry
for competitive telecommunications companies (and thus may be preempted by the
FCC) have been the subject to much litigation and remain unsettled. Although
the Company relies primarily upon leased network facilities of other telephone
companies, in certain instances the Company deploys its own switching
facilities and therefore may need to obtain certain municipal permits or other
authorizations. The actions of municipal governments in imposing conditions on
the grant of permits or other authorizations or their failure to act in
granting such permits or other authorizations could harm the Company's
business.
The foregoing does not purport to describe all present and proposed federal,
state or local regulations and legislation affecting the telecommunications
industry. Other federal and state regulations are currently the subject of
judicial proceedings, legislative hearings and administrative proposals, which
could change, in varying degrees, the manner in which the communications
industry operates. At this time, the Company cannot predict the outcome of
these proceedings, nor their impact upon the telecommunications industry or
upon the Company.
16
Other. In conducting its business, the Company is subject to various laws and
regulations relating to commercial transactions generally, such as the Uniform
Commercial Code and is also subject to the electronic funds transfer rules
embodied in Regulation E promulgated by the Federal Reserve. Congress has held
hearings regarding, and various agencies are considering, whether to regulate
providers of services and transactions in the electronic commerce market. For
example, the Federal Reserve completed a study, directed by Congress, regarding
the propriety of applying Regulation E to stored value cards. The Department of
Treasury promulgated proposed rules applying record keeping, reporting and
other requirements to a wide variety of entities involved in electronic
commerce. It is possible that Congress, the states or various government
agencies could impose new or additional requirements on the electronic commerce
market or entities operating therein. If enacted, such laws, rules and
regulations could be imposed on the Company's business and industry and could
have a material adverse effect on the Company's business, financial condition
or results of operations. The Company's proposed international activities also
will be subject to regulation by various international authorities and the
inherent risk of unexpected changes in such regulation.
Proprietary Rights and Technology
The Company's ability to compete is dependent in part upon its proprietary
technology. The Company relies primarily on a combination of intellectual
property laws and contractual provisions to protect its proprietary rights and
technology. These laws and contractual provisions provide only limited
protection of the Company's proprietary rights and technology. The Company's
proprietary rights and technology include confidential information and trade
secrets which the Company attempts to protect through confidentiality and
nondisclosure provisions in its licensing, services, reseller and other
agreements. The Company typically attempts to protect its confidential
information and trade secrets through these contractual provisions for the
terms of the applicable agreement and, to the extent permitted by applicable
law, for some negotiated period of time following termination of the agreement.
PTEK currently has three patents, seven patent applications pending, numerous
worldwide registrations of trademarks and service marks, and numerous worldwide
trademark and service mark registrations pending. Despite the Company's efforts
to protect its proprietary rights and technology, there can be no assurance
that others will not be able to copy or otherwise obtain and use the Company's
proprietary technology without authorization, or independently develop
technologies that are similar or superior to the Company's technology. However,
the Company believes that, due to the rapid pace of technological change in the
information and telecommunications service industry, factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements and the timeliness and quality of support
services are of equal or greater importance to establishing and maintaining a
competitive advantage in the industry.
Many patents, copyrights and trademarks have been issued in the general areas
of information services and telecommunications, computer telephony, the
Internet and unified messaging. From time to time, in the ordinary course of
our business, we have been and expect to continue to be, subject to third party
claims that our current or future products or services infringe the patent,
copyright or trademark rights or other intellectual property rights of third
parties. Claims alleging patent, copyright or trademark infringement may be
brought against us with respect to current or future products or services. If
these types of actions or claims are brought we may not ultimately prevail and
any claiming parties may have significantly greater resources than we have to
pursue litigation of these types of claims. Any infringement claims, whether
with or without merit, could:
. be time consuming and a diversion to management;
. result in costly litigation;
. cause delays in introducing new products and services or enhancements;
. result in costly royalty or licensing agreements; or
. cause us to discontinue use of the challenged technology, tradename or
service mark at potentially significant expense associated with the
marketing of a new name or the development or purchase of replacement
technology.
17
Examples of prior and current infringement claims include the following:
In October 1996, one of our subsidiaries received a letter from a third party
claiming that aspects of our subsidiary's voice messaging products and services
may be infringing upon one or more of the third party's patents. We have
reviewed the patent claims of this third party and we do not believe that any
of our subsidiary's products or services infringe on the claims of the third
party. No patent infringement claims have been filed against us by the third
party at this time. Should this third party file patent infringement claims
against us, we believe that we would have meritorious defense to those claims.
