PREMIERE GLOBAL SERVICES, INC. - FORM 10-Q - August 7, 2015

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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - PREMIERE GLOBAL SERVICES, INC.pgi20150630exhibit322.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - PREMIERE GLOBAL SERVICES, INC.pgi20150630exhibit312.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - PREMIERE GLOBAL SERVICES, INC.pgi20150630exhibit321.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - PREMIERE GLOBAL SERVICES, INC.pgi20150630exhibit311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   
For the quarterly period ended June 30, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission File Number: 001-13577
PREMIERE GLOBAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Georgia
59-3074176
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

3280 Peachtree Rd N.E., The Terminus Building, Suite 1000, Atlanta, Georgia 30305
(Address of principal executive offices, including zip code)
(404) 262-8400
(Registrant’s telephone number including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
o
 
Accelerated filer
þ
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at August 4, 2015
Common Stock, $0.01 par value
46,808,447



PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q

 
Page
PART I
FINANCIAL INFORMATION
 
 
 
Item 1
Condensed Consolidated Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
Item 3
 
 
Item 4
 
 
 
PART II
OTHER INFORMATION
 
 
 
Item 1
 
 
Item 1A
 
 
Item 2
 
 
Item 6
 
 
 
 


i


PART I. FINANCIAL INFORMATION 
ITEM 1
FINANCIAL STATEMENTS
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
 
June 30, 2015
 
December 31, 2014
ASSETS
 
 
 
CURRENT ASSETS
 

 
 

Cash and equivalents
$
20,707

 
$
40,220

Accounts receivable (net of allowances of $746 and $557, respectively)
89,977

 
77,334

Prepaid expenses and other current assets
16,528

 
13,536

Income taxes receivable
662

 
1,897

Deferred income taxes, net
8,658

 
10,447

Total current assets
136,532

 
143,434

PROPERTY AND EQUIPMENT,  NET
101,595

 
100,954

OTHER ASSETS
 

 
 

Goodwill
417,699

 
386,416

Intangibles, net of amortization
103,073

 
102,350

Deferred income taxes, net
2,225

 
2,342

Other assets
14,982

 
20,734

Total assets
$
776,106

 
$
756,230

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

CURRENT LIABILITIES
 

 
 

Accounts payable
$
52,702

 
$
57,211

Income taxes payable
1,957

 
2,217

Accrued taxes, other than income taxes
10,386

 
17,562

Accrued expenses
60,062

 
37,807

Current maturities of long-term debt and capital lease obligations
2,079

 
1,971

Accrued restructuring costs
1,384

 
958

Deferred income taxes, net
3

 
17

Total current liabilities
128,573

 
117,743

LONG-TERM LIABILITIES
 

 
 

Long-term debt and capital lease obligations
339,775

 
332,825

Accrued expenses
33,261

 
23,219

Deferred income taxes, net
28,247

 
27,453

Total long-term liabilities
401,283

 
383,497

COMMITMENTS AND CONTINGENCIES (Note 11)


 


SHAREHOLDERS’ EQUITY
 

 
 

Common stock, $.01 par value; 150,000,000 shares authorized, 46,808,447
and 47,378,794 shares issued and outstanding, respectively
485

 
475

Additional paid-in capital
432,838

 
442,585

Accumulated other comprehensive loss
(11,481
)
 
(6,545
)
Accumulated deficit
(175,592
)
 
(181,525
)
Total shareholders’ equity
246,250

 
254,990

Total liabilities and shareholders’ equity
$
776,106

 
$
756,230



Accompanying notes are integral to these condensed consolidated financial statements.
1


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
Net revenue
$
144,304

 
$
144,287

 
$
286,626

 
$
287,526

Operating expenses
 

 
 

 
 
 
 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
56,885

 
59,001

 
114,041

 
118,543

Selling and marketing
37,070

 
37,593

 
74,125

 
75,429

General and administrative (exclusive of expenses shown separately below)
21,021

 
19,070

 
41,173

 
37,005

Research and development
4,842

 
4,616

 
10,592

 
9,121

Depreciation
8,892

 
8,885

 
17,464

 
17,551

Amortization
4,387

 
2,484

 
8,437

 
4,967

Restructuring costs
(37
)
 
—

 
4,146

 
—

Asset impairments
127

 
—

 
150

 
—

Net legal settlements and related expenses
(11
)
 
—

 
(11
)
 
—

Acquisition-related costs
3,027

 
1,786

 
3,600

 
3,691

Total operating expenses
136,203

 
133,435

 
273,717

 
266,307

Operating income
8,101

 
10,852

 
12,909

 
21,219

Other (expense) income
 

 
 

 
 
 
 
Interest expense
(2,882
)
 
(2,385
)
 
(5,503
)
 
(4,485
)
Interest income
6

 
11

 
14

 
20

Other, net
649

 
(36
)
 
402

 
255

Total other expense, net
(2,227
)
 
(2,410
)
 
(5,087
)
 
(4,210
)
Income from continuing operations before income taxes
5,874

 
8,442

 
7,822

 
17,009

Income tax expense
994

 
2,309

 
1,555

 
5,606

Net income from continuing operations
4,880

 
6,133

 
6,267

 
11,403

Loss from discontinued operations, net of taxes
(108
)
 
(118
)
 
(334
)
 
(183
)
Net income
$
4,772

 
$
6,015

 
$
5,933

 
$
11,220

BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING
44,029

 
45,859

 
44,479

 
46,121

Basic net income (loss) per share (1)
 

 
 

 
 
 
 
Continuing operations
$
0.11

 
$
0.13

 
$
0.14

 
$
0.25

Discontinued operations
—

 
—

 
(0.01
)
 
—

Net income per share
$
0.11

 
$
0.13

 
$
0.13

 
$
0.24

DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING
44,585

 
46,550

 
45,037

 
46,784

Diluted net income (loss) per share (1)
 
 

 
 

 
 
 
 
Continuing operations
$
0.11

 
$
0.13

 
$
0.14

 
$
0.24

Discontinued operations
—

 
—

 
(0.01
)
 
—

Net income per share
$
0.11

 
$
0.13

 
$
0.13

 
$
0.24


(1)
Column totals may not sum due to the effect of rounding on EPS.

