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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 2001.
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 is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant, based upon the closing sale price of common stock on March 26,
2002 as reported by The Nasdaq Stock Market's National Market, was approximately
$181,906,653.
As of March 26, 2002 there were 53,738,271 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 2002 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................................................................................... 9
Item 3. Legal Proceedings............................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 11
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 12
Item 6. Selected Financial Data...................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 48
Item 8. Financial Statements and Supplementary Data.................................................. 49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 88
Part III
Item 10. Directors and Executive Officers of the Registrant........................................... 89
Item 11. Executive Compensation....................................................................... 89
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 89
Item 13. Certain Relationships and Related Transactions............................................... 89
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 90
Signatures.............................................................................................. 99
Exhibits ............................................................................................... 100
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:
. 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;
. 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;
. Our services may be interrupted due to failure of the platforms
and network infrastructure utilized in providing our services;
. Domestic and international terrorist activity, war and political
instability may adversely affect the level of services utilized by
our customers and the ability of those customers to pay for
services utilized;
. 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
businesses in which we are engaged;
. Changes in the securities markets may negatively impact us;
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. The failure of the purchaser to pay the liabilities assumed in
the sale of the Voicecom business unit;
. Factors described under the caption "Factors Affecting Future
Performance" in this Form 10-K; and
. Factors described from time to time in our press releases, reports
and other filings made with the Securities and Exchange Commission.
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.
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PART I
ITEM 1. BUSINESS
OVERVIEW
PTEK Holdings, Inc., a Georgia corporation ("PTEK" or the "Company"),
is a global provider of communications and data services, including
conferencing (audio conference calling and Web-based collaboration), multimedia
messaging (high-volume fax, e- mail, wireless messaging and voice message
delivery), IVR (interactive voice response), network based voice messaging and
unified personal communications (advanced personal communications management
systems that integrate voice mail, e-mail and fax messaging). The Company's
services are directed primarily at the enterprise marketplace and the Company
has more than 80,000 corporate accounts, including almost 70% of the Fortune
500. PTEK believes that corporate customers will increasingly rely on outsource
providers for these communications and data services because these tasks are
too complex and/or costly to handle internally and do not represent a core
competency.
In 1997 and 1998, the Company focused on acquiring market leaders in
communications and data service categories, which are now operated as separate
business units. They include Premiere Conferencing, an industry leader for
enhanced, automated and Web conferencing solutions; Xpedite, the global leader
in multimedia messaging services; and Voicecom, a leading provider of unified
communications and IVR solutions.
To better serve PTEK's global corporate customer base, over the last
few years the Company has funded new technology development in each of its
business units to help position them in larger market categories. Premiere
Conferencing has expanded into automated and Web conferencing services; Xpedite
has developed a suite of e-mail, wireless and voice-based messaging services;
and Voicecom has expanded its IVR services.
On March 26, 2002 the Company sold substantially all the assets of its
Voicecom business unit in exchange for cash and the assumption of certain
liabilities. As a result, the Company has exited in all material respects the
IVR, network based voice messaging and unified personal communications
businesses. See the "Subsequent Events" section of Management's Discussion and
Analysis below and Note 23 to the Consolidated Financial Statements.
PTEK was incorporated in Florida in 1991 and reincorporated in Georgia
in 1995. The corporate headquarters for PTEK are located at 3399 Peachtree Road,
NE, Lenox Building, Suite 600, Atlanta, GA 30326, and the telephone number is
(404) 262-8400.
INDUSTRY BACKGROUND
Nearly everywhere in the world, the bulk of business communication is
done through telephone and Web-based conferencing, e-mail, fax and voice mail
messaging. This explosion of communications in various forms has forced more and
more companies to outsource their managed group communications needs.
Conferencing and Web collaboration is projected to be an $11 billion
market by 2005 (Source: Wainhouse Research). The multimedia messaging segment,
which combines fax, e-mail and voice and video distribution, is projected to be
a $10.5 billion market within three years (Source: IDC and Forrester). PTEK
provides market leading solutions in both of these categories.
Today, PTEK's services, combined with its global infrastructure, are
the primary conduits for literally billions of business communications each
year.
SERVICE OFFERINGS
PTEK's communications and data service offerings have been provided
through its three business units -- Premiere Conferencing, Xpedite and Voicecom.
Premiere Conferencing offers a full range of enhanced, automated and
Web conferencing services for all forms of group communications activities.
Customers use Premiere Conferencing for a wide range of communications from very
large events such as investor relations calls, press conferences and training
seminars with hundreds or thousands of participants, to smaller four-to-six
person conference calls. Premiere Conferencing provides group communications
services for leading companies in a variety of vertical industries, including
technology, healthcare, financial services, public relations and market
research. Premiere Conferencing hosted almost 2 million calls comprising more
than 600 million minutes in 2001.
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Through its own proprietary software technology, Premiere Conferencing
offers ReadyConference(SM), its automated service that does not require hands-on
involvement from an operator. These automated services allow users to begin and
conduct their conference calls without the assistance of an operator, or the
need of a reservation, via a dedicated dial-in number and passcode available for
use anytime. ReadyConference can be used for a variety of group communications,
including any meeting requiring instant access by a number of participants.
Premiere Conferencing's PremiereCall service includes assistance from
an operator or operators to ensure participants are on line, to begin the
conference and conduct a roll call. In addition, complete event management
services that include a dedicated team and professional announcer to work more
closely with the client throughout the event are available. Typical applications
include sales meetings, earnings releases, press conferences, customer seminars
and product rollouts. Premiere Conferencing's client services team understands
the importance of professional, secure communications and works closely with its
customers to ensure a successful conference.
Premiere Conferencing also offers Web-conferencing services,
VisionCast(R) and ReadyCast(SM), that combine the power of the Internet with its
audio conferencing offerings to provide real-time, multimedia presentation
solutions. VisionCast gives customers the interactivity and collaborative nature
of an in-person meeting while maintaining the cost and time savings of a
traditional conference call. Customers use VisionCast to conduct distance
learning, training, seminars, company meetings, focus groups and media
conferences. VisionCast includes features such as chat, Web tours, polling,
white boarding functions, record and playback capabilities, roll call and live
demo options. ReadyCast combines similar data collaboration capabilities with
the cost efficiency and convenience of Premiere Conferencing's ReadyConference
automated conferencing service. As part of its Web-based services, Premiere
Conferencing also offers SoundCast(R), an audio streaming technology that
provides live Internet streaming to simulcast a live conference call or recorded
presentation over the Web.
Premiere Conferencing services are available in ten countries with
bridging and sales infrastructure in the United States, Canada, Australia, New
Zealand, Hong Kong, Singapore, Japan, France, Germany and England, and Premiere
Conferencing plans to open a European operations center in Ireland in the second
quarter of 2002.
Xpedite offers a comprehensive suite of value-added multimedia
messaging services that manage and facilitate the electronic distribution of
information to all types of electronic addresses including fax, e-mail, voice
and wireless. Customers use Xpedite to manage critical information distribution
for transaction-based services such as bank statements, subscription renewals,
promotional offers, purchase orders, newsletters, research reports, rate sheets
and pricing/product announcements. Xpedite provides services to almost half of
the global Fortune 500 companies across nearly every business sector, including
financial services, professional associations, travel, hospitality, publishing,
technology and manufacturing. Xpedite processed approximately 2 billion messages
in 2001 through its proprietary messaging platforms.
In 2000, Xpedite launched messageREACH(SM), an e-mail service that
provides control, tracking, security, personalization and automated
administration for high volume e-mail and e-commerce applications. Xpedite has
added several significant service enhancements to messageREACH, including
improved HTML message support, transactional message support for applications
such as trade and account balance confirmations, billing and invoicing, as well
as campaign management capabilities for large scale e-marketing applications.
Among the advanced features built into the service are support for the
distribution and collection of forms, multiple layers of encryption and levels
of password protection, anti-spam, "opt-out" protection, automated
personalization of messages with text and graphical inserts, opt-in list
building, viral marketing and the hosting of customer databases for campaign
management.
messageREACH customers can access a proprietary software tool,
intelliSEND(SM) Wizard, to help with the creation of graphically rich HTML
documents for e-mail, and for the insertion of trackable hyperlinks to documents
or Web sites. The proprietary messageREACH delivery engine and infrastructure
operate solely for the support of messageREACH customers and were custom
designed by Xpedite's technical team, incorporating leading Internet technology.
Xpedite also provides Short Message Services (SMS) for wireless users in Europe
and South Asia, which allows text messages to be delivered to GSM phones using
existing Xpedite access methods.
Xpedite also launched voiceREACH(SM), a new automated service that
simultaneously delivers large volumes of prerecorded voice messages to any size
list of phone numbers, voice mailboxes or other answering devices. Typical users
of voiceREACH services include associations, political organizations, securities
firms and trade show operators.