However, due to the inherent uncertainties of litigation, we are unable to
predict the outcome of any potential litigation with the third party, and any
adverse outcome could have a material adverse effect on our business, results
of operations and financial condition. Even if we were to ultimately prevail,
our business could be adversely affected by the diversion of management
attention and litigation costs. Because of this risk, we withheld in escrow
approximately 123,000 shares of our common stock from the purchase price paid
to acquire one of our voice messaging subsidiaries. This escrow arrangement
terminates in April 2000. This escrow may not be sufficient to fully cover our
exposure in the event of litigation or an adverse outcome to the potential
infringement claims.
In February 1997, we entered into a long-term nonexclusive license agreement
with AudioFAX IP LLC settling a patent infringement suit filed by AudioFAX in
June 1996. Effective April 1, 1998, this initial license agreement was amended
to include Xpedite within the coverage of the license. In September 1997, one
of our subsidiaries also entered into a long-term nonexclusive license
agreement with AudioFAX.
Prior to its acquisition by us, Xpedite received a letter from Cable &
Wireless, Inc. informing Xpedite that Cable & Wireless had received a demand
letter from AudioFAX claiming that some Cable & Wireless products and services
infringed AudioFAX's patent rights. Cable & Wireless initially sought
indemnification from Xpedite for this claim. Subsequent to our acquisition of
Xpedite, Cable & Wireless notified us of the AudioFAX claim and sought
indemnification directly from us. We have requested, but as yet are without,
sufficient information to evaluate the merits of this claim and we are unable
at this time to predict the outcome of this matter.
In 1999, we received separate letters from Ronald Katz, Aerotel
Limited/Aerotel USA, Inc. and Cable & Wireless informing us of the existence of
their respective patents or patent portfolios and the potential applicability
of those patents on our products and services. We are currently considering
each of these matters. However, we currently lack sufficient information to
assess the potential outcomes of these matters. Due to the inherent
uncertainties of litigation, however, we are unable to predict the outcome of
any potential litigation, and any adverse outcome could have a material effect
on our business, financial condition and results of operations. Even if we were
to prevail in this type of challenge, our business could be adversely affected
by the diversion of management attention and litigation costs.
In the fourth quarter of 1999, we entered into a license agreement with
Aspect Telecommunications, Inc. ("Aspect") settling a patent infringement suit
filed by Aspect in March 1999. See Item 3--"Legal Proceedings."
Employees
As of December 31, 1999, the Company employed 2,467 persons, substantially
all of whom were employed on a full-time basis. Of these employees, 803 were
engaged in sales and marketing; 391 in engineering and research and
development; 965 in customer service and technical support; and 308 were in
general and administrative activities. None of the Company's employees are
members of a labor union or are covered by a collective bargaining agreement.
Item 2. Properties
PTEK Holdings corporate headquarters occupy approximately 21,000 square feet
of office space in Atlanta, Georgia under a lease expiring August 31, 2007. The
headquarters of the Company's Voicecom business unit occupies approximately
74,800 square feet of office space in the same building under leases expiring
August 31, 2007 and August 31, 2006 plus 12,100 square feet in a nearby
building whose lease expires December 31, 2003. Xpedite occupies approximately
61,500 square feet of office space in Eatontown, New Jersey under three
18
separate leases expiring on September 30, 2000, May 31, 2001 and October 31,
2001, respectively. Premiere Conferencing occupies approximately 103,000 square
feet of office space in Colorado Springs, Colorado under a lease expiring
August 31, 2006, and approximately 46,000 square feet of office space in
Lenexa, Kansas under a lease expiring August 31, 2009.
The Company also has data and switching centers and sales offices within and
outside the United States. The Company believes that its current facilities and
office space is sufficient to meet its present needs and does not anticipate
any difficulty securing additional space, as needed, on terms acceptable to the
Company.
Item 3. Legal Proceedings
The Company has several litigation matters pending, as described below, which
it is defending vigorously. Due to the inherent uncertainties of the litigation
process and the judicial system, the Company is unable to predict the outcome
of such litigation matters. If the outcome of one or more of such matters is
adverse to the Company, it could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company and certain of its officers and directors have been named as
defendants in multiple shareholder class action lawsuits filed in the United
States District Court for the Northern District of Georgia. Plaintiffs seek to
represent a class of individuals (including a subclass of former Voice-Tel
franchises and a subclass of former Xpedite shareholders) who purchased or
otherwise acquired the Company's common stock from as early as February 11,
1997 through June 10, 1998. Plaintiffs allege the Company admitted it had
experienced difficulty in achieving its anticipated revenue and earnings from
voice messaging services due to difficulties in consolidating and integrating
its sales function. Plaintiffs allege, among other things, violation of
Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 and
Sections 11, 12 and 15 of the Securities Act of 1933. We filed a motion to
dismiss the complaint on April 14, 1999. On December 14, 1999, the court issued
an order that dismissed the claims under Sections 10(b) and 20 of the Exchange
Act without prejudice, and dismissed the claims under Section 12(a)(1) of the
Securities Act with prejudice. The effect of this order was to dismiss from
this lawsuit all open-market purchase by the plaintiffs. The plaintiffs filed
an amended complaint on February 29, 2000, which the Company intends to move to
dismiss.