Accompanying notes are integral to these condensed consolidated financial statements.
2


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
Net income
$
4,772

 
$
6,015

 
$
5,933

 
$
11,220

Other comprehensive income (loss):
 

 
 

 
 
 
 
Unrealized gain (loss) on available-for-sale securities, net of taxes
31

 
(198
)
 
83

 
(1,673
)
Net gain reclassified from accumulated other comprehensive income to net income
—

 
—

 
—

 
(468
)
Translation adjustments
4,326

 
2,429

 
(5,006
)
 
2,349

Total other comprehensive income (loss)
4,357

 
2,231

 
(4,923
)
 
208

Comprehensive income
$
9,129

 
$
8,246

 
$
1,010

 
$
11,428



Accompanying notes are integral to these condensed consolidated financial statements.
3


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)

 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total
Shareholders’ Equity
 
 
BALANCE, December 31, 2014
$
475

 
$
442,585

 
$
(181,525
)
 
$
(6,545
)
 
$
254,990

Net income
—

 
—

 
5,933

 
—

 
5,933

Other comprehensive income (loss)
13

 
—

 
—

 
(4,936
)
 
(4,923
)
Equity-based compensation
—

 
5,882

 
—

 
—

 
5,882

Treasury stock purchase and retirement
(15
)
 
(14,191
)
 
—

 
—

 
(14,206
)
Redemption of restricted shares, net
12

 
(1,366
)
 
—

 
—

 
(1,354
)
Income tax deficiency from equity awards
—

 
(72
)
 
—

 
—

 
(72
)
BALANCE, June 30, 2015
$
485

 
$
432,838

 
$
(175,592
)
 
$
(11,481
)
 
$
246,250



Accompanying notes are integral to these condensed consolidated financial statements.
4


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
Net income
$
5,933

 
$
11,220

Loss from discontinued operations, net of taxes
334

 
183

Net income from continuing operations
6,267

 
11,403

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation
17,464

 
17,551

Amortization
8,437

 
4,967

Amortization of debt issuance costs
364

 
322

Net legal settlements and related expenses
(11
)
 
—

Payments for legal settlements and related expenses
(110
)
 
—

Deferred income taxes
(601
)
 
908

Restructuring costs
4,146

 
—

Payments for restructuring costs
(3,583
)
 
(1,659
)
Asset impairments
150

 
—

Equity-based compensation
6,065

 
4,884

Excess tax benefits from share-based payment arrangements
(92
)
 
(395
)
Provision for doubtful accounts
447

 
362

Acquisition-related costs
3,600

 
3,691

Cash paid for acquisition-related costs
(3,067
)
 
(3,779
)
Changes in working capital, net of business acquisitions
(10,218
)
 
812

Net cash provided by operating activities from continuing operations
29,258

 
39,067

Net cash used in operating activities from discontinued operations
(391
)
 
(165
)
Net cash provided by operating activities
28,867

 
38,902

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Capital expenditures
(19,782
)
 
(15,520
)
Business acquisitions, net of cash acquired
(16,284
)
 
66

Other investing activities, net
(301
)
 
2,052

Net cash used in investing activities from continuing operations
(36,367
)
 
(13,402
)
Net cash used in investing activities from discontinued operations
—

 
—

Net cash used in investing activities
(36,367
)
 
(13,402
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Principal payments under borrowing arrangements
(55,291
)
 
(83,447
)
Proceeds from borrowing arrangements
61,500

 
62,000

Payment of earn-out liability
(1,841
)
 
—

Excess tax benefits of share-based payment arrangements
92

 
395

Purchase and retirement of treasury stock, at cost
(15,293
)
 
(18,988
)
Exercise of stock options
—

 
963

Net cash used in financing activities from continuing operations
(10,833
)
 
(39,077
)
Net cash used in financing activities from discontinued operations
—

 
—

Net cash used in financing activities
(10,833
)
 
(39,077
)
Effect of exchange rate changes on cash and equivalents
(1,180
)
 
548

NET DECREASE IN CASH AND EQUIVALENTS
(19,513
)
 
(13,029
)
CASH AND EQUIVALENTS, beginning of period
40,220

 
44,955

CASH AND EQUIVALENTS, end of period
$
20,707

 
$
31,926



Accompanying notes are integral to these condensed consolidated financial statements.
5

PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
1.    BASIS OF PRESENTATION
Premiere Global Services, Inc., or PGi, is the world’s largest dedicated provider of collaboration software and services. We created iMeet®, an expanding portfolio of purpose-built applications designed to meet the daily collaboration and communications needs of business professionals, with solutions for web, video and audio conferencing, smart calendar management, webcasting, project management and sales acceleration. PGi's award-winning unified communications and collaboration, or UC&C, solutions help nearly 50,000 businesses in 25 countries in our three segments in North America, Europe and Asia Pacific.
Our unaudited condensed consolidated financial statements and related footnotes have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and Rule 10-01 of Regulation S-X issued by the Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe that these condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the results for interim periods shown. All significant intercompany accounts and transactions have been eliminated in consolidation. Our results of operations for the three and six months ended June 30, 2015 are not indicative of the results that may be expected for the full fiscal year of 2015 or for any other interim period. The financial information presented herein should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2014, which includes information and disclosures not included in this quarterly report.
Unless otherwise stated, current and prior period results in our condensed consolidated statements of operations and cash flows and these notes reflect our results from continuing operations and exclude the effect of discontinued operations. See Note 4 to our condensed consolidated financial statements for additional information and related disclosures regarding our discontinued operations.
2.
SIGNIFICANT ACCOUNTING POLICIES
Cash and Equivalents and Restricted Cash
Cash and equivalents consist of cash on hand. Cash balances that are legally restricted as to usage or withdrawal are separately included in “Prepaid expenses and other current assets” in our condensed consolidated balance sheets. At June 30, 2015 and December 31, 2014, we had $0.7 million and $0.4 million of restricted cash, respectively.
Accounts Receivable and Allowance for Doubtful Accounts
Included in accounts receivable at June 30, 2015 and December 31, 2014 was earned but unbilled revenue of $8.1 million and $5.1 million, respectively, which results from non-calendar month billing cycles and the one-month lag time in billing of certain of our services. Earned but unbilled revenue is billed within 30 days. Provision for doubtful accounts was $0.2 million and $0.1 million for the three months ended June 30, 2015 and 2014, respectively. Provision for doubtful accounts was $0.4 million for each of the six months ended June 30, 2015 and 2014. Write-offs against the allowance for doubtful accounts were $0.1 million for each of the three months ended June 30, 2015 and 2014. Write-offs against the allowance for doubtful accounts were $0.3 million for each of the six months ended June 30, 2015 and 2014. Our allowance for doubtful accounts represents reserves for receivables that reduce accounts receivable to amounts expected to be collected. Management uses significant judgment in estimating uncollectible amounts. In estimating uncollectible amounts, management considers factors such as historical and anticipated customer payment performance and industry-specific economic conditions. Using these factors, management assigns reserves for uncollectible amounts by accounts receivable aging categories to specific customer accounts.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded under the straight-line method over the estimated useful lives of the assets commencing when the assets are placed in service. The estimated useful lives are five to seven years for furniture and fixtures, two to five years for software and three to five years for computer servers and Internet and telecommunications equipment. Accumulated depreciation was $193.2 million and $177.8 million as of June 30, 2015 and December 31, 2014, respectively. The cost of installation of equipment is capitalized, as applicable. Amortization of assets recorded under capital leases is included in depreciation. Assets recorded under capital leases and leasehold improvements are depreciated over the shorter of their useful lives or the term of the related lease.