Xpedite supports multiple protocols and can be accessed through a
variety of methods including ftp, TCP/IP, PC-Xpedite software, or Simple Mail
Transfer Protocol (SMTP). Xpedite services are available throughout the world
with local sales and customer support available in 18 countries throughout
Europe, Asia, Australia and North America.
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Voicecom offers a suite of integrated communications solutions
including network based voice messaging, IVR and unified personal
communications. Voicecom services are used by geographically dispersed companies
to increase communications and to improve productivity and customer care.
Voicecom's services support a variety of applications including customer care,
interpersonal messaging and enterprise communications, in a variety of
industries including financial services, healthcare, marketing and real estate.
Voicecom processed over 55 million messages and handled hundreds of millions of
calls in 2001.
Voicecom's network based voice messaging services allow a user to
record a voice message and send it to one voice mailbox or many voice mailboxes
on the network. Users can respond to a network voice message and messages can
also be easily forwarded or copied. Voicecom's network is effectively a "voice
intranet." Voicecom is able to provide its voice messaging service via local
numbers in more than 4,500 cities throughout North America. This network-based
solution is well suited for geographically dispersed companies such as direct
selling organizations, real estate and insurance.
In addition to its local based network voice messaging services,
Voicecom also offers centralized, 800-based corporate voice messaging services.
For certain large corporate customers, Voicecom purchases and installs voice
messaging equipment on the customers' premises. In those cases, Voicecom
provides full facilities management, including equipment maintenance and end
user service and support. All of Voicecom's central voice messaging services
(800-based, premise-based and pure facilities management) include end user
support services, such as development and distribution of voice mail
directories, generation and maintenance of large voice mail distribution lists,
administration services (adds, deletes and changes) and customer or end-user
training.
Voicecom's call answering and IVR services reduce the burden of
incoming calls and increase customer satisfaction. These services range from
after hour call handling and automated attendant solutions to more complex IVR
solutions. IVR is a 24/7 automated system that answers all incoming calls to a
location or central phone number and presents callers with a brief menu of
choices to meet their needs. The choices typically include location hours,
directions, account information and emergency services. Voicecom supports a
variety of IVR applications using custom voice prompts and commands from a
caller's telephone keypad to retrieve, process and route certain information or
telephone calls. For instance, financial institutions can use this service to
allow bank customers to access existing account information, open new accounts,
apply for loans, use online financial services and receive directions to banking
and ATM locations. IVR services are primarily designed for financial
institutions, retail outlets and property management companies.
Voicecom's unified communications services provide the ability for
businesses and consumers alike to streamline their communications by integrating
multiple mechanisms for information delivery - e-mail, fax and voicemail. All of
Voicecom's unified communications solutions provide advanced calling (including
calling card and conference calling) and message management capabilities and are
highly suited for the mobile professional. The Voicecom Assistant and
Orchestrate(R) services effectively allow for "anywhere" messaging regardless of
the medium used to communicate.
On March 26, 2002 the Company sold substantially all the assets of its
Voicecom business unit in exchange for cash and the assumption of certain
liabilities. See the "Subsequent Events" section of Management's Discussion and
Analysis below and Note 23 to the Consolidated Financial Statements.
CUSTOMER BASE
PTEK customers represent nearly every major industry, serving almost
70% of the Fortune 500. Millions of business people worldwide depend on PTEK
services everyday.
Premiere Conferencing has approximately 5,600 domestic and
international corporate accounts, supporting almost 72,000 moderators. The
business unit has successfully penetrated key accounts in various industries
including technology, healthcare, investor relations, financial services, public
relations and market research. Premiere Conferencing has long-term customer
relationships with well respected companies and organizations such as IBM
Corporation, HCA, The Healthcare Company, Novell, SGI, Hewlett Packard, Merck,
Merrill Lynch, UBS/PaineWebber, the NCAA and the National Institutes of Health.
Xpedite has more than 90,000 domestic and international corporate
accounts, representing over 175,000 users. Xpedite serves almost half of the
Fortune 500 companies. The business unit has successfully targeted industries
such as securities, banking, mortgage, publishing, healthcare, associations,
investor relations, public relations, travel and hospitality. Xpedite's diverse
customer base includes globally recognized companies such as Boeing, Bank One,
Marriott, Merck, Xerox, Chase Manhattan, Nippon Life Insurance, Sam's Club,
Bertelesmann, Dell Computer, United Airlines, British Airways, Bank of America,
McGraw Hill, Toyota, Federal Express and Salomon Smith Barney.
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Voicecom has approximately 5,000 corporate accounts and nearly 375,000
users. The business unit initially was successful in penetrating direct selling
organizations such as Amway, Mary Kay, Primerica, Avon and others. Voicecom now
targets key vertical markets such as financial services with existing customers
including Bank of America, Key Bank and PNC Bank; telecom providers with
existing customers including Sprint PCS, Verizon and TalkAmerica; the retail
industry with existing customers such as LensCrafters; the government sector
with existing customers such as the USDA; property management with existing
customers including AIMCO and Equity Properties; and real estate with existing
customers including Prudential, Northwest Century 21 and RE/MAX.
SALES AND MARKETING
Each of PTEK's business units markets its services through direct sales
employing a regional reporting structure and a centrally managed national and
global accounts program. The Company's sales force targets large and mid-size
enterprises. The centrally managed national and global accounts program focuses
on multi-location businesses that are better served by dedicated representatives
with responsibility across different geographic regions. The direct sales force
is organized by services and by industry on a global scale. The company employs
nearly 600 sales professionals around the world.
In addition to direct sales, the Company has begun to develop a network
of independent agents who can sell Premiere Conferencing, Xpedite and Voicecom
services primarily to middle market accounts.
As a service organization, PTEK's customer service teams play a major
role in managing customer relationships, as well as selling additional
value-added services to existing accounts. PTEK employs more than 750 customer
service professionals.
PLATFORMS AND NETWORK INFRASTRUCTURE
The Company, through its three business units, operates global Internet
and telecom-based networks that allow customers access to the Company's various
services through the Internet and through local and/or 800 telephone numbers.
Premiere Conferencing services are provided from full-service
operations centers in Colorado Springs, Colorado, and Lenexa, Kansas, and from
Conalkilty, Ireland starting in the second quarter of 2002. Automated bridging
nodes are maintained in Canada, Australia, New Zealand, Hong Kong, Singapore,
Japan, France, Germany and England. Complex, operator-assisted calls are
supported on various commercially available bridging platforms. Internally
developed conference bridges are used to support automated conferencing
services. Customers access the conferencing platform through direct inward
dialing, 800 numbers, the Internet and virtual network access.
Xpedite services are provided primarily through an electronic messaging
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 fax- and voice-based messages 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 Australia, Hong Kong, Japan, Korea, Singapore, Switzerland, the United
Kingdom, the United States, Germany and France. Remote nodes on the network are
located in Belgium, Canada, Denmark, Italy, Malaysia, the Netherlands, New
Zealand and Taiwan.
Voicecom offers advanced network-based voice messaging services through
its platforms located in the United States, Canada, Taiwan, Australia and the
United Kingdom. The telephony service platforms are interconnected via
Voicecom's highly available data network infrastructure. This network transports
the subscriber messages between the distributed systems. The local numbers are
routed back from the local markets to these hubs over leased fixed facilities.
Voicecom also offers outsourced voice messaging services to large corporate
clients via toll-free access to voice messaging platforms located in Atlanta,
Georgia; Reno, Nevada; Arlington, Virginia; and Oakbrook, Illinois. In addition,
certain corporate voice messaging services are provided using equipment that is
installed on the customers' premises. Voicecom's Orchestrate service is provided
on a highly available and highly scaleable platform that includes servers and
third-party software integrated and enhanced with Voicecom's unified
communications middleware. The primary Orchestrate service hubs are located in
Atlanta, Georgia and Dallas, Texas. Voicecom's IVR services are provided on a
variety of platforms. The platform utilized for any particular application is
determined by the specific requirements for that application.
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RESEARCH AND DEVELOPMENT
PTEK's ability to design, develop, test and support new software
technology for product enhancements in a timely manner is an important
ingredient to its future success. Next generation services such as VisionCast,
ReadyCast, messageREACH and VoiceREACH are critical additions to the suite of
communications and data services PTEK provides to its customers, not only to
position the operating units in larger market segments, but more importantly to
meet changing customer needs and respond to the overall technological changes in
the marketplace.
Each PTEK operating unit includes research, development and engineering
personnel who are responsible for designing, 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 it
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.
PTEK employs 86 research and development professionals.