A lawsuit was filed on November 4, 1998 against the Company, as well as
individual defendants Boland T. Jones, Patrick G. Jones, George W. Baker, Sr.,
Eduard J. Mayer and Raymond H. Pirtle, Jr. in the Southern District of New
York. Plaintiffs were shareholders of Xpedite who acquired common stock of the
Company as a result of the merger between the Company and Xpedite in February
1998. Plaintiffs' allegations are based on the representations and warranties
made by the Company in the prospectus and the registration statement related to
the merger, the merger agreement and other documents incorporated by reference,
regarding the Company's acquisitions of Voice-Tel and VoiceCom, the Company's
roll-out of Orchestrate, the Company's relationship with customers Amway
Corporation and DigiTEC 2000, Inc., and the Company's 800-based calling card
service. Plaintiffs allege causes of action against the Company for breach of
contract, against all defendants for negligent misrepresentation, violations of
Sections 11 and 12(a)(2) of the Securities Act of 1933, and against the
individual defendants for violation of Section 15 of the Securities Act.
Plaintiffs seek undisclosed damages together with pre- and post-judgment
interest, recission or recissory damages as to violation of Section 12(a)(2) of
the Securities Act of 1933, punitive damages, costs and attorneys' fees. The
defendants' motion to transfer venue to Georgia has been granted. The
defendants' motion to dismiss has been granted in part and denied in part. The
Company intends to file an answer.
On February 23, 1998, Rudolf R. Nobis and Constance Nobis filed a complaint
in the Superior Court of Union County, New Jersey against 15 named defendants
including Xpedite and certain of its alleged current and former officers,
directors, agents and representatives. The plaintiffs allege that the 15 named
defendants and certain unidentified "John Doe defendants" engaged in wrongful
activities in connection with the management of the plaintiffs' investments
with Equitable Life Assurance Society of the United States and/or Equico
Securities, Inc. (collectively "Equitable"). More specifically, the complaint
asserts wrongdoing in connection
19
with the plaintiffs' investment in securities of Xpedite and in unrelated
investments involving insurance-related products. The allegations in the
complaint against Xpedite are limited to plaintiffs' investment in Xpedite. The
plaintiffs have alleged that two of the named defendants, allegedly acting as
officers, directors, agents or representatives of Xpedite, induced the
plaintiffs to make certain investments in Xpedite but that the plaintiffs
failed to receive the benefits that they were promised. Plaintiffs allege that
Xpedite knew or should have known of alleged wrongdoing on the part of other
defendants. Plaintiffs seek an accounting of the corporate stock in Xpedite,
compensatory damages of approximately $4.85 million, plus $200,000 in "lost
investments," interest and/or dividends that have accrued and have not been
paid, punitive damages in an unspecified amount, and for certain equitable
relief, including a request for Xpedite to issue 139,430 shares of common stock
in the plaintiffs' names, attorneys' fees and costs and such other and further
relief as the Court deems just and equitable.
In March 1999, Aspect Telecommunications, Inc. ("Aspect"), the purported
current owner of certain patents, filed suit against the Company and Premiere
Communications, Inc. ("PCI") alleging that they had violated claims in these
patents and requesting damages and injunctive relief. In the fourth quarter of
1999, the Company and PCI entered into a settlement agreement with Aspect,
which settled and disposed of Aspect's claims in this litigation. This
settlement will not have a material adverse effect on the Company's business,
financial condition or results of operations.
On June 11, 1999, the Company filed a complaint against MCI WorldCom in the
Superior Court of Fulton County for the State of Georgia. The Company
subsequently filed an amended complaint on June 18, 1999. The amended complaint
alleges that MCI WorldCom breached the Strategic Alliance Agreement, dated
November 13, 1996, between the Company and MCI WorldCom by, inter alia,
awarding various contracts to vendors other than the Company and to which the
Company was entitled either exclusive or preferential consideration. In
addition to injunctive relief, the Company seeks damages of not less than
$10 million, per- and post-judgment interest, cost and expenses of litigation,
including attorneys' fees. On July 1, 1999 the court entered an order staying
all proceedings pending arbitration. In connection with that order, MCI
WorldCom agreed that it would not issue any requests for information, requests
for proposals or enter into any contracts with respect to the proposals
challenged by the Company.