6


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Research and Development
Research and development expenses primarily related to developing new services, features and enhancements to existing services that do not qualify for capitalization are expensed as incurred.
Software Development Costs
We capitalize certain costs incurred to develop software features used as part of our service offerings within “Property and Equipment, Net” in our condensed consolidated balance sheets. We capitalized approximately $5.5 million and $5.4 million of these costs for the three months ended June 30, 2015 and 2014, respectively, and $11.6 million and $9.9 million of these costs for the six months ended June 30, 2015 and 2014, respectively. We amortize these capitalized costs on a straight-line basis over the estimated life of the related software, not to exceed five years. Depreciation expense recorded for the developed software was $4.1 million and $3.6 million for the three months ended June 30, 2015 and 2014, respectively, and $7.8 million and $7.2 million for the six months ended June 30, 2015 and 2014, respectively.
Goodwill
Goodwill is subject to an impairment assessment performed at the reporting unit level at least annually and more frequently if indicators of impairment are identified. Our reporting units are our operating segments: North America, Europe and Asia Pacific. No impairment of goodwill was identified in the year ended December 31, 2014, the date of our most recent assessment. As of June 30, 2015, we are not aware of any events that would lead to an impairment; therefore, we do not believe that any of our reporting units are at risk of failing step one of the goodwill impairment test.
Investments
In March 2013, we invested $1.0 million in a privately-held cloud solutions provider. This investment is accounted for under the cost method and is periodically assessed for other-than-temporary impairment using financial results, economic data and other quantitative and qualitative factors deemed applicable. In the event an other-than-temporary impairment occurs, an impairment loss equal to the difference between the cost basis and the fair value would be recognized.
Our cost method investment had a carrying value of $1.0 million as of June 30, 2015 and was included as a component of “Other assets” in our condensed consolidated balance sheets for each period presented. The total carrying value of our cost method investments as of December 31, 2014 were $1.1 million and was included as a component of “Other assets” in our condensed consolidated balance sheets for each period presented. Of this amount at December 31, 2014, $1.0 million was related to our investment in a privately held cloud solutions provider.
In June 2011, we invested approximately $1.0 million in a privately-held conferencing company. During December 2013, this investment changed from a historical cost investment to an available-for-sale asset when that company’s shares began trading publicly on a foreign stock exchange. The fair value of this investment is based on the quoted price of our shares of such company on that foreign exchange at each measurement date. This investment is also subject to fluctuations in foreign currency exchange rates. Any related gains or losses related to the market value of the shares or fluctuations in foreign currency are excluded from earnings until realized and reported as a component of “Accumulated other comprehensive loss” in our condensed consolidated balance sheets. In February 2014, we sold 50% of our investment for approximately $1.0 million realizing a gain of $0.5 million. This gain was reflected in "Other, net" in our condensed consolidated statements of operations. After the effects of foreign currency exchange rate fluctuations and adjustments to the quoted market value, the available-for-sale investment had a market value of $0.4 million and $0.3 million as of June 30, 2015 and December 31, 2014, respectively, and was included as a component of “Prepaid expenses and other current assets” in our condensed consolidated balance sheets.
Revenue Recognition
    
We recognize revenues when persuasive evidence of an arrangement exists, services have been rendered, the price to the buyer is fixed or determinable and collectability is reasonably assured. Revenues from continuing operations consist primarily of usage fees generally based on per minute methods.

Our UC&C software-as-a-service, or SaaS, revenue consists of five primary components associated with our next-generation collaboration solutions:


7


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


•
Subscription-based license fees associated with fixed-period minimum revenue commitments related to our iMeet® and GlobalMeet® products. These subscription-based fees are considered service arrangements per the authoritative guidance; accordingly, fees related to subscription agreements are recognized ratably over the contract term, which is typically 12 to 24 months;

•
Subscription- and event-based fees associated with commitments for our self-service webcasting and event streaming
product and our team workspace and project management platform. Subscription-based fees are considered service
arrangements per the authoritative guidance; accordingly, fees related to subscription agreements are recognized ratably over the contract term, which is typically 12 months, and event-based fees are recognized when the event occurs;

•
Per minute usage fees generated through the use of iMeet and GlobalMeet. These usage fees are generated if a customer contracts for the use of GlobalMeet on a per-minute basis, or if a customer elects to use either minutes in excess of the contractual amount allowed in a subscription agreement or of a type not included in the arrangement. This revenue is recognized as incurred by the customer, consistent with our other per minute usage fees;

•
Certain set-up fees, which are recognized ratably over the contract term or the expected customer life, whichever is longer; and

•
Revenue from our Internet Protocol, or IP, conferencing products, which deliver conferencing services across an enterprise customer’s existing network infrastructure, thereby eliminating third-party variable network costs. This revenue is recognized as incurred by the customer, consistent with our other per minute usage fees.

Unbilled revenue consists of earned but unbilled revenue that results from non-calendar month billing cycles and the one-month lag time in billing related to certain of our services. Deferred revenue consists of payments made by customers in advance of the time services are rendered. Incremental direct costs incurred related to deferred revenue are deferred over the life of the contract and are recorded in “Prepaid expenses and other current assets” in our condensed consolidated balance sheets.
USF Charges
In accordance with Federal Communications Commission, or FCC, rules, we are required to contribute to the federal Universal Service Fund, or USF, for some of our solutions, which we recover from our applicable customers and remit to the Universal Service Administration Company, or USAC. We present the USF charges that we collect and remit on a net basis, with both collections from our customers and the amounts we remit, recorded in "Net revenue" in our condensed consolidated statements of operations. Had we presented USF charges on a gross basis, net revenue and cost of revenue would have been $6.4 million and $6.5 million higher for the three months ended June 30, 2015 and 2014, respectively, and $12.7 million and $13.2 million higher for the six months ended June 30, 2015 and 2014, respectively.
Foreign Currency Translation
The assets and liabilities of subsidiaries with a functional currency other than the U.S. Dollar are translated at rates of exchange existing at our condensed consolidated balance sheet dates. Revenue and expenses are translated at average rates of exchange prevailing during the year. The resulting translation adjustments are recorded in the “Accumulated other comprehensive loss” component of shareholders’ equity. In addition, certain of our intercompany loans with foreign subsidiaries are considered to be permanently invested for the foreseeable future. Therefore, foreign currency exchange gains and losses related to these permanently invested balances are recorded in the “Accumulated other comprehensive loss” component of shareholders’ equity in our condensed consolidated balance sheets.
Treasury Stock
All treasury stock transactions are recorded at cost, and all shares of treasury stock repurchased are retired. During the six months ended June 30, 2015, we repurchased 1,529,354 shares of our common stock for $14.2 million in the open market at an average price of $9.29 per share, pursuant to our board-approved stock repurchase program. During the six months ended June 30, 2014, we repurchased 1,408,559 shares of our common stock for $18.2 million in the open market at an average price of $12.89 per share, pursuant to our prior board-approved stock repurchase program.