COMPETITION
PTEK competes with major communications service providers around the
world such as AT&T, WorldCom, Sprint, and the international PTTs. The Company
also competes with smaller companies in each of its service categories,
including Intercall, Raindance, ACT Teleconferencing, WebEx and Genesys in
conferencing; EasyLink, AVT, Critical Path and MessageMedia (f/k/a DoubleClick)
in multimedia messaging; J2 Global Communications, Webley, General Magic and
Net2Phone in unified communications; Avaya, Intervoice-Brite, Net2Phone- and
NetByTel in IVR; and Avaya and Intervoice-Brite in voice messaging. In all
cases, PTEK's strategy is to gain a competitive advantage in winning and keeping
customers by enabling its business units to deliver leading technology-driven
solutions to its customers and support them with superior customer service.
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.
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, 2001, 2000 and 1999, see Note
22--"Consolidated Financial Statements."
GOVERNMENT REGULATION
Premiere Communications, Inc. ("PCI"), which is part of the Company's
Voicecom business unit, provides both telecommunications and information
services. Consequently, PCI is, and certain other PTEK subsidiaries may be,
subject to federal, state and local telecommunications regulation in the United
States. Various international authorities may also seek to regulate the services
provided by PCI and possibly other PTEK subsidiaries.
The Federal Communications Commission ("FCC") classifies PCI as a
non-dominant carrier for its domestic interstate and international common
carrier telecommunications services. Generally, common carriers that provide
domestic interstate and international telecommunications services must maintain
and publicly disclose price lists, describing rates, terms and conditions of
service, must comply with federal regulatory programs such as universal service,
telecommunications relay service, and payphone compensation, and must comply
with decisions and policies adopted or enforced by the FCC. PCI exercises
reasonable efforts to comply with the various FCC decisions, policies and
regulatory programs. Most state public service or utility commissions ("PUCs")
also subject carriers such as PCI that provide intrastate, common carrier
telecommunications services to various compliance and approval requirements,
such as those in connection with entry certification, tariff filings, transfers
of control, mergers or other acquisitions, issuance of debt instruments,
periodic reporting and payment of regulatory fees, as well as others. PCI either
has applied for and received, or is in the process of applying for and
receiving, the necessary certificates or authorizations to provide intrastate,
long distance services. FCC or state PUC authorizations can generally be
conditioned, modified or revoked for failure to comply with applicable laws,
rules,
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regulations or regulatory policies. Fines or other penalties also may be
imposed for such violations. There can be no assurance that PCI is currently in
compliance with, or remitting all necessary fees in connection with, all
applicable FCC or state PUC requirements, or that the FCC, state PUCs or third
parties will not raise issues in the future with regard to PCI's compliance with
applicable laws or regulations.
A number of states have adopted laws restricting and/or governing the
distribution of unsolicited e-mails, or spam. Other states are considering
similar legislation. Congress has also considered such legislation, and could
enact legislation governing spam at some future point. The Company monitors such
legislation and regulatory developments to minimize the risk of its
participation in activities that violate anti-spam legislation. In addition, a
number of legislative and regulatory proposals are under consideration by
federal and state lawmakers and regulatory bodies and may be adopted with
respect to the Internet. Some of the issues that such laws or regulations may
cover include user privacy, obscenity, fraud, pricing and characteristics and
quality of products and services. The adoption of any such laws or regulations
may decrease the growth of the Internet, which could in turn decrease the
projected demand for the Company's products and services or increase its cost of
doing business. In addition, the sending of spam through the Company's network
could result in third parties asserting claims against the Company. Moreover,
the applicability to the Internet of existing U.S. and international laws
governing issues such as property ownership, copyright, trade secret, libel,
taxation and personal privacy is uncertain and developing. Any new legislation
or regulation, or application or interpretation of existing laws, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition, the Company's operations may be subject to federal and
state laws and regulations regulating the unsolicited transmission of
facsimiles. The Company monitors such laws and regulations and its service
agreements with customers state that customers are responsible for their
compliance with all applicable laws and regulations. The Company could,
nevertheless, be subject to litigation, fines, losses, and possible other relief
under such laws and regulations.
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. 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 that the Company attempts to protect through confidentiality and
nondisclosure provisions in its 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 seven patents, five 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 communications and data services, 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.
EMPLOYEES
As of December 31, 2001, PTEK employed 2,240 people. PTEK employees are
not represented by a labor union or covered by any collective bargaining
agreements.
8
ITEM 2. PROPERTIES
PTEK's corporate headquarters occupy approximately 21,000 square feet
of office space in Atlanta, Georgia under a lease expiring August 31, 2007. As
of December 31, 2001, the headquarters of the Company's Voicecom business unit
occupied approximately 74,000 square feet of office space in the same building
under leases expiring August 31, 2007 and August 31, 2006 plus approximately
19,000 square feet in a nearby building whose lease expires December 31, 2003.
Xpedite occupies approximately 90,000 square feet of office space in Tinton
Falls, New Jersey under a 15-year lease. Premiere Conferencing occupies
approximately 105,000 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 are 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
Enterprises, Inc. ("Voice-Tel") franchisees and a subclass of former Xpedite
Systems, Inc. ("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. The Company 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 purchases by the
plaintiffs. The plaintiffs filed an amended complaint on February 29, 2000. The
defendants filed a motion to dismiss on April 14, 2000, which was granted in
part and denied in part on December 8, 2000. The defendants filed an answer on
January 8, 2001. On January 22, 2002, the court ordered the parties to mediate.
The parties did so on February 8, 2002, and the mediation process is continuing.
A lawsuit was filed on November 4, 1998 against the Company and certain
of its officers and directors in the Southern District of New York. Plaintiffs
are 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 Systems, Inc. ("VoiceCom
Systems"), the Company's roll-out of Orchestrate, the Company's relationship
with customers Amway Corporation and DigiTEC, 2000, 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, punitive damages, costs and attorneys' fees. The defendants'
motion to transfer venue to Georgia was granted. The defendants' motion to
dismiss was granted in part and denied in part. The defendants filed an answer
on March 30, 2000. On January 22, 2002, the court ordered the parties to
mediate. The parties did so on February 8, 2002, and the mediation process is
continuing.
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"). The complaint asserts
wrongdoing in connection with the plaintiffs' investment in securities of
Xpedite and in unrelated investments involving
9
insurance-related products. The defendants include Equitable and certain of its
current or former representatives. The allegations in the complaint against
Xpedite are limited to plaintiffs' investment in Xpedite. The plaintiffs have
alleged that two of the named defendants, allegedly acting as officers,
directors, agents or representatives of Xpedite, induced the plaintiffs to make
certain investments in Xpedite but that the plaintiffs failed to receive the
benefits that they were promised. Plaintiffs allege that Xpedite knew or should
have known of alleged wrongdoing on the part of other defendants. Plaintiffs
seek an accounting of the corporate stock in Xpedite, compensatory damages of
approximately $4.85 million, plus $200,000 in "lost investments," interest
and/or dividends that have accrued and have not been paid, punitive damages in
an unspecified amount, and for certain equitable relief, including a request
for Xpedite to issue 139,430 shares of common stock in the plaintiffs' names,
attorneys' fees and costs and such other and further relief as the court deems
just and equitable. This case has been dismissed without prejudice and
compelled to NASD arbitration, which has commenced. In August 2000, the
plaintiffs filed a statement of claim with the NASD against 12 named
respondents, including Xpedite (the "Nobis Respondents"). The claimants allege
that the 12 named respondents engaged in wrongful activities in connection with
the management of the claimants' investments with Equitable. The statement of
claim asserts wrongdoing in connection with the claimants' investment in
securities of Xpedite and in unrelated investments involving insurance-related
products. The allegations in the statement of claim against Xpedite are limited
to claimants' investment in Xpedite. Claimants seek, among other things, an
accounting of the corporate stock in Xpedite, compensatory damages of not less
than $415,000, a fair conversion rate on stock options, losses on the
investments, plus interest and all dividends, punitive damages, attorneys' fees
and costs. Hearings before the NASD panel were held on November 27-29, 2001,
January 22-24, 2002 and February 4-7, 2002.
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. This case has been
dismissed without prejudice and compelled to NASD arbitration, which has
commenced. In August 2000, a statement of claim was also filed with the NASD
against all but one of the Nobis Respondents making virtually the same
allegations on behalf of claimant Elizabeth Tendler. Claimant seeks an
accounting of the corporate stock in Xpedite, compensatory damages of not less
than $265,000, a fair conversion rate on stock options, losses on other
investments, interest and/or unpaid dividends, punitive damages, attorneys fees
and costs. Hearings before the NASD panel were held on November 27-29, 2001,
January 22-24, 2002 and February 4-7, 2002.