A lawsuit was filed on November 1, 1999 by Donald H. Turner, a former officer
of the Company against the Company, Boland T. Jones and Jeffrey A. Allred in
the Superior Court of Fulton County, Georgia. Against the Company the plaintiff
alleges breach of contract and promissory estoppel relating to the termination
of his employment against, and against all defendants the plaintiff alleges
fraudulent inducement relating to his hiring by the Company. The plaintiff
seeks compensatory damages of $875,000, forgiveness of a $100,000 loan,
interest, attorneys' fees and punitive damages in an unspecific amount.
On September 3, 1999, Elizabeth Tendler filed a complaint in the Superior
Court of New Jersey Law Division: Union County, against 17 named defendants
including the Company and Xpedite, and various alleged current and former
officers, directors, agents and representatives of Xpedite. Plaintiff alleges
that the defendants engaged in wrongful activities in connection with the
management of the plaintiff's investments, including investments in Xpedite.
The allegations against Xpedite and the Company are limited to plaintiff's
investment in Xpedite. Plaintiff's claims against Xpedite and the Company
include breach of contract, breach of fiduciary duty, unjust enrichment,
conversion, fraud, interference with economic advantage, liability for ultra
vires acts, violation of the New Jersey Consumer Fraud Act and violation of New
Jersey RICO. Plaintiff seeks an accounting of the corporate stock of Xpedite,
compensatory damages of approximately $1.3 million, accrued interest and/or
dividends, a constructive trust on the proceeds of the sale of any Xpedite or
PTEK stock, shares of Xpedite and/or PTEK to satisfy defendants' obligations to
plaintiff, attorneys' fees and costs, punitive and exemplary damages in an
unspecified amount, and treble damages. On February 25, 2000, Xpedite filed its
answer, as well as cross claims and third party claims. The Company has not
been served with the summons and complaint.
20
The Company is also involved in various other legal proceedings which the
Company does not believe will have a material adverse effect upon the Company's
business, financial condition or results of operations, although no assurance
can be given as to the ultimate outcome of any such proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security holders during
the fourth quarter of the fiscal year covered by this report.
21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock, $.01 par value per share (the "Common Stock"),
has traded on the Nasdaq National Market under the symbol "PTEK" since its
initial public offering on March 5, 1996. The following table sets forth the
high and low sales prices of the Common Stock as reported on the Nasdaq
National Market for the periods indicated. Such prices are based on inter-
dealer bid and asked prices without markup, markdown, commissions or
adjustments and may not represent actual transactions.
1999 High Low
---- ------- -------
First Quarter................................................ $13.000 $ 6.000
Second Quarter............................................... 20.875 11.000
Third Quarter................................................ 11.875 5.688
Fourth Quarter............................................... 8.625 4.375
1998 High Low
---- ------- -------
First Quarter................................................ $34.625 $20.875
Second Quarter............................................... 35.000 7.688
Third Quarter................................................ 11.313 3.625
Fourth Quarter............................................... 8.250 2.500
The closing price of the Common Stock as reported on the Nasdaq National
Market on March 29, 2000 was $7.0625. As of March 28, 2000 there were
approximately 605 record holders of the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock, and the
current policy of the Company's Board of Directors is to retain any available
earnings for use in the operation and expansion of the Company's business. The
payment of cash dividends on the common stock is unlikely in the foreseeable
future. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will depend upon the Company's
earnings, capital requirements, financial condition and any other factors
deemed relevant by the Board of Directors.
During the year ended December 31, 1999, certain current and former
employees, directors and investors exercised options to purchase an aggregate
of 372,589 shares of Common Stock at prices ranging from $0.42 to $1.61 per
share in transactions exempt from registration pursuant to Section 4(2) and
Rule 701 of the Securities Act.
Item 6. Selected Financial Data
The following selected consolidated balance sheet and statement of operations
data as of and for the years ended December 31, 1999, 1998, 1997, 1996 and
1995, and the consolidated balance sheet data as of December 31, 1999 and 1998,
have been derived from the audited consolidated financial statements of the
Company, which give retroactive effect to the acquisitions of Voice-Tel and
VoiceCom Systems, Inc., both of which were accounted for as poolings-of-
interests, and are qualified by reference to such consolidated financial
statements including the related notes thereto. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and the notes thereto.
EBITDA before accrued settlement costs, acquired research and development
costs and restructuring, merger and other special charges is defined as net
income before taxes, other income (expense), depreciation, amortization,
accrued settlement costs, acquired research and development costs and
restructuring, merger costs and other special charges.
22
EBITDA before accrued settlement costs, acquired research and development
costs and restructuring, merger and other special charges is considered a key
management performance indicator of financial condition because it excludes
the effects of goodwill and intangible amortization attributable to
acquisitions primarily acquired using the Company's common stock, the effects
of prior years' cash investing and financing activities that affect current
period profitability and the effect of one time cash or non-cash charges
associated with acquisitions and internal exit activities. EBITDA, as defined
by the Company, is used as an indicator of operating cash flow before payments
for interest and taxes. EBITDA before accrued settlement costs, acquired
research and development costs and restructuring, merger and other special
charges may not be comparable to similarly titled measures presented by other
companies and could be misleading unless all companies and analysts calculate
them in the same manner.