8


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


During the six months ended June 30, 2015 and 2014, we redeemed 138,652 and 89,651 shares, respectively, of our common stock to satisfy certain of our employees’ tax withholding obligations due upon the vesting of their restricted stock grants and remitted $1.2 million and $0.8 million, respectively, to the Internal Revenue Service on our employees’ behalf.
Preferred Stock
We have 5.0 million shares of authorized $0.01 par value preferred stock, none of which are issued or outstanding. Under the terms of our amended and restated articles of incorporation, our board of directors is empowered to issue preferred stock without shareholder action.
Restructuring Costs
Restructuring reserves are based on certain estimates and judgments related to severance and exit costs, contractual obligations and related costs and are recorded as “Restructuring costs” in our condensed consolidated statements of operations. See Note 3 to our condensed consolidated financial statements for additional information and related disclosures regarding our restructuring costs.
Acquisition-related Costs
Acquisition-related costs reflected in our condensed consolidated statements of operations include, but are not limited to, transaction costs such as banking, legal, accounting and other professional fees directly related to acquisitions, termination and related costs for transitional and certain other employees, integration-related professional fees and other post-business combination expenses associated with our acquisitions.
The following table summarizes acquisition-related costs incurred during the three and six months ended June 30, 2015 and 2014 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Professional fees
$
60

 
$
750

 
$
371

 
$
1,713

Integration-related costs
1,625

 
1,036

 
2,560

 
1,978

Earn-out adjustments, net
1,342

 
—

 
669

 
—

Total acquisition-related costs
$
3,027


$
1,786

 
$
3,600

 
$
3,691

Included in Integration-related costs above in 2015 is a lease abandonment charge of approximately $0.8 million related to a facility in the United Kingdom that will no longer be utilized due to recent acquisition activities in that country. For further discussion of these costs, see Note 10 to our condensed consolidated financial statements.
Excise and Sales Tax
    
Some of our solutions may be subject to telecommunications excise tax and sales taxes in states where we have not collected and remitted such taxes from our customers. During the six months ended June 30, 2015 and 2014, we did not make any material payments related to the settlement of these state and excise sales tax contingencies.

We have reserves for certain state excise and sales tax contingencies based on the likelihood of obligation. These contingencies are included in “Accrued taxes, other than income taxes” in our condensed consolidated balance sheets. We had reserved approximately $10.1 million and $9.9 million at each of June 30, 2015 and December 31, 2014, respectively, for certain state excise and sales tax contingencies and interest. We believe we have appropriately accrued for these contingencies. In the event that actual results differ from these reserves or new information becomes available, we may need to make adjustments which could materially impact our financial condition and results of operations. In addition, states may disagree with our method of assessing and remitting such taxes or additional states may subject us to inquiries regarding such taxes.



9


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Income Taxes

Income taxes are determined under the asset and liability method as required by Accounting Standards Codification, or ASC, 740, “Income Taxes.” Under this method, deferred tax assets and liabilities are recognized based upon the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary items are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. To the extent we establish a valuation allowance or increase this allowance in a period, an expense is recorded within the income tax provision in our condensed consolidated statements of operations. Under current accounting principles, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority.
Income tax expense for the three and six months ended June 30, 2015 was $1.0 million and $1.6 million, respectively compared to $2.3 million and $5.6 million for the three and six months ended June 30, 2014, respectively. The decrease in income tax expense during the six months ended June 30, 2015 compared to the same period in the prior year is primarily related to the decrease in income from continuing operations before income taxes for the three and six months ended June 30, 2015 compared to the same periods of 2014.
We had $8.2 million of unrecognized tax benefits as of both June 30, 2015 and December 31, 2014. Upon resolution, $6.8 million and $6.9 million of unrecognized tax benefits would affect our annual effective tax rate as of June 30, 2015 and December 31, 2014, respectively. The unrecognized tax benefits are included in “Accrued expenses” under “Long-Term Liabilities” in our condensed consolidated balance sheets.
    
Our valuation allowance at June 30, 2015 primarily relates to certain foreign and state net operating loss and capital loss carryforwards that, in the opinion of management, are more likely than not to expire unutilized. During the six months ended June 30, 2015, the net change in our valuation allowance was not material.
New and Recently Adopted Accounting Pronouncements
    
In April 2015, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ASU, 2015-03, "Simplifying the Presentation of Debt Issuance Costs." The amendment modifies the presentation of unamortized debt issuance costs on our condensed consolidated balance sheets. Under the new guidance, we will present such amounts as a direct deduction from the face amount of the debt rather than as an asset. Amortization of the debt issuance costs will continue to be reported as interest expense. The guidance will be effective for us beginning January 1, 2016. Early adoption is permitted. The new guidance must be applied retrospectively to each prior period presented. We do not expect the impact of adopting this guidance to be material to our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The SEC has indicated that it plans to review and update the revenue recognition guidance in Staff Accounting Bulletin Topic 13, or SAB Topic 13, when the ASU is issued. The extent to which the ASU’s guidance will affect us as it relates to revenue recognition will depend on whether the SEC removes or amends the guidance in SAB Topic 13 to be consistent with the new revenue standard. In addition, the ASU provides guidance on accounting for certain revenue-related costs including, but not limited to, when to capitalize costs associated with obtaining and fulfilling a contract. ASU 2014-09 provides companies with two implementation methods. Companies can choose to apply the standard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application (modified retrospective application). This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. On July 9, 2015, the FASB decided to defer the effective date of ASU 2014-09 by one year and early adoption would now be permitted, but not before the original publication effective date. We are in the process of evaluating the impact that the adoption of the standard will have on our consolidated financial position, results of operations, and related disclosures.


10


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


3.
RESTRUCTURING COSTS
Below is a reconciliation of the beginning and ending liability balances related to our restructuring efforts for the six months ended June 30, 2015. The expenses associated with these activities are reflected in “Restructuring costs” in our condensed consolidated statements of operations. Cash payments for restructuring costs from continuing operations were $3.6 million and $1.7 million during the six months ended June 30, 2015 and 2014, respectively. The components included in the reconciliation of the liability balances are as follows (in thousands):
 
Balance at
 
Provisions
 
Cash Payments
 
Non-cash (1)
 
Balance at
December 31, 2014
June 30, 2015
Accrued restructuring costs:
 
 
 
 
 
 
 
 
 
Severance and exit costs
$
842

 
$
3,767

 
$
(3,163
)
 
$
(143
)
 
$
1,303

Contractual obligations
116

 
379

 
(420
)
 
6

 
81

Total restructuring costs
$
958

 
$
4,146

 
$
(3,583
)
 
$
(137
)
 
$
1,384


(1) Non-cash includes the impact of currency fluctuations.