On or about May 19, 2000, the Company was served with a Complaint filed
by Robert Cowan in the Circuit Court of Jackson County, Missouri, alleging
claims for breach of contract, fraudulent misrepresentation, negligent
misrepresentation, breach of duty of good faith and fair dealings, unjust
enrichment, and violation of Georgia and Missouri blue sky laws. Plaintiff's
claims arise out of the Company's acquisition of American Teleconferencing
Services, Ltd. ("ATS") in April 1998. Plaintiff was a shareholder of ATS who
received shares of PTEK stock in the transaction. The Company removed the case
to the United States District Court for the Western District of Missouri, and
filed a Motion to Compel Arbitration, or Alternatively to Transfer Venue, or
Alternatively to Dismiss the Complaint. Plaintiff filed a Motion to Remand the
case back to state court. By order dated March 28, 2001, the court granted
plaintiff's Motion to Remand and dismissed as moot the Company's Motion to
Compel Arbitration, or Alternatively to Transfer Venue, or Alternatively to
Dismiss the Compliant. By Order dated July 25, 2001, the state court denied the
Company's Motion to Compel Arbitration, or Alternatively to Transfer Venue, or
Alternatively to Dismiss the Complaint. This case is in discovery and is set for
trial in June 2002.
On November 3, 2000, a complaint was filed by BGL Development, Inc.
d/b/a The Bristol Group in the United States District Court for the Southern
District of New York. Plaintiff alleges that it had a contract with Xpedite
whereby Xpedite would pay certain commissions for new customers that plaintiff
brought to Xpedite. Plaintiff claims back commissions are due and that they have
not been paid in breach of the contract. Plaintiff claims damages of not less
than $185,000. On November 20, 2000, the Company filed its answer and
affirmative defenses. On October 2, 2001, Xpedite filed a request with the court
for leave to file its Motion for Summary Judgment. Following a hearing on
January 17, 2002, the Court denied Xpedite's motion. The trial was held on
January 29-31, 2002, which resulted in a verdict for the Plaintiff in the amount
of $103,000. Xpedite is presently evaluating its options with respect to an
appeal.
10
On May 14, 2001, Voice-Tel filed two complaints against Quixtar, Inc.
and Alticor Inc., f/k/a Amway Corporation, and Amway Corporation, in the State
Court of Fulton County, Georgia, which were subsequently removed to the U.S.
District Court for the Northern District of Georgia. Voice-Tel alleged, among
other things, fraud in the inducement of a contract to market voice messaging
services and sought a declaratory judgment that contractual provisions which
alleged trade secrets and restrictions on competition were null and void. In
response to these lawsuits, Alticor and Quixtar asserted certain counterclaims
for breach of contract and to enjoin competitive behavior by PTEK and its
affiliates. On November 6, 2001, JOBA, Inc. ("JOBA"), a Voice-Tel franchisee,
filed an Application to Intervene in the Quixtar and Alticor lawsuits. In the
Application to Intervene, JOBA sought to file a Complaint that would include,
among other things, claims against not only Quixtar and Alticor but also against
Voice-Tel for an alleged breach of a franchise agreement and other alleged
agreements, and against PTEK for alleged tortuous interference of contract. On
December 3, 2001, Voice-Tel filed its Brief in Opposition to the Application to
Intervene. On December 4, 2001, Voice-Tel filed a Motion for Partial Summary
Judgment in the Quixtar and Alticor lawsuits. On December 10, 2001, Voice-Tel
filed a separate Complaint against JOBA and Digital Communication Services, Inc.
("Digital") in the U.S. District Court for the Northern District of Georgia. The
Complaint sought injunctive relief and a declaratory judgment with respect to
Voice-Tel's right to terminate the franchise agreements with JOBA and Digital.
JOBA and Digital subsequently dismissed their efforts to intervene in the
Quixtar and Alticor lawsuits, and on January 7, 2002 answered Voice-Tel's
Complaint and asserted counterclaims for breach of franchise agreement and
tortious interference of contract against Voice-Tel, Premiere Communications,
Inc. ("PCI") and PTEK. In addition, on January 7, 2002, JOBA and Digital sought
to stay the proceedings and compel arbitration as to Digital. On January 18,
2002, Voice-Tel, PCI and PTEK filed responses and answers to the counterclaims
and filed additional breach of contract and tort claims against JOBA and
Digital. Voice-Tel, PCI and PTEK also filed objections to the Motion to Stay
Proceedings as to Digital. On February 8, 2002, the Court denied the
JOBA/Digital Motion to Stay Proceedings. In March 2002, Voice-Tel and JOBA and
Digital sought leave of court to file amended complaints and answers. On March
14, 2002, the parties to the Quixtar and Alticor lawsuits entered into a
settlement agreement resolving in full all claims asserted by each party against
the other. The litigation with JOBA and Digital is ongoing and is in discovery.
The Company filed a complaint against Qwest Communications Corporation
("Qwest") in the State Court of Fulton County, Georgia on June 1, 2001. The case
was subsequently removed to the U.S. District Court for the Northern District of
Georgia. This complaint alleges a breach of contract by Qwest to purchase voice
conferencing services. In response to PTEK's breach of contract claim, Qwest
asserted a counterclaim for alleged breach of a contract to purchase certain
software licenses. The Company filed a Motion for Partial Summary Judgment on
October 19, 2001. The parties are now engaged in negotiations directed at
resolution of all claims and counterclaims.
On January 30, 2002, a complaint was filed by 15 Lake Bellevue, LLC in
the Superior Court of King County, Washington. Plaintiff seeks to enforce a
Lease Guaranty Agreement entered into by the Company on behalf of Webforia, Inc.
with respect to a lease for commercial real estate located in Bellevue, King
County, Washington. The Company's potential liability under the Guaranty is
limited to the lesser of the lease obligations or $2,000,000, together with
attorneys' fees, interest and collection expenses. The Company intends to file
an answer to the lawsuit.
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.
11
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 closing sales prices of the Common Stock as reported on the Nasdaq
National Market for the periods indicated.
2001 High Low
---- ---- ---
First Quarter................... $3.13 $1.31
Second Quarter.................. 2.95 2.13
Third Quarter................... 3.70 1.77
Fourth Quarter.................. 3.87 2.00
2000 High Low
---- ---- ---
First Quarter................... $11.44 $6.0
Second Quarter.................. 7.13 3.13
Third Quarter................... 4.19 2.63
Fourth Quarter.................. 3.44 0.91
The closing price of the Common Stock as reported on the Nasdaq
National Market on March 26, 2002 was $3.88. As of March 26, 2002 there were
approximately 599 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, 2001, one former employee exercised
an option to purchase an aggregate of 3,400 shares of Common Stock at a price
of $.52 per share in a transaction exempt from registration pursuant to Section
4(2) and Rule 701 of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated statement of operations data,
balance sheet data, and cash flow data as of and for the years ended December
31, 2001, 2000, 1999, 1998 and 1997 have been derived from the audited
consolidated financial statements of the Company. 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.
"Adjusted EBITDA" is defined by the Company as operating income or loss
before depreciation, amortization, restructuring costs, asset impairments,
equity based compensation, and net legal settlements and related expenses.
Adjusted EBITDA is management's primary measure of segment profit and loss.
Adjusted EBITDA is considered a key management performance indicator of
financial condition because it excludes the effects of goodwill and intangible
amortization and impairments 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, the effects of
sales of marketable securities, the write down of assets, equity based
compensation, restructuring costs and net legal settlements and related
expenses. Adjusted EBITDA is used as an indicator of operating cash flow before
payments for interest, taxes and special charges, and 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.
12
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Revenues.............................................. $422,930 $436,935 $458,448 $444,818 $229,352
Gross profit.......................................... 320,122 321,495 328,757 309,782 165,378
Operating loss/(1)/................................... (230,726) (76,357) (138,081) (91,053) (16,714)
Net loss.............................................. (242,120) (58,866) (33,491) (84,254) (18,428)
Net loss attributable to common and
Common equivalent shares for shareholders for:
--basic and diluted net loss per share.............. (242,120) (58,866) (33,491) (84,254) (18,428)
Net loss per common and common Equivalent shares for:
--basic and diluted/(2)/............................ $ (4.84) $ (1.22) $ (0.72) $ (1.90) $ (0.57)
Shares used in computing net loss per
Common and common equivalent shares for:
--basic and diluted................................. 49,998 48,106 46,411 44,325 32,443
Balance Sheet Data (at period end):
Cash, cash equivalents and marketable securities...... $ 49,500 $29,716 $101,981 $ 40,609 $176,339
Working capital....................................... 13,116 15,949 34,746 (92,628) 132,906
Total assets.......................................... 386,438 630,933 770,481 796,416 379,593
Total debt............................................ 187,176 178,762 179,625 299,673 181,698
Total shareholders' equity............................ 79,032 313,406 422,220 397,793 107,761
Statement of Cash Flow Data:
Cash provided by operating activities................. $ 60,905 $17,929 $ 9,927 $ 22,248 $ 27,159
Cash (used in) provided by investing activities....... (35,405) (6,466) 107,216 21,292 (160,055)
Cash (used in) provided by financing activities....... (304) (2,394) (120,924) (46,115) 138,730
- --------------
/(1)/ Adjusted EBITDA was $63.8 million in 2001, $68.7 million in 2000, $52.4
million in 1999, $61.8 million in 1998 and $60.1 million in 1997.