Year Ended December 31
-------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations
Data:
Revenues................... $ 458,448 $444,818 $229,352 $197,474 $147,543
Gross profit............... 328,757 309,782 165,378 141,873 103,675
Operating income
(loss)(1)................. (138,081) (91,053) (16,714) 6,806 7,003
Net income (loss).......... (33,491) (84,254) (18,428) 3,458 4,171
Net income (loss)
attributable to common and
common equivalent shares
for shareholders for:
--basic net income (loss)
per share................ $ (33,491) $(84,254) $(18,428) $ 3,429 $ 3,863
--diluted net income
(loss) per share......... (33,491) (84,254) (18,428) 3,429 3,863
Net income (loss) per
common and common
equivalent shares for:
--basic(2)................ $ (0.72) $ (1.90) $ (0.57) $ 0.12 $ 0.19
--diluted(2).............. $ (0.72) $ (1.90) $ (0.57) $ 0.11 $ 0.17
Shares used in computing
net income (loss) per
common and common
equivalent shares for
--basic................... 46,411 44,325 32,443 27,670 19,868
--diluted................. 46,411 44,325 32,443 31,288 24,312
Balance Sheet Data (at
period end):
Cash, cash equivalents and
investments............... $ 101,981 $ 40,609 $176,339 $ 83,836 $ 11,759
Working capital............ 34,746 (92,628) 132,906 45,377 (16,093)
Total assets............... 770,481 796,416 379,593 201,541 78,131
Total debt................. 179,625 299,673 181,698 47,975 52,650
Total shareholders' equity
(deficit)................. 422,220 397,793 107,761 104,533 (11,639)
Statement of Cash Flow Data:
Cash provided by operating
activities................ 9,927 22,248 27,159 36,889 13,559
Cash provided by (used) in
investing Activities...... 107,216 21,292 (160,055) (96,112) (13,186)
Cash (used in) provided by
financing activities...... (120,924) (46,115) 138,730 66,196 3,523
- --------
(1) Excluding charges for restructuring, merger costs and other special
charges of approximately $8.0 million in 1999, $24.1 million in 1998 and
$54.0 million in 1997, charges for acquired research and development of
approximately $15.5 million in 1998 and $11.0 million in 1996, and accrued
settlements costs of approximately $1.5 million in 1998 and 1997, and
$1.3 million in 1996, operating income (loss) would have been
approximately $(130.1) million in 1999, $(50.0) million in 1998,
$38.8 million in 1997 and $19.1 million in 1996. EBITDA would have been
$38.8 million in 1999, $61.8 million in 1998, $60.1 million in 1997 and
$33.3 million in 1996.
(2) Basic net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding during the period. Diluted
net income (loss) per share is computed using the weighted average number
of shares of common stock and dilutive common stock equivalents
outstanding during the
23
period from convertible preferred stock, convertible subordinated notes
(using the if-converted method) and from stock options (using the treasury
stock method).
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
PTEK Holdings, Inc., a Georgia corporation, and its subsidiaries
(collectively, the "Company") began operations in 1991 and the Company
completed its initial public offering in March 1996. The Company provides an
array of innovative solutions which are designed to simplify everyday
communications of businesses and individuals. The Company's services include
voice and electronic messaging, electronic document distribution, conferencing,
calling card services and Internet-based communications services. Through a
series of acquisitions from September 1996 through September 1999, the Company
has assembled a suite of communications services, an international private data
network and points-of-presence in regions covering North America, Asia/Pacific
and Europe. The Company has also invested in Internet companies that have
developed their own innovative service offerings that will enable these
companies to become industry leaders.
The Company's reportable segments align the Company into six areas of focus
that are driven by product offering, investment strategy and functional cost
control. The Company was realigned into a decentralized organization in the
third quarter of 1999 from the previous market segment focus of the Emerging
Enterprise Solutions (EES) and Corporate Enterprise Solutions (CES) business
units. The Company's realignment was a further refinement of the EES and CES
business unit organization previously established in the fourth quarter of 1998
and positioned the Company as an operating and investing business. The Company
has focused its management on the various products within CES and EES through
further decentralization, bringing in new management into the various new
segments. These six business segments are called Voicecom (formerly in both EES
and CES), Xpedite (formerly in CES), Premiere Conferencing (formerly in CES),
Retail Calling Card Services (formerly in EES), PTEKVentures and Corporate.