Realignment of Workforce – 2015

For the 2015 alignment, we recorded restructuring expenses of $4.3 million during the six months ended June 30, 2015. Of these expenses, $3.9 million relate to severance costs. We eliminated approximately 85 positions in an effort to realign our international operations and ensure that our organizational structure is optimally aligned to take full advantage of our market opportunities. We also recorded $0.4 million in contract termination costs associated with this realignment. On a segment basis, these restructuring costs totaled $1.5 million in North America, $1.0 million in Europe and $1.8 million in Asia Pacific. Our reserve for the 2015 realignment was $1.1 million at June 30, 2015, which we anticipate will be paid within one year.

Realignment of Workforce – 2014

During 2014, we eliminated approximately 15 positions in an effort to consolidate and streamline various functions of our workforce. To date, we have recorded $0.5 million of severance costs, including a $(0.1) million adjustment recorded in 2015, and $0.1 million in contract termination costs associated with this realignment. On a segment basis, these restructuring costs totaled $0.1 million in North America and $0.5 million in Europe. There is no remaining reserve for the 2014 realignment at June 30, 2015.

Realignment of Workforce – 2013
 
During 2013, we eliminated approximately 60 positions in an effort to consolidate and streamline various functions of our workforce. To date, we have recorded $3.3 million of severance costs and $0.2 million in contract termination costs associated with this realignment. On a segment basis, these restructuring costs totaled $1.3 million in North America, $2.0 million in Europe and $0.2 million in Asia Pacific. Our reserve for the 2013 realignment was $0.2 million at June 30, 2015, which we anticipate will be paid within one year.
4.
DISCONTINUED OPERATIONS
The following amounts associated with our discontinued businesses have been segregated from continuing operations and are reflected as discontinued operations for the three and six months ended June 30, 2015 and 2014 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Operating loss
$
(102
)
 
$
(124
)
 
$
(390
)
 
$
(166
)
Interest expense
(65
)
 
(60
)
 
(130
)
 
(119
)
Income tax benefit
59

 
66

 
186

 
102

Loss from discontinued operations, net of taxes
$
(108
)
 
$
(118
)
 
$
(334
)
 
$
(183
)

11


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The results of discontinued operations for the three and six months ended June 30, 2015 and 2014 reflect ongoing administration and resolution of issues associated with residual liabilities not assumed by the purchaser of our PGiSend messaging business, which was sold in 2010.
5.GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill by reportable business segments from December 31, 2014 to June 30, 2015 (in thousands):

 
North America
 
Europe
 
Asia Pacific
 
Total
Goodwill:
 

 
 

 
 

 
 

Gross value at December 31, 2014
$
428,511

 
$
44,433

 
$
5,895

 
$
478,839

Accumulated impairment losses
(92,423
)
 
—

 
—

 
(92,423
)
Carrying value at December 31, 2014
336,088

 
44,433

 
5,895

 
386,416

Modality acquisition
2,153

 
29,858

 
177

 
32,188

Adjustments to prior acquisitions
580

 
—

 
—

 
580

Impact of currency fluctuations
(1,442
)
 
237

 
(280
)
 
(1,485
)
Carrying value at June 30, 2015
$
337,379

 
$
74,528

 
$
5,792

 
$
417,699

 
Goodwill is not subject to amortization but is subject to periodic reviews for impairment. Goodwill due to our recent acquisitions has been determined on a consolidated basis and preliminarily allocated to reporting units. A formal allocation to reporting units has not yet been completed. Refer to Note 10 to our condensed consolidated financial statements for additional information on goodwill acquired.
Intangible Assets
Summarized below are the carrying value and accumulated amortization, if applicable, by intangible asset class (in thousands):
 
June 30, 2015
 
December 31, 2014
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer lists
$
142,481

 
$
(73,712
)
 
$
68,769

 
$
138,149

 
$
(69,904
)
 
$
68,245

Non-compete agreements
15,010

 
(8,041
)
 
6,969

 
13,170

 
(6,891
)
 
6,279

Developed technology
23,414

 
(3,475
)
 
19,939

 
23,000

 
(1,843
)
 
21,157

Other
10,450

 
(3,054
)
 
7,396

 
8,809

 
(2,140
)
 
6,669

Total other intangible assets
$
191,355

 
$
(88,282
)
 
$
103,073

 
$
183,128

 
$
(80,778
)
 
$
102,350

We record fees incurred in connection with our patents and trademarks in “Prepaid expenses and other current assets” in our condensed consolidated balance sheets until the patents and trademarks are granted or abandoned. We had $0.8 million and $1.0 million of these assets recorded as of June 30, 2015 and December 31, 2014, respectively.

Intangible assets include $101.6 million of net intangible assets at June 30, 2015 that are subject to amortization. Intangible assets that are subject to amortization are amortized over an estimated useful life between one and 20 years. Intangible assets with indefinite lives that are not subject to amortization include $0.4 million of domain names and $1.1 million of trademarks.

Estimated annual amortization expense of our other intangible assets for the next five years is as follows (in thousands):

12


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Year
 
Estimated Annual
Amortization Expense
2015
 
$
17,178

2016
 
$
16,869

2017
 
$
15,068

2018
 
$
13,522

2019
 
$
11,755


6.INDEBTEDNESS
Long-term debt and capital lease obligations at June 30, 2015 and December 31, 2014 are as follows (in thousands):
 
June 30,
2015
 
December 31,
2014
Borrowings on credit facility
$
338,527

 
$
330,895

Capital lease obligations
3,327

 
3,901

Subtotal
341,854

 
334,796

Less current portion
(2,079
)
 