Adjusted EBITDA prior to 2001 included Equity based compensation as a
deduction; thus Adjusted EDITDA in the preceding sentence for 1998
through 2000 differs from Adjusted EBITDA as originally reported.
/(2)/ Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted net loss
per share is computed using the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding during the
period from convertible preferred stock, convertible subordinated notes
(using the if-converted method) and from stock options (using the
treasury stock method).
The Voicecom business unit was sold on March 26, 2002. See Note 23 to the
Consolidated Financial Statements.
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" or "PTEK") is a global provider of communications
and data services, including conferencing (audio conference calling and
Web-based collaboration), multimedia messaging (high-volume fax, e-mail,
wireless messaging and voice message delivery), IVR (interative voice response),
network based voice messaging and unified personal communications (advanced
personal communications management systems that integrate voice mail, e-mail and
fax messaging). The Company's reportable segments align the Company into three
operating segments based on product offering. These segments are Premiere
Conferencing, Xpedite and Voicecom. Premiere Conferencing offers a full range of
enhanced, automated and Web conferencing services for all forms of group
communications activities, primarily to Fortune 1000 customers. Xpedite offers a
full range of value-added multimedia messaging services through its worldwide
proprietary IP network for electronic information delivery. Xpedite's customers
are primarily global Fortune 1000 companies. Voicecom offers
13
a suite of integrated communications solutions including voice messaging, IVR
services and unified communications. Voicecom targets key vertical markets such
as direct selling organizations, financial services, telecom providers, real
estate and healthcare. Retail Calling Card Services is a business segment that
the Company exited through the sale of its revenue base effective August 1,
2000. The Company also exited the venture business in 2001, which was conducted
through PtekVentures, the Company's Internet investment arm. See "Subsequent
Events" in Management's Discussion and Analysis below for a discussion of the
Company's sale of Voicecom in the first quarter of 2002.
The Company recognizes revenues when persuasive evidence of an
arrangement exists, services have been rendered, the price to the buyer is fixed
or determinable, and collectibility is reasonably assured. Revenues consist of
fixed monthly fees, usage fees generally based on per minute or transaction
rates, and service initiation fees. Deferred revenue consists of payments made
by customers in advance of the time services are rendered. The Company's revenue
recognition policies are consistent with the guidance in Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," as
amended by SAB No. 101A and 101B.
"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.
"Selling and marketing" costs consist primarily of salaries and wages,
travel and entertainment, advertising, commissions and facility costs associated
with the functions of selling or marketing the Company's services.
"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.
"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.
"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 property and equipment, generally two to ten
years, with the exception of leasehold improvements which are depreciated on a
straight-line basis over the shorter of the term of the lease or the useful life
of the assets. Intangible assets being amortized include goodwill, customer
lists, developed technology and assembled work force. Intangible assets are
amortized over periods generally ranging from three to seven years.
"Restructuring costs" represent severance, exit costs and contractual
obligation costs associated with the realignment of workforces and the exit of
certain businesses.
"Asset impairments" represent the adjustment of the carrying value of
long-lived assets to current fair value under Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." Long-lived assets subject to this
fair value assessment were goodwill, customer lists, developed technology and
property, plant and equipment.
"Equity based compensation" relates primarily to restricted stock
granted to employees in exchange for options, restricted stock granted to
certain officers of PTEK and one of its operating units, and the cancellation of
notes receivable from certain executive officers of the Company for the taxes
owed by such officers with respect to certain restricted stock grants and the
taxes related thereto. In addition, it includes the non-cash cost of stock
options and restricted stock issued to consultants for services rendered.
"Net legal settlements and related expenses" represent the costs
incurred or management's estimate of costs that will more likely than not be
incurred related to various legal contingencies and related matters.
"Interest expense" includes the interest costs associated with the
Company's convertible subordinated notes, term equipment loan and various
capital lease obligations.
14
"Interest income" includes interest earned on highly liquid investments
with a maturity at date of purchase of three months or less.
"Gain on sale of marketable securities" includes proceeds less
commissions in excess of original cost on the sale of marketable securities
available for sale. These marketable securities are traded on a national
exchange with a readily determinable market price.
"Asset impairment and obligations - investments" includes the
adjustment of the carrying value of non-public investments accounted for under
the cost or equity method to current fair value and obligations incurred by the
Company as a result of these investments.
"Amortization of goodwill - equity investments" relates to the
amortization of the excess of purchase price over the pro-rata net carrying
value of investments accounted for under the equity method of accounting. The
equity method of accounting for an investment is used when the Company exerts
significant management influence over the investee.
"Adjusted EBITDA" is defined by the Company as operating income or loss
before depreciation, amortization, restructuring costs, asset impairments,
equity based compensation, and net legal settlements and related expenses.
Adjusted EBITDA is management's primary measure of segment profit and loss.
Adjusted EBITDA is considered a key financial management performance
indicator because it excludes the effects of goodwill and intangible
amortization and impairments 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, the effects of
sales of marketable securities, the write down of assets, equity based
compensation, restructuring costs and net legal settlements and related
expenses. Adjusted EBITDA provides each segment's management team with a
consistent measurement tool for evaluating the operating profit of the business
before investing activities, taxes and special charges. Adjusted EBITDA 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. Adjusted EBITDA is not a standard accounting term as defined by
generally accepted accounting principles in the United States ("GAAP").
The preparation of financial statements in conformity with 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. See also the section entitled "Critical Accounting
Policies." 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.
On January 1, 2001, management responsibility for international
conferencing and voice messaging services was transferred from Xpedite to
Premiere Conferencing and Voicecom, respectively. Prior to that date, these
international revenues were reported in the Xpedite operating segment. Beginning
January 1, 2001, these international revenues have been reported in the Premiere
Conferencing and Voicecom operating segments. In order to report comparable
operating segment financial results, certain financial information for years
prior to 2001 has been reclassified in Management's Discussion and Analysis to
reflect the pro forma effect of this management change.
SUBSEQUENT EVENTS
Consistent with the Company's increased focus on extending its market
leadership in conferencing and multimedia messaging services for global
enterprise customers, in 2001 the Company retained a financial advisor to assist
in evaluating strategic alternatives for portions of its business. As a result
of that evaluation, the Company decided to pursue the separation of Voicecom
from the rest of PTEK. Since that time the Company has explored several
possibilities, including a spin-off of Voicecom to the Company's shareholders
and a sale of the unit. On March 26, 2002 the Company sold substantially all the
assets of its Voicecom business unit to an affiliate of Gores Technology Group
for the purchase price of approximately $22.4 million, comprised of cash and the
assumption of Voicecom liabilities. In accordance with SFAS No. 144, the
transaction will be accounted for as a discontinued operation in the first
quarter of 2002. The Voicecom discontinued operations will include the loss from
operations through the closing date and the loss on disposal. See Note 23 to the
Consolidated Financial Statements.
15
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,
------------------------
2001 2000 1999
---- ---- ----
REVENUES........................................................................ 100.0% 100.0% 100.0%
TELECOMMUNICATIONS COSTS........................................................ 24.3 26.4 28.3
------- ------- -------
GROSS PROFIT.................................................................... 75.7 73.6 71.7
------- ------- -------
DIRECT OPERATING COSTS.......................................................... 16.9 15.6 15.1
------- ------- -------
CONTRIBUTION MARGIN............................................................. 58.8 58.0 56.6
------- ------- -------
OPERATING EXPENSES
Selling and marketing....................................................... 21.3 21.5 23.5
General and administrative.................................................. 18.7 17.5 18.8
Research and development.................................................... 3.6 3.2 2.6
Depreciation................................................................ 8.4 9.3 15.3
Amortization................................................................ 22.3 23.6 21.6
Restructuring costs......................................................... 2.5 -- 1.7
Asset impairments........................................................... 31.1 0.2 --
Equity based compensation................................................... 4.8 0.5 3.1
Net legal settlements and related expenses.................................. 0.6 (0.3) --
------- --------- ------
Total operating expenses................................................ 113.3 75.5 86.6
------- ------ -------
OPERATING LOSS.................................................................. (54.5) (17.5) (30.0)
------- -------- -------
OTHER (EXPENSE) INCOME
Interest expense............................................................ (2.9) (2.7) (5.6)
Interest income............................................................. 0.2 0.3 0.2
Gain on sale of marketable securities....................................... 0.7 13.6 33.2
Asset impairment - investments.............................................. (7.5) (3.4) --
Amortization of goodwill - equity investments............................... (0.4) (1.1) --
Other, net.................................................................. (0.4) (0.1) 2.7
------- ---- --------
Total other (expense) income............................................ (10.3) 6.6 30.5
------- -------- --------
(LOSS) INCOME BEFORE INCOME TAXES............................................... (64.8) (10.9) 0.5
INCOME TAX (BENEFIT) PROVISION.................................................. (7.6) 2.6 7.7
------- -------- --------
NET LOSS........................................................................ (57.2)% (13.5)% (7.2)%
======= ======= =======
16
The following table presents certain financial information about the
Company's operating segments for the periods presented (amounts in millions),
with amortization expense and asset impairments allocated to the appropriate
operating segment:
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
REVENUES:
Xpedite..................................................................... $ 215.7 $230.1 $ 239.2
Voicecom.................................................................... 92.5 119.9 128.5
Premiere Conferencing....................................................... 115.1 73.4 53.8
Retail Calling Card Services................................................ -- 13.7 37.2
Eliminations................................................................ (0.4) (0.2) (0.3)
------- ------- --------
Totals...................................................................... $422.9 $436.9 $ 458.4
====== ====== =======
OPERATING (LOSS) PROFIT:
Xpedite..................................................................... $(146.1) $ (39.9) $ (30.4)
Voicecom.................................................................... (53.6) (16.5) (17.4)
Premiere Conferencing....................................................... 11.4 (0.4) (3.8)
Retail Calling Card Services................................................ -- (1.1) (43.8)
Corporate................................................................... (42.4) (18.3) (42.4)
Eliminations................................................................ -- (0.2) (0.3)
-------- ------- --------
Totals...................................................................... $(230.7) $ (76.4) $(138.1)
======== ======== ========
ADJUSTED EBITDA:
Xpedite..................................................................... $ 48.5 $55.4 $ 60.4
Voicecom.................................................................... 3.5 13.9 14.7
Premiere Conferencing....................................................... 28.6 13.7 9.0
Retail Calling Card Services................................................ -- 1.6 (5.8)
Corporate................................................................... (16.8) (15.7) (25.6)
Eliminations................................................................ -- (0.2) (0.3)
-------- -------- --------
Totals...................................................................... $ 63.8 $ 68.7 $ 52.4
======== ======= =======
REVENUES
Consolidated revenues decreased 3.2% to $422.9 million in 2001 from
$436.9 million in 2000, and decreased 4.7% in 2000 from $458.4 million in 1999.