Voicecom focuses on local and 800-based voice messaging services, Internet-
enabled communications with its Orchestrate(R) product, along with interactive
voice response services and wholesale communications platform outsourcing
solutions. Its customer base ranges from small office/home office to multi-
level marketing organizations to Fortune 1000 corporate accounts. Xpedite
focuses on store and forward fax, real time fax services, electronic messaging
services with its MessageReachSM product and voice messaging in the
Asia/Pacific region, primarily to Fortune 1000 corporate accounts and
governments. Premiere Conferencing focuses on attended and unattended
conferencing services, primarily to Fortune 1000 customers. Retail Calling Card
Services is a business unit whose operations the Company has decided to exit.
It consists of the Premiere WorldLink calling card product, which was primarily
marketed through direct response advertising and co-branding relationships to
single retail users. Discontinued operations treatment of this business unit is
not available as the Company will continue pursuing the wholesale and corporate
account distribution channels of this product, both of which operate with
positive EBITDA, as defined by the Company. PTEKVentures focuses on investments
in companies in the Internet with innovative service offerings that will enable
these companies to become industry leaders. Corporate focuses on being a
holding company with minimal headcount leaving the day to day operations of
running the business at the operating business segments. EBITDA before accrued
settlement costs, acquired research and development costs and restructuring,
merger and other special charges is management's primary measure of segment
profit and loss.
The Company has pursued its goal of becoming a provider of a suite of
telecommunications and Internet- enabled communications services both
domestically and internationally through various acquisitions from 1996 through
1999. Through these acquisitions, the Company has been able to assemble a
variety of product and service offerings, as described above. In 1996, the
Company acquired TeletT, which became the foundation for the Company's
Orchestrate(R) product offering. In 1999 the Company acquired Intellivoice
Communications, a company that was previously a consultant in developing the
next generation Orchestrate(R) product offering, Orchestrate(R) 2000. The
Orchestrate(R) product is offered under the Voicecom business segment. In 1997,
the Company acquired the franchise network of Voice-Tel, which provided local
access voice mail and voice
24
messaging. The Company also acquired VoiceCom Systems, Inc. in 1997, which
provided 800-based corporate voice-mail and calling card services. Both the
Voice-Tel and VoiceCom Systems, Inc. acquisitions, as well as the Orchestrate
product offering, provide the basis of the Voicecom operating segment. In 1998,
the Company acquired Xpedite, a provider of domestic and international fax
services. Also in 1998, the Company acquired the international affiliates of
Xpedite and other complimentary international fax service providers. These
acquisitions, along with the Australian operations of Voice-Tel, have formed
the basis for the Xpedite operating segment. The Company acquired ATS in 1998,
which, along with the conferencing business from the VoiceCom Systems, Inc.
acquisition, forms the basis of the Premiere Conferencing operating segment.
During 1998 and 1999, the Company invested in Internet-based companies that it
believes will be leaders in their market niches in the expanding Internet
economy. The Company has formed the PTEKVenutures segment of the Company with
dedicated resources to develop these kinds of investments. The Company
anticipates future growth of investments in the PTEKVentures segment with the
establishment of dedicated management in 1999 focused on growing this aspect of
the Company's business.
The Company's revenues are based on usage in the Xpedite, Premiere
Conferencing and Retail Calling Card Services business segments and a mix of
both usage and monthly fixed fee's in the VoiceCom business segment.
Telecommunications costs consist primarily of the cost of metered and fixed
telecommunications related costs incurred in providing the Company's services.
Direct operating costs consist primarily of salaries and wages, travel,
consulting fees and facility costs associated with maintaining and operating
the Company's various revenue generating platforms and telecommunications
networks, regulatory fees and non-telecommunications costs directly associated
with providing services.
Direct sales and marketing costs consist primarily of salaries and wages,
travel and entertainment, advertising, commissions and facility costs
associated with function of selling or marketing the Company's services.
Research and development costs consist primarily of salaries and wages,
travel, consulting fees and facilities costs associated with developing product
enhancements and new product development.
General and administrative costs consist primarily of salaries and wages
associated with billing, customer service, order processing, executive
management and administrative functions that support the Company's operations.
Bad debt expense associated with customer accounts is also included in this
caption.
Depreciation and amortization includes depreciation of computer and
telecommunications equipment, furniture and fixtures, office equipment,
leasehold improvements and amortization of intangible assets. The Company
provides for depreciation using the straight-line method of depreciation over
the estimated useful lives of the assets, with the exception of leasehold
improvements which are depreciated on a straight-line basis over the shorter of
the term of the lease or the useful life of the assets. Intangible assets being
amortized include goodwill, customer lists, developed technology and assembled
work force, and the MCI WorldCom strategic alliance agreement.
EBITDA before accrued settlement costs, acquired research and development
costs and restructuring, merger and other special charges is defined as net
income before taxes, other income (expense), depreciation, amortization,
accrued settlement costs, acquired research and development costs and
restructuring, merger costs and other special charges.