(1,971
)
Total long-term debt and capital lease obligations
$
339,775

 
$
332,825


Our credit facility consists of a $350.0 million revolver, a $150.0 million Term A loan and an uncommitted $75.0 million accordion feature, which allows for additional credit commitments up to a maximum of $575.0 million, subject to the credit facility terms and conditions. Our subsidiary, American Teleconferencing Services, Ltd., or ATS, is the borrower under our credit facility, with PGi and certain of our material domestic subsidiaries guaranteeing the obligations of ATS under the credit facility, which is secured by substantially all of our assets and the assets of our material domestic subsidiaries. In addition, we have pledged as collateral all of the issued and outstanding stock of our material domestic subsidiaries and 65% of the issued and outstanding stock of our material foreign subsidiaries. Proceeds drawn under our credit facility can be used for working capital, capital expenditures, acquisitions and other general corporate purposes. The annual interest rate applicable to borrowings under our credit facility, at our option, is (1) the base rate (the highest of the federal funds rate plus one-half of one percent, the prime rate or one-month LIBOR plus one and one-half percent) plus an applicable percentage that varies based on our consolidated leverage ratio at quarter end, or (2) LIBOR (or, if applicable, the rate designated in the credit facility for certain foreign currencies) for one, two, three or six months adjusted for a percentage that represents the Federal Reserve Board’s reserve percentage plus an applicable percentage that varies based on our consolidated leverage ratio at quarter end. The applicable percentages for base rate loans and LIBOR loans were 1.50% and 2.50%, respectively, at June 30, 2015 under our credit facility. Our interest rate on LIBOR loans, which comprised materially all of our outstanding borrowings, as of June 30, 2015, was 2.72%. In addition, we pay a commitment fee on the unused portion of our credit facility that is based on our consolidated leverage ratio at quarter end. As of June 30, 2015, the rate applied to the unused portion of our credit facility was 0.40%. Our credit facility contains customary terms and restrictive covenants, including financial covenants. At June 30, 2015, we had $338.5 million of borrowings and $3.2 million in letters of credit outstanding under our credit facility.
7.
EQUITY-BASED COMPENSATION
We may issue stock options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards to employees, officers, directors and consultants under our 2014 incentive plan, or 2014 plan, and our amended and restated 2000 directors stock plan, as amended, or 2000 directors stock plan. We issue both service and performance-based restricted stock awards and units to employees. Performance-based restricted stock awards and units are issued to certain key executives and other employees and vest based on financial performance metrics over the requisite service period. The compensation committee of our board of directors administers these stock plans. A total of 4,959,944 and 1,900,000 shares are authorized for issuance under our 2014 plan and 2000 directors stock plan, respectively.
Equity-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized over the vesting periods. Included in the expense amounts are employer-related costs for taxes incurred upon vesting of awards which do not impact "Additional paid-in capital" in our condensed consolidated balance sheets. The following table presents total

13


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


equity-based compensation expense for restricted stock awards and non-qualified stock options included in the line items below in our condensed consolidated statements of operations (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Cost of revenue
$
103

 
$
166

 
$
266

 
$
338

Selling and marketing
684

 
681

 
1,367

 
1,417

Research and development
180

 
173

 
446

 
300

General and administrative
2,126

 
1,637

 
3,986

 
2,829

Equity-based compensation expense
$
3,093

 
$
2,657

 
$
6,065

 
$
4,884

Restricted Stock
The fair value of restricted stock awards is the market value of the stock on the date of grant. The effect of vesting conditions that apply only during the requisite service period is reflected by recognizing compensation cost only for the restricted stock awards for which the requisite service is rendered. As a result, we are required to estimate an expected forfeiture rate, as well as the probability that performance conditions that affect the vesting of certain stock-based awards will be achieved, and only recognize expense for those shares expected to vest. We estimate that forfeiture rate based on historical experience of our stock-based awards that are granted, exercised and voluntarily cancelled. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. Our estimated forfeiture rate for restricted stock awards is 3.0%.
The following table summarizes the activity of unvested restricted stock awards under our stock plans from December 31, 2014 to June 30, 2015:
 
Shares
 
Weighted-Average Grant Date Fair Value
Unvested at December 31, 2014
2,297,652

 
$
10.97

Granted
1,242,628

 
9.81

Vested/released
(546,275
)
 
10.13

Forfeited
(105,308
)
 
10.08

Unvested at June 30, 2015
2,888,697

 
$
10.67

Included in the table above are 172,000 and 134,591 restricted stock units outstanding at June 30, 2015 and December 31, 2014, respectively. Restricted stock units represent a right to receive shares of our common stock in the future, subject to attainment of service-based and/or performance-based vesting criteria. Shares underlying restricted stock units are not outstanding and instead convert to shares of our common stock if and when the vesting criteria are met.
The weighted-average grant date fair value of restricted stock granted during the six months ended June 30, 2015 and 2014 was $9.81 and $12.34, respectively. The aggregate fair value of restricted stock vested was $1.4 million and $5.3 million for the three and six months ended June 30, 2015, respectively, and $2.3 million and $5.2 million for the three and six months ended June 30, 2014, respectively. During the six months ended June 30, 2015 and the year ended December 31, 2014, we issued 415,765 and 626,928 shares, respectively, of our common stock relating to the vesting of restricted stock. As of June 30, 2015, we had $23.4 million of unvested restricted stock, which we will record in our condensed consolidated statements of operations over a weighted-average recognition period of approximately 2.0 years.
Stock Options
The fair value of stock options is estimated at the date of grant with the Black-Scholes option pricing model using various assumptions such as expected life, volatility, risk-free interest rate, dividend yield and forfeiture rates. The expected life of stock-based awards granted represents the period of time that they are expected to be outstanding and is estimated using historical data. Using the Black-Scholes option valuation model, we estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. We have not paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends

14


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. Finally, we use historical data to estimate pre-vesting option forfeitures. Stock-based compensation is recorded for only those awards that are expected to vest. No stock options have been issued since the year ended December 31, 2005.
The following table summarizes the stock options activity under our stock plans from December 31, 2014 to June 30, 2015:
 
Options
 
Weighted-
Average Exercise Price
 
Weighted-Average Remaining Contractual Life (in years)
 
Aggregate Intrinsic Value
Options outstanding at December 31, 2014
22,334

 
$
11.30

 
 
 
 
Granted
—

 
—

 
 
 
 
Exercised
—

 
—

 
 
 
 
Expired
(22,334
)
 
11.30

 
 
 
 
Options outstanding and exercisable at June 30, 2015
—

 
$
—

 
—

 
$
—

As of June 30, 2015, we had no remaining unvested stock options to be recorded as an expense in our condensed consolidated statements of operations for future periods.
8.
EARNINGS PER SHARE
Basic and Diluted Earnings Per Share
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. The weighted-average number of common shares outstanding does not include any potentially dilutive securities or any unvested restricted shares of common stock. These unvested restricted shares, although classified as issued and outstanding at June 30, 2015 and 2014, are considered contingently returnable until the restrictions lapse and will not be included in the basic earnings per share calculation until the shares are vested. Unvested shares of our restricted stock do not contain nonforfeitable rights to dividends and dividend equivalents.
Diluted earnings per share includes the effect of all potentially dilutive securities on earnings per share. Our unvested restricted shares, restricted stock units and stock options are potentially dilutive securities. The difference between basic and diluted weighted-average shares outstanding was the dilutive effect of unvested restricted shares, restricted stock units and stock options for the three and six months ended June 30, 2015 and 2014.
The following table represents a reconciliation of the basic and diluted earnings per share from continuing operations, or EPS, computations contained in our condensed consolidated financial statements (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income from continuing operations
$
4,880