Revenues in the Company's operating segments are as follows:
. Xpedite revenues decreased 6.3% to $215.7 million in 2001 and
decreased 3.8% to $230.1 million in 2000. The declines in revenue
in 2001 are attributable to a general decline in the second half
of 2001 in demand and price compression in the traditional store
and forward fax business. These declines have been caused
primarily by weakness in the hospitality and financial services
industries worldwide along with a general weakness in foreign
currencies against the U.S. dollar. In addition, price compression
in the legacy store and forward fax business and a slowing in the
growth of new products such as MessageREACH and VoiceREACH
contributed to the overall decline. Excluding two customer base
acquisitions in the first quarter of 2001, revenues would have
decreased at a higher rate. The declines in revenue in 2001
materialized in the second half of 2001 and management expects
these declines to continue at a lower rate of attrition into the
foreseeable future. The revenue declines in 2000 were primarily
associated with the foreign currency weakness against the U.S.
dollar and severe declines in real-time fax pricing in the
Asia/Pacific region due to deregulation of most Asian
telecommunications markets.
. Voicecom revenues decreased 22.9% to $92.5 million in 2001 and
decreased 6.7% to $119.9 million in 2000. The declines in revenue
in 2001 were due to significant customer losses and loss of access
to significant customer distribution channels in major direct
selling organizations. Various corporate voice mail customers gave
notice of their intention not to renew contracts with Voicecom
during the second half of 2001. These corporate customers, such as
Abbott Laboratories, Pharmacia Upjohn, TAP Pharmaceuticals, Tricon
and Centers for Disease Control, represented in the aggregate
approximately 9.4% of Voicecom's reported 2001 revenue. In
addition, the contractual right to market to certain major direct
selling organizations such as Amway and Primerica Financial
Services were not renewed in the same time period. Amway and
Primerica Financial Services represent in the aggregate
approximately 25.6% of Voicecom's reported 2001 revenue.
17
During the second half of 2001, management was able to retain
under contract approximately 50% of Amway's distribution channel
without the corporate endorsement of Amway and has been able to
retain without contract 25% of the distribution channels of
Primerica Financial Services. These events have lessened the
impact of the potential loss of business for Voicecom as it
relates to these distribution channels. In addition, pricing
pressure in Voicecom's IVR product offering and weakness in
Voicecom's wholesale calling card operations to competitive local
exchange carriers have contributed to these declines as well. The
declines in 2000 were primarily related to Voicecom's exit of the
direct selling channel of voicemail services to small office and
home office customers. The exit of this selling channel occurred
in the fourth quarter of 1999 and was due to the high cost of
customer acquisition, making this channel unprofitable.
. Premiere Conferencing revenues increased 56.8% to $115.1 million
in 2001 and increased 36.4% to $73.4 million in 2000. The
increases in 2001 and 2000 are primarily attributable to growth in
Premiere Conferencing's automated conferencing service,
ReadyConference, which allows unscheduled and unattended
conference calls 24 hours a day, 7 days a week, and an expansion
of these services into key foreign markets. Management expects
overall revenue growth in this operating segment to continue into
the foreseeable future, primarily driven by growth in minutes of
use. The overall industry trend outlook for audio conferencing is
for growth in revenue through minute volume with some decline in
average revenue per minute.
. Retail Calling Card Services revenues decreased 63.2% to $13.7
million in 2000. The decrease in 2000 was primarily due to the
sale of the customer base related to this segment in August 2000.
GROSS MARGINS
Consolidated gross profit margins were 75.7%, 73.6% and 71.7% in 2001,
2000, and 1999, respectively. Gross margins in the Company's operating segments
were as follows:
Xpedite gross profit margins were 74.7%, 70.0%, and 68.3% in 2001,
2000, and 1999, respectively. Gross margins increased in 2001 due to decreases
in per minute telecommunications rates for the Xpedite worldwide network, as
well as increased sales of its new products, messageREACH and voiceREACH, which
carry higher gross margins. Lower telecommunications costs have become the
general industry trend over the past several years. Since Xpedite is not
contractually bound to a fixed term rate, its telecommunications costs per
minute trend with the industry.
Voicecom gross profit margins were 67.7%, 77.2% and 79.8% in 2001, 2000
and 1999, respectively. Gross margins declined in 2001 primarily due to (1)
significant declines in the direct selling organization customer base which
resides on Voicecom's fixed cost local access network, and (2) temporary
incremental telecommunications costs incurred to consolidate the number of local
access network sites. Gross margins declined in 2000 primarily due to increased
network costs associated with the development of Orchestrate, increases in lower
margin business associated with the post-sale management services agreement
related to the retail calling card customer base sale, and revenue declines in
the voice messaging small office and home office voice mail selling channel
which is operated primarily on a fixed cost local access network. These declines
were offset in part by decreases in telecommunications delivery costs.
Premiere Conferencing gross profit margins were 84.0%, 81.3%, and 78.3%
in 2001, 2000, and 1999, respectively. Gross margins increased in 2001 and 2000
primarily due to significant decreases in per minute telecommunications delivery
costs. These significant decreases are the result of the general industry price
declines seen for long distance delivery. Since Premiere Conferencing is not
contractually bound to a fixed term rate, its telecommunications costs per
minute trend with the industry.
Retail Calling Card Services gross profit margins were 61.9% and 56.2%
in 2000 and 1999, respectively. Gross margins increased in 2000 due to the
negotiation of lower per minute telecommunications rates with the providers of
these services. Gross margins increased in 1999 due to (1) the exit from the
prepaid calling card business in the third quarter of 1998, which had inherently
lower gross margins due to the mix of this business being primarily
international, and (2) lower per minute telecommunications rates offered by its
telecommunications providers.
DIRECT OPERATING COSTS
Consolidated direct operating costs as a percent of revenues were
16.9%, 15.6% and 15.1% in 2001, 2000, and 1999 respectively. These increases as
a percentage of revenue are due to the growth of the Premiere Conferencing
operating segment as an overall percentage of the consolidated business in the
last three years. Operating costs at Premiere Conferencing are approximately
29.1% of revenues compared to 20.8% and 8.7% of revenues for Voicecom and
Xpedite, respectively. The higher concentration of direct operating costs are
associated with the attended live operator portion of the
18
conferencing business. In contrast, Premiere Conferencing enjoys higher gross
margins and lower selling, general and administrative support costs compared
with the other operating segments of the Company, which can be seen in its
higher Adjusted EBITDA margins.