EBITDA before accrued settlement costs, acquired research and development
costs and restructuring, merger and other special charges is considered a key
management performance indicator of financial condition because it excludes the
effects of goodwill and intangible amortization attributable to acquisitions
primarily acquired using the Company's common stock, the effects of prior
years' cash investing and financing activities
25
that affect current period profitability and the effect of one time cash or
non-cash charges associated with cash flow before payments for interest and
taxes. EBITDA before accrued settlement costs, acquired research and
development cost and restructuring, merger and other special charges may not be
comparable to similarly titled measures presented by other companies and could
be misleading unless all companies and analysts calculate them in the same
manner.
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from the estimates. The following
discussion and analysis provides information which management believes is
relevant to an assessment and understanding of the Company's consolidated
results of operations and financial condition. This discussion should be read
in conjunction with the consolidated financial statements and notes thereto.
Results Of Operations
The following table presents the percentage relationship of certain
statements of operations items to total revenues for the Company's consolidated
operating results for the periods indicated:
Year Ended
December 31, 1999
---------------------
1999 1998 1997
----- ----- -----
REVENUES.................. 100.0 % 100.0 % 100.0 %
COST OF SERVICES.......... 28.3 30.4 27.9
----- ----- -----
GROSS MARGIN.............. 71.7 69.6 72.1
----- ----- -----
Direct operating costs... 15.1 12.1 7.8
----- ----- -----
CONTRIBUTION MARGIN....... 56.6 57.5 64.3
----- ----- -----
OPERATING EXPENSES
Direct sales and
marketing............... 23.5 24.6 24.4
Research and
development............. 2.6 1.2 0.8
General and
administrative.......... 21.9 17.8 13.0
Depreciation............. 15.3 10.4 8.5
Amortization............. 21.6 14.7 0.8
Restructuring, merger
costs and other special
charges................. 1.7 5.4 23.6
Acquired research and
development............. -- 3.5 --
Accrued settlement
costs................... -- 0.3 0.7
----- ----- -----
Total operating
expenses............... 86.6 77.9 71.8
----- ----- -----
OPERATING INCOME (LOSS)... (30.0) (20.4) (7.5)
----- ----- -----
OTHER INCOME (EXPENSE)
Interest, net............ (5.4) (3.3) (0.4)
Gain on marketable
securities.............. 33.2 -- --
Other, net............... 2.7 0.1 0.1
----- ----- -----
Total other income
(expense).............. 30.5 (3.2) (0.3)
INCOME (LOSS) BEFORE
INCOME TAXES............. 0.5 (23.6) (7.8)
INCOME TAX PROVISION
(BENEFIT)................ 7.7 (4.8) 0.4
----- ----- -----
NET LOSS.................. (7.2)% (18.8)% (8.2)%
===== ===== =====
26
The following table presents certain financial information about the
Company's operating segments for the periods presented (amounts in millions):
Year Ended
December 31, 1999
-----------------------
1999 1998 1997
------- ------ ------
REVENUES:
Xpedite.............................................. $ 242.0 $197.0 $ 3.9
Voicecom............................................. 125.7 152.9 166.7
Premiere Conferencing................................ 53.8 36.9 3.5
Retail Calling Card Services......................... 37.2 58.0 55.3
Eliminations......................................... (0.3) -- --
------- ------ ------
Totals............................................... $ 458.4 $444.8 $229.4
======= ====== ======
OPERATING PROFIT (LOSS):
Xpedite.............................................. $ (30.4) $(19.7) $ (0.1)
Voicecom............................................. (6.9) 23.7 49.1
Premiere Conferencing................................ (3.8) 1.8 0.7
Retail Calling Card Services......................... (43.8) (27.3) (5.8)
Corporate............................................ (45.3) (28.5) (5.1)
Eliminations......................................... (0.3) -- --
Restructuring, merger costs and other special
charges............................................. (7.6) (24.1) (54.0)
Acquired research and development.................... -- (15.5) --
Accrued settlement costs............................. -- (1.5) (1.5)
------- ------ ------
Totals............................................... $(138.1) $(91.1) $(16.7)
======= ====== ======
EBITDA:
Xpedite.............................................. $ 61.2 $ 54.1 $ (0.1)
Voicecom............................................. 16.8 51.0 67.7
Premiere Conferencing................................ 9.0 7.0 0.7
Retail Calling Card Services......................... (5.8) (22.1) (3.1)
Corporate............................................ (42.1) (28.2) (5.1)
Eliminations......................................... (0.3) -- --
------- ------ ------
Totals............................................... $ 38.8 $ 61.8 $ 60.1
======= ====== ======
Analysis
The Company's financial statements reflect the results of operations of
Xpedite, Xpedite international affiliates, ATS and Intellivoice from the date
of their respective acquisition. These acquisitions have been accounted for
under the purchase method of accounting. The Company's financial statements
have been restated for all periods presented to reflect the Voice-Tel and
VoiceCom Systems, Inc. acquisitions, which have been accounted for under the
pooling-of-interests method of accounting. The following discussion and
analysis is prepared on that basis and is discussed on an operating segment
basis.