 
$
6,133

 
$
6,267

 
$
11,403

Weighted-average shares outstanding - basic and diluted:
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic
44,029

 
45,859

 
44,479

 
46,121

Add effect of dilutive securities:
 
 
 
 
 
 
 
Unvested restricted stock
556

 
673

 
558

 
646

Stock options
—

 
18

 
—

 
17

Weighted-average shares outstanding - diluted
44,585

 
46,550

 
45,037

 
46,784

Basic net income per share from continuing operations
$
0.11

 
$
0.13

 
$
0.14

 
$
0.25

Diluted net income per share from continuing operations
$
0.11

 
$
0.13

 
$
0.14

 
$
0.24


The weighted-average diluted common shares outstanding for the three and six months ended June 30, 2015 excludes the effect of 115,384 and 130,144 restricted stock and out-of-the-money options, respectively, because their effect would be anti-

15


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


dilutive. The weighted-average diluted common shares outstanding for the three and six months ended June 30, 2014 excludes the effect of 1,352 and 13,965 restricted stock and out-of-the-money options, respectively, because their effect would be anti-dilutive.
9.     FAIR VALUE MEASUREMENTS
 
The fair value amounts for cash and equivalents, accounts receivable, net, accounts payable and accrued expenses approximate carrying amounts due to the short maturities of these instruments. The estimated fair value of our long-term debt and capital lease obligations at each of June 30, 2015 and December 31, 2014 was based on expected future payments discounted using current interest rates offered to us on debt of the same remaining maturity and characteristics, including credit quality, and did not vary materially from carrying value.
 
Fair value is defined as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability at the measurement date in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820, “Fair Value Measurements and Disclosures,” establishes a three-tier fair value hierarchy as a basis for such assumptions which prioritizes the inputs used in measuring fair value as follows:
 
•
Level 1 – Quoted prices in active markets for identical assets or liabilities;
•
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
•
Level 3 – Unobservable inputs for the asset or liability in which there is little or no market data.

Recurring Fair Value Measurement
 
The fair value of our investment in a conferencing company, which is trading publicly on a foreign stock exchange, was based on the quoted price of such shares on that foreign exchange at the measurement date of June 30, 2015; therefore, the fair value of this investment was based on Level 1 inputs. The balance of this investment was included as a component of “Prepaid expenses and other current assets” in our condensed consolidated balance sheets at each of June 30, 2015 and December 31, 2014.

As further discussed in Note 10, we recorded a contingent consideration liability in connection with our acquisitions of TalkPoint Holdings, L.L.C., or TalkPoint, and Central Desktop, Inc., or Central Desktop, and Modality Systems Limited, or Modality. The fair value of the liabilities were estimated using internal forecasts with inputs that are not observable in the market, and thus represent Level 3 fair value measurements. The inputs in the Level 3 measurements are not supported by market activity, as they are probability assessments of expected future sales related to our acquisitions of TalkPoint, Central Desktop and Modality during the earn-out period.


16


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


We have segregated all financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below (in thousands):
 
June 30, 2015
 
December 31, 2014
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
$
379

 
$
379

 
$
—

 
$
—

 
$
327

 
$
327

 
$
—

 
$
—

Total
$
379

 
$
379

 
$
—

 
$
—

 
$
327

 
$
327

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
December 31, 2014
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Current Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earn-out liability
$
20,145

 
$
—

 
$
—

 
$
20,145

 
$
4,727

 
$
—

 
$
—

 
$
4,727

Long-term Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earn-out liability
$
13,780

 
$
—

 
$
—

 
$
13,780

 
$
6,545

 
$
—

 
$
—

 
$
6,545

Total
$
33,925

 
$
—

 
$
—

 
$
33,925

 
$
11,272

 
$
—

 
$
—

 
$
11,272

10.    ACQUISITIONS
In accordance with ASC Topic 805, “Business Combinations,” we account for acquisitions by applying the acquisition method of accounting. The acquisition method of accounting requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at their fair values as of the closing date of the acquisition. None of our acquisitions presented below were significant, individually or in the aggregate, under Rule 3-05 and Article 11 of SEC Regulation S-X.
Central Desktop
On October 16, 2014, we completed the acquisition of Central Desktop, a leading cloud-based team workspace platform, by acquiring all of Central Desktop’s outstanding stock via merger. The following table summarizes the consideration paid for Central Desktop (in thousands):
Negotiated sales price
$
25,000

Working capital and other adjustments
76

Purchase price
$
25,076

In addition, the Central Desktop merger agreement provides for a potential earn-out payment to the sellers based on its annual revenue growth in 2015. We funded the acquisition through borrowings under our credit facility and cash and equivalents on hand. We incurred $0.4 million of direct transaction costs, which are recorded in acquisition-related costs for the year ended December 31, 2014. Central Desktop’s financial results since its acquisition date are included in our North America segment.

TalkPoint
On September 19, 2014, we completed the acquisition of TalkPoint, a leading provider of webcasting software and services, by acquiring all of TalkPoint’s outstanding equity interests. The following table summarizes the consideration paid for TalkPoint (in thousands):
Negotiated sales price
$
56,500

Working capital and other adjustments
(673
)
Purchase price
$
55,827


17


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


In addition, the TalkPoint purchase agreement provides for a potential earn-out payment to the sellers based on its annual revenue growth in 2015. We funded the acquisition through borrowings under our credit facility and cash and equivalents on hand. We incurred $0.4 million of direct transaction costs, which are recorded in acquisition-related costs for the year ended December 31, 2014. TalkPoint’s financial results since its acquisition date are included primarily in our North America segment.

Valuation of Assets and Liabilities

The fair values of the net tangible and intangible assets acquired and liabilities assumed in connection with these acquisitions have been recognized in our condensed consolidated balance sheets based upon their values at their respective acquisition dates, as set forth below. The excess of the purchase price over the net tangible and intangible assets was recorded as goodwill. The factors contributing to the recognition of goodwill are based on strategic and synergistic benefits that are expected to be realized from an expanded global customer base, including opportunities for us to sell our UC&C SaaS solutions to those customers, and opportunities to improve performance by leveraging best practices, operational expertise and global scale. The recognized goodwill for Central Desktop is not expected to be deductible for income tax purposes.

The preliminary fair values recorded for Central Desktop and TalkPoint were based upon preliminary valuations, and the estimates and assumptions used in such valuations are subject to change, which could be significant, within the measurement period (up to one year from each acquisition date). The primary areas of the preliminary valuations that are not yet finalized relate to amounts for income taxes including, but not limited to, current tax accounts, deferred tax accounts, amounts for uncertain tax positions and net operating loss carryforwards inclusive of associated limitations and valuation allowances, amounts for state and local excise and sales tax contingencies, the fair values of certain tangible assets and liabilities acquired, certain legal matters, the determination of identifiable intangible assets and the final amount of residual goodwill. We expect to continue to obtain information to assist us in determining the fair values of the assets acquired and liabilities assumed at each acquisition date during the measurement periods.