SELLING AND MARKETING
Consolidated selling and marketing costs as a percent of revenues were
21.3%, 21.5% and 23.5% in 2001, 2000 and 1999, respectively. Overall costs
decreased $3.7 million in 2001 primarily due to reductions in nonproductive
sales force and commission costs in both the Xpedite and Voicecom operating
segments. The declines in both of these operating segments contributed to the
overall percentage decline for the Company. The reductions in nonproductive
sales force costs were part of the rationalization of the workforce the Company
made during 2001. Selling and marketing costs decreased by approximately $14.0
million in 2000 when compared to 1999, with significant decreases at both the
Voicecom and Retail Calling Card operating segments ($12.9 million and $10.6
million, respectively). Xpedite and Premiere Conferencing experienced increases
of $5.8 million and $4.8 million, respectively, when compared to 1999 levels. At
Voicecom, the decrease in direct sales and marketing costs as a percentage of
revenues in 2000 is attributable in part to a reduction of 122 employees in the
latter half of 1999 that was undertaken as part of the plan to exit the small
office and home office voice-mail sales channel. In addition, further sales
force reductions were made at Voicecom in 2000 related to a nonproductive sales
force. Significant reductions in direct advertising costs associated with an
earlier version of Orchestrate also contributed to the decrease at Voicecom. The
decrease within the Retail Calling Card operating segment is primarily
attributable to the discontinuance of efforts to acquire new customers. The
increase at Xpedite is primarily related to the ramp up of sales and marketing
efforts relating to this operating segment's new service offerings, while the
increase at Premiere Conferencing is principally due to the significant growth
in revenue in this operating segment from 1999 to 2000.
GENERAL AND ADMINISTRATIVE
Consolidated general and administrative costs as a percent of revenues
were 18.7%, 17.5% and 18.8% in 2001, 2000 and 1999, respectively. General and
administrative costs increased to 18.7% of revenues or $2.5 million in 2001.
This increase is primarily due to infrastructure support increases related to
the expansion of the Premiere Conferencing operating segment and increased
administrative and customer support costs at the Xpedite operating segment.
These costs were offset in part by significant administrative support cost
reductions at the Voicecom operating segment and the holding company corporate
staff as part of the second quarter workforce rationalization. Increases in
administrative and technical support costs at the Xpedite operating segment were
addressed during the Company's fourth quarter 2001 workforce rationalization and
those results will not be seen until 2002. General and administrative costs
decreased to 17.5% of revenues or $10.1 million in 2000. The overall decrease in
general and administrative costs is related to reduced corporate overhead
stemming from the Company's third quarter 1999 restructuring initiative to
decentralize certain management functions. Revenue declines in the Xpedite and
Voicecom segments partially offset the improvement in general and administrative
costs as a percent of revenue.
RESEARCH AND DEVELOPMENT
Consolidated research and development costs as a percent of revenues
were 3.6%, 3.2% and 2.6% in 2001, 2000 and 1999, respectively. From 1999 to
2001, the Company's research and development activities focused on developing
new products and services in each of its operating segments. The increases in
2000 were attributable to Xpedite's development of its new service offerings,
messageREACH and voiceREACH, Premiere Conferencing's continued development of
ReadyConference, ReadyCast and VisionCast, and Voicecom's continued development
of Orchestrate.
DEPRECIATION
Consolidated depreciation costs as a percent of revenues were 8.4%,
9.3% and 15.3% in 2001, 2000 and 1999, respectively. Depreciation costs in the
Company's operating segments were as follows:
. Xpedite depreciation costs were 5.9%, 5.1% and 6.0% of segment
revenues in 2001, 2000 and 1999, respectively. The $1.0 million
increase in 2001 is primarily related to increased capital
expenditures in the latter half of 2000 and first half of 2001
related to MessageREACH and VoiceREACH. In addition, reduced
capital expenditure levels in 1998 and 1999 caused the decline in
the depreciation in 2000 as the depreciable base of assets was not
replenished at the same rate the base was being depreciated.
. Voicecom depreciation costs were 15.9%, 14.9% and 13.4% of
segment revenues in 2001, 2000 and 1999, respectively. This
represents a $3.2 million decrease from 2000 to 2001 and a $0.7
million increase from 1999 to 2000. The decline in depreciation in
terms of dollars is attributable to the impairment of property,
plant and equipment during the fourth quarter of 2001 and
significantly reduced levels of capital expenditures in 2001.
19
See "Asset impairments" for a further discussion of the nature of
these impairments. The overall increase as a percentage of revenue
is associated with the severe revenue declines in the operating
segment during 2001. The increase in 2000 was primarily associated
with increased levels of capital expenditures in late 1999 and
early 2000 associated with the development of Orchestrate 2000.
The overall increase as a percentage of revenue is associated with
revenue declines during 2000.
. Premiere Conferencing depreciation costs were 6.2%, 8.2% and 7.8%
of segment revenues in 2001, 2000 and 1999, respectively. This
represents a $1.1 million increase from 2000 to 2001 and a $1.8
million increase from 1999 to 2000. The increase in depreciation
in terms of dollars is attributable to increased capital
expenditures in 2001 to provide additional capacity to accommodate
the growth of the business. The 2001 percentage of revenue
decrease is due to the significant revenue growth in 2001.
. Retail Calling Card depreciation costs were 19.0% and 87.6% of
segment revenues in 2000 and 1999, respectively. The decrease in
expense as a percent of revenues from 1999 to 2000 is attributable
primarily to the shortening of the useful life of
telecommunications equipment from five to seven years in the
fourth quarter of 1998 to 15 months. The useful life of this
equipment was shortened as the equipment was held and used over
the period of its remaining estimated life.
. Corporate depreciation costs were $0.8 million, $2.2 million and
$1.6 million in 2001, 2000 and 1999, respectively. The decrease in
depreciation from 2000 to 2001 was associated with the normal run
out of depreciable assets not replaced. The increase in
depreciation from 1999 to 2000 resulted from shortening the useful
lives of certain purchased administrative software that was either
outsourced or replaced with less expensive alternatives.
AMORTIZATION
Consolidated amortization was $94.1 million, $103.2 million and $98.9
million in 2001, 2000 and 1999, respectively. Goodwill amortization was $67.4
million, $68.1 million and $68.1 million in 2001, 2000 and 1999, respectively.
Other intangibles amortization, which consist primarily of customer lists,
developed technology and assembled workforce was $26.7 million, $35.1 million
and $30.8 million in 2001, 2000 and 1999, respectively. The decline in goodwill
amortization in 2001 is primarily related to the impairment of certain goodwill
during the fourth quarter of 2001. With the adoption of SFAS No. 142,
"Accounting for Goodwill and Other Intangible Assets," the Company will no
longer record amortization expense associated with goodwill after December 31,
2001, but instead will be subject to a periodic impairment assessment by
applying a fair value based test. Other intangibles amortization decreased in
2001 due to customer list impairments associated with both the Voicecom and
Xpedite operating segments and developed technology impairments associated with
the Voicecom operating segment. See "Asset impairments" below for a further
discussion related to these impairments. Management anticipates that
amortization associated with other intangibles at December 31, 2001 will be
approximately $11.0 million in 2002. The increase in amortization expense during
2000 is associated with the shortening of the estimated useful life of Internet
portal rights associated with a co-marketing agreement with WebMD. Management
made this assessment in light of the continuing future economic benefit
associated with these portal rights.
RESTRUCTURING COSTS
Realignment of Workforce and Facilities - Fourth Quarter 2001
Due to continued revenue declines not anticipated by management in both
the Voicecom and Xpedite operating segments in the second half of 2001, plans
for additional workforce cost reductions were established and personnel notified
during the fourth quarter of 2001. The plan commitment is expected to reduce
annual operating expenses by $7.6 million. The plan eliminated, through
involuntary separation, approximately 120 non-sales force employees in both
Voicecom and Xpedite and eliminates 143 network equipment sites in the Voicecom
operating segment. The overall management plan allows for taking these cost
savings and reinvesting them into additional sales force employees in order to
stabilize the decline in revenues in both operating segments. Accordingly, the
Company accrued restructuring costs of approximately $4.1 million associated
with this plan commitment. Cash payments in 2001 associated with this plan were
$1.0 million. The Company expects to incur $2.4 million of additional cash
payments in 2002 to satisfy this plan obligation. Of the $4.1 million of costs
associated with this plan, approximately $0.7 million of non-cash charges were
incurred for severance cost obligations paid through immediately vested stock
options issued below market price on the date of grant. Accordingly, this
portion of the restructuring costs was recorded as additional paid-in-capital.
20
Realignment of Workforce and Facilities - Second Quarter 2001
During the second quarter of 2001, management committed to a plan to
reduce annual operating expenses by approximately $13.7 million through the
elimination of certain operating activities in its Voicecom and Xpedite
operating segments, and at Corporate, and the corresponding reductions in
personnel costs relating to the Company's operations, sales and administration.
The plan eliminated, through involuntary separation, approximately 168 non-sales
force employees and exited duplicative facilities in the Voicecom business
segments. Accordingly, the Company accrued restructuring costs of approximately
$6.7 million associated with this plan commitment. The Company expects to incur
approximately $5.0 million of cash payments related to severance, exit costs and
contractual obligations associated with the $6.7 million plan costs.