Revenues
Consolidated revenues increased 3.1% to $458.4 million in 1999 and 93.9% to
$444.8 million in 1998. Revenues in the Company's operating segments increased
as follows:
. Xpedite revenues increased 22.8% to $242.0 million in 1999 and 4,951.3%
to $197.0 million in 1998. The increase in 1999 was attributable to (1)
twelve months of revenue in 1999 versus ten months in 1998 from Xpedite
Systems, Inc. which was acquired in 1998 and accounted for under the
purchase method of accounting, (2) growth in this unit's Asia/Pacific
region and (3) acquisitions made in this segment's European region
during the second quarter of 1999. The increase in 1998 was primarily
attributable to the acquisition of Xpedite Systems, Inc. in February of
1998.
27
. VoiceCom revenues decreased 17.8% to $125.7 million in 1999 and 8.3% to
$152.9 million in 1998. The decrease in 1999 was attributable to the
expiration of revenue commitments under the strategic alliance agreement
with MCIWorldcom in September 1998, the bankruptcy of two wholesale
platform calling card customers in the second quarter of 1998, decreases
in its local based voice messaging distribution channel with Amway,
decreases in its 800-based corporate messaging and calling card
programs. These decreases were offset, in part, by increases in revenue
from the Company's call center IVR service with Bank of America and its
Orchestrate strategic alliance with Healtheon/WebMD. The decrease in
1998 was attributable to having twelve months of the MCIWorldcom revenue
commitment in 1997 versus only nine months in 1998 when it expired in
September 1998, decreases in its local based voice messaging
distribution channel with Amway and decreases in its 800-based corporate
messaging and calling card programs.
. Premiere Conferencing revenues increased 45.8% to $53.8 million in 1999
and 954.3% to $36.9 in 1998. The increase in 1999 is attributable to (1)
twelve months of revenue in 1999 versus nine months in 1998 for ATS,
which was acquired in the second quarter of 1998 and accounted for under
the purchase method of accounting and (2) increases from its unattended
conferencing product. Management of this segment anticipates growing
this portion of its business in which the conferencing event is fully
automated and more profitable as less labor costs are required to
support and maintain.
. Retail calling card services revenues decreased 35.9% to $37.2 million
in 1999 and increased 4.9% to $58.0 million in 1998. The decrease in
1999 is attributable to (1) the exiting of unprofitable prepaid calling
card programs in the third quarter of 1998, (2) management's decision in
the first quarter of 1998 to discontinue its unprofitable direct
response advertising in in-flight magazines for its Worldlink calling
card and (3) management's decision in 1999 to discontinue unprofitable
direct response advertising of its Worldlink calling card program with
its co-branding partners. In the third quarter of 1999, management
decided not to acquire any new customers in this segment because it
determined that the cost of acquiring such customers outweighed the
revenues generated from these customers. Management expects that further
decreases in revenue will occur in this segment as operations
discontinue. Management is currently seeking potential buyers for this
customer base. The increase in 1998 is attributable to growth in the co-
branding and collegiate distribution channels for calling card services,
offset by declines in its in-flight magazine distribution channel.
Gross Margins
Consolidated gross profit margins were 71.7%, 69.6% and 72.1% in 1999, 1998
and 1997, respectively. Gross margins in the Company's operating segments are
as follows:
Xpedite gross profit margins were 68.3%, 64.9% and 80.0% in 1999, 1998, and
1997, respectively. Gross margins increased in 1999 due to decreases in per
minute telecommunications rates for the Xpedite worldwide network. Lower
telecommunications costs have become the general industry trend over the past
two years. Gross margins were higher in 1997 because this segment's business
that year was primarily composed of local based voice messaging business in
Asia/Pacific, which has inherently higher gross margins due to the absence of
per minute long distance charges. Gross margins declined in 1998 due to the
acquisition of Xpedite Systems, Inc., which had inherently lower gross margins
due to the presence of per minute long distance charges.
VoiceCom gross profit margins were 79.8%, 81.1% and 80.9% in 1999, 1998 and
1997, respectively. Gross margins declined in 1999 primarily due to the
expiration of the MCIWorldcom revenue commitments, offset by lower fixed
telecommunications costs, which is a general industry trend. Gross margins
increased in 1998 due to a better mix of local based messaging revenues versus
800 based corporate messaging services and lower fixed telecommunications
c