Approximately $3.8 million of these cash payments were made by December 31, 2001
and were primarily related to severance and exit cost activities. The remaining
$1.2 million of cash payments are associated with contractual obligations not
expected to expire until December 31, 2003. Approximately $1.7 million of
non-cash charges are related to certain executive management severance costs
from employee stock option modifications and forgiveness of employee notes
receivable. Accordingly, this portion of the restructuring costs was recorded as
additional paid-in-capital.
Exit from Asia Real-Time Fax and Telex Business
During the fourth quarter of 2000, the Company recorded a charge of
$0.6 million for costs associated with Xpedite's decision to exit its legacy
real-time fax and telex business in Asia. This service depended on significant
price disparities between regulated incumbent telecommunications carriers and
Xpedite's cost of delivery over its fixed-cost network. With the deregulation of
most Asian telecommunications markets, Xpedite's cost advantage dissipated, and
the Company decided to exit this service and concentrate on higher value-added
services such as transactional messaging and messageREACH. The $0.6 million
charge included contractual and other obligations totaling $0.4 million and
severance costs of $0.2 million.
Contractual and other obligations are mainly cash outlays for rent on
office space and telephone lines. Management achieved exiting this office space
and telephone lines during the fourth quarter of 2001 which was ahead of
original plan of first quarter of 2002. Accordingly, management reversed the
remaining obligation reserve of $0.2 million in 2001.
The severance charge includes cash severance payments made to 67
employees. The Company expects to realize an annual savings of approximately
$0.3 million from these terminations. During 2001, the Company paid the
remaining severance obligations planned for and does not expect any further
payments.
Decentralization of Company
In the third quarter of 1999, the Company recorded restructuring,
merger costs and other special charges of approximately $8.2 million in
connection with its reorganization from the two EES (Emerging Enterprise
Solutions) and CES (Corporate Enterprise Solutions) operating units into three
operating business units, a retail calling card business, and a holding company.
The $8.2 million charge is comprised of $7.3 million of severance and exit
costs, $0.7 million of lease termination costs and $0.2 million of facility exit
costs.
Severance benefits provided for the termination of 203 employees,
primarily related to corporate administrative functions, direct sales force and
operation of under-performing operating segments in the former EES and CES
groups. Of the 203 severed employees, 114 were from the Voicecom operating
segment, 61 from the Xpedite operating segment and 28 from Corporate
headquarters. The reduction made to the Voicecom and Xpedite operating segments
allowed for the transfer to those segments of approximately 70 employees who had
performed centralized administrative functions at Corporate. As of December 31,
1999, all 203 employees were terminated. Annual savings of approximately $13.1
million were realized from these terminations. The balance at December 31, 1999
for severance and exit costs represents the remaining reserve for future cash
severance and exit payments to former corporate executive management and various
management in the former CES group that were terminated in 1999. These remaining
cash payments were disbursed during the first nine months of 2000. During 2000,
cash severance payments totaled $3.2 million. In the third quarter of 2000, the
Company recognized as income $0.6 million of accrued severance and exit payments
upon completion of the severance program associated with the decentralization of
the Company. This amount represents actual exit costs that were below planned
exit costs, relating to the decentralization plan for the European and
Asia/Pacific regions of the Company's Xpedite operating segment.
Lease termination costs are attributable to the abandonment of a
facility under the Retail Calling Card Services segment. Lease termination costs
are cash outlays. The Company incurred $0.7 million in costs in 1999 in
terminating this lease. Other costs were attributable to site clean up and exit
team travel costs to exit one facility in the Xpedite segment. The Company
incurred $0.1 million of costs that were cash outlays in the fourth quarter of
1999 to close this facility. In the first quarter of 2000, the Company paid $0.1
million in lease termination and exit costs.
21
As the decentralization plan of the Company was completed and no
further payments are expected by management, the remaining balance of the
reserve totaling $0.6 million was reversed in the third quarter of 2000.
Reorganization of Company into EES and CES Business Groups
In the fourth quarter of 1998, the Company recorded a charge of $11.4
million to reorganize the Company into two business segments that focused on
specific groups of customers. The balance of severance and exit costs at
December 31, 2001 and 2000 represents remaining severance reserve for a former
executive manager. Cash severance payments in 2001 were $0.5 million. The
Company expects to pay the remaining reserve balance of $0.1 million over a
four-month period ending April 30, 2002.
ASSET IMPAIRMENTS
The following table summarizes the asset impairments incurred by
operating segment for the years ended December 31, 2001 and 2000 (in thousands):
2001 Xpedite Voicecom Conferencing Holding Co. Total
-----------------------------------------------------------------------
Goodwill........................... $91,571 $12,584 -- -- $104,155
Other intangibles.................. 6,679 3,413 -- -- 10,092
Property and equipment, net........ 777 14,748 984 785 17,294
-----------------------------------------------------------------------
$99,027 $30,745 $984 $785 $131,541
2000
Property and equipment, net........ $ 800 -- -- -- $ 800
------- -- -- -- --------
During the second half of 2001, business conditions declined
significantly in both the Voicecom and Xpedite operating segments. The following
is a comparison of revenue and Adjusted EBITDA performance for the first six
months of 2001 versus the second six months of 2001 (in thousands).
First six months 2001 Second six months 2001 % Change
Voicecom Xpedite Voicecom Xpedite Voicecom Xpedite
---------------------------- -------------------------------- ---------------------------
Revenue.................... $51,257 $112,552 $41,257 $103,113 -19.5% -8.4%
Adjusted EBITDA............ $ 2,018 $ 27,512 $ 1,483 $ 20,956 -26.5% -23.8%
During the third and fourth quarters of 2001, the Company experienced
declines in revenue at its Xpedite and Voicecom operating units. During the
fourth quarter of 2001, the Company assessed the outlook of various service
offering revenues and evaluated the potential impairment of various assets
associated with the operating equipment, goodwill and other intangible assets at
Voicecom and Xpedite pursuant to SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Management
reviewed the identifiable undiscounted future cash flows, including the
estimated residual value to be generated by the assets to be held and used by
the business acquired in Xpedite and Voicecom at their asset grouping level.
Based on the results of these assessments, the Company recorded the $131.5
million impairment in the fourth quarter of 2001.
Xpedite impairment - 2001
In Xpedite, an increasing rate of decline in the traditional store and
forward fax business and weakness in the European and Asia Pacific regions of
the business began to occur in the latter part of the third quarter and the
early part of the fourth quarter. By the latter part of the fourth quarter, the
outlook for revenue growth and the ability to sustain margins in the Xpedite
operating segment had significantly changed from the outlook earlier in the
quarter. The hospitality and financial services industries that comprise a
significant portion of the Xpedite business had begun to display greater
weakness than expected. Accordingly, management was concerned that a fair value
assessment would potentially be lower than the carrying value on the balance
sheet. A third party appraisal was performed using a discounted cash flow income
approach to valuing the business, using a 15% discount rate. The valuation
resulted in an asset impairment related to the Xpedite operating segment of
$99.0 million to reflect the carrying value in excess of fair value at December
31, 2001. Of the $99.0 million, property and equipment impairments of $0.7
million at Xpedite related primarily to the abandonment of its Indonesian
operations due to declining revenues and profits. Indonesia represented less
than 1% of Xpedite's revenues.
22
Voicecom impairment - 2001
In Voicecom, the following occurred: (1) lack of a market materializing
for the new Orchestrate product offering launched in the third quarter of 2000,
(2) voice mail distribution channels related to direct selling organizations
such as Amway and Primerica Financial Services diminished quicker than
anticipated, (3) losses of corporate voice mail customers materialized, and (4)
new business did not develop. Management had taken two workforce reductions, and
aggressively reduced Voicecom's business cost structure. However, the declines
in revenue in the early fourth quarter were outpacing cost reductions.
Management performed a valuation analysis of the business using the discounted
cash flow income approach and compared this to valuations from potential buyers.
From these valuations, an impairment of the net carrying value of the Voicecom
operating segment was required. Accordingly, during the fourth quarter the
Company took an impairment charge of $30.7 million to adjust the balance sheet
carrying value of Voicecom to its fair value at December 31, 2001. Property and
equipment impairments of $14.7 million at Voicecom related primarily to the
abandonment of certain network operating equipment.
Other impairments - 2001
Additionally, management has recorded asset impairments totaling $1.8
million related to the carrying value of capitalized software associated with
certain internal information systems at both Premiere Conferencing and the
holding company that have been taken out of service.
Real-time fax impairment - 2000
With the deregulation of most Asian telecommunications markets,
Xpedite's cost advantage dissipated, and Xpedite decided to exit this service
and concentrate on higher value-added services such as transactional messaging
and messageREACH. The asset impairments of $0.8 million included the write-down
of furniture and fixtures and real-time fax equipment including autodialers,
faxpads and computers. The valuation was based on the fair value of the assets
as of December 31, 2000. All equipment costs were incurred in conjunction with
the closing of the real-time fax operations in Malaysia, Singapore, Hon