The preliminary valuation of the assets acquired and liabilities assumed for Central Desktop and TalkPoint are as follows (in thousands):
 
Central Desktop Preliminary Valuation
 
TalkPoint Preliminary Valuation
Cash and equivalents
$
193

 
$
2

Other current assets
902

 
3,340

Property and equipment
301

 
303

Intangible assets
9,200

 
28,400

Deferred income taxes, net
905

 
—

Other assets
64

 
1,578

Total assets acquired
11,565

 
33,623

 
 
 
 
Current liabilities
5,723

 
1,442

Long-term liabilities
—

 
8,006

Deferred income taxes, net
3,492

 
—

Total liabilities assumed
9,215

 
9,448

 
 
 
 
Total identifiable net assets
2,350

 
24,175

Goodwill
22,726

 
31,652

Total net assets
$
25,076

 
$
55,827


Preliminary Valuation Adjustments for Central Desktop

We performed a preliminary valuation of the assets and liabilities of Central Desktop at its acquisition date. Adjustments as a result of the preliminary valuation and the bases for their determination are summarized as follows:


18


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Developed technology - Developed technology was the primary asset acquired in the Central Desktop acquisition. We valued developed technology using the relief from royalty approach. The developed technology was preliminarily valued at $6.0 million for the acquisition under this approach and will be amortized over seven years.

Customer relationships - Customer relationships were the secondary asset acquired in the Central Desktop acquisition. We valued customer relationships using the income approach, specifically the multi-period excess earnings method. The customer relationships were preliminarily valued at $1.1 million for the acquisition under this approach and will be amortized over ten years.

Non-compete agreements - We valued non-compete agreements using the income approach, specifically based on the negative impact on the business that the individuals could have on revenue. The non-compete agreements were valued at $1.8 million for the Central Desktop acquisition under this approach and will be amortized over five years.

Trade names - We valued trade names using the income approach, specifically the multi-period excess earnings method. In determining the fair value of the trade names, the multi-period excess earnings approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the trade names after applying a royalty rate to the overall revenue. The trade names were valued at $0.3 million for the Central Desktop acquisition under this approach and will be amortized over two years.

Earn-out - We recorded a contingent consideration liability of approximately $2.9 million as of the acquisition date related to the Central Desktop earn-out, included in “Accrued expenses” under “Current Liabilities” in our condensed consolidated balance sheet. The fair value of the liability was estimated using internal forecasts with inputs that are not observable in the market, and thus represents a Level 3 fair value measurement, as defined in Note 9. The inputs in the Level 3 measurement are not supported by market activity, as they are probability assessments of expected future sales related to our acquisition of Central Desktop during the earn-out period. The earn-out will be re-measured quarterly, with the change being reflected as "Acquisition-related costs" in our condensed consolidated statements of operations.

Preliminary Valuation Adjustments for Talkpoint

We performed a preliminary valuation of the assets and liabilities of TalkPoint at its acquisition date. Significant adjustments as a result of the preliminary valuation and the bases for their determination are summarized as follows:
             
Indemnification asset - We recognized an indemnification asset of $1.1 million in connection with the TalkPoint acquisition, which is included above in "Other assets." The indemnification asset represents reimbursements we reasonably expect to receive primarily from escrow funds currently held by a financial institution pursuant to the TalkPoint purchase agreement. We recorded offsetting net contingent tax liabilities of $1.1 million in connection with the recognition of the indemnification asset. The tax contingencies are included in “Accrued expenses” under “Long-Term Liabilities” in our condensed consolidated balance sheets.

Developed technology - Developed technology was the primary asset acquired in the TalkPoint acquisition. We valued developed technology using the relief from royalty approach. The developed technology was preliminarily valued at $16.0 million for the acquisition under this approach and will be amortized over seven years.

Customer relationships - Customer relationships were the secondary asset acquired in the TalkPoint acquisition. We valued customer relationships using the income approach, specifically the multi-period excess earnings method. The customer relationships were preliminarily valued at $9.5 million for the acquisition under this approach and will be amortized over ten years.

Non-compete agreements - We valued non-compete agreements using the income approach, specifically based on the negative impact on the business that the individuals could have on revenue. The non-compete agreements were valued at $2.2 million for the TalkPoint acquisition under this approach and will be amortized over five years.

Trade names - We valued trade names using the income approach, specifically the multi-period excess earnings method. In determining the fair value of the trade names, the multi-period excess earnings approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the trade names after applying a royalty rate to the overall revenues. The trade names were valued at $0.7 million for the TalkPoint acquisition under this approach and will be amortized over two years.


19


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Earn-out - We recorded a contingent consideration liability of approximately $6.4 million as of the acquisition date related to the Talkpoint earn-out, included in “Accrued expenses” under “Long-Term Liabilities” in our condensed consolidated balance sheets. The fair value of the liability was estimated using internal forecasts with inputs that are not observable in the market, and thus represents a Level 3 fair value measurement, as defined in Note 9. The inputs in the Level 3 measurement are not supported by market activity, as they are probability assessments of expected future sales related to our acquisition of TalkPoint during the earn-out period. The earn-out will be re-measured quarterly, with the change being reflected as "Acquisition-related costs" in our condensed consolidated statements of operations.

Central Desktop and TalkPoint Preliminary Pre-Acquisition Contingencies Assumed

We have evaluated and continue to evaluate pre-acquisition contingencies relating to Central Desktop and TalkPoint that existed as of each acquisition date. Based on our evaluation to date, we have preliminarily determined that certain pre-acquisition contingencies are probable in nature and estimable as of each acquisition date. Accordingly, we have recorded our best estimates for these contingencies as part of the preliminary valuation of the assets and liabilities acquired. We continue to gather information relating to all pre-acquisition contingencies that we have assumed. Any changes to the pre-acquisition contingency amounts recorded during each measurement period will be included in the final valuation and related amounts recognized. Subsequent to the end of each measurement period, any adjustments to pre-acquisition contingency amounts will be reflected in our results of operations.

Other Acquisitions

Modality

On February 5, 2015, we acquired substantially all of the outstanding equity interests of Modality, a dedicated Microsoft Skype for Business services and software firm, for $17.5 million, subject to a net working capital adjustment. We funded the acquisition through borrowings under our credit facility and incurred $0.3 million of direct transaction costs, which are recorded in acquisition-related costs for the six months ended June 30, 2015. In addition, the Modality purchase agreement provides for potential earn-out payments to the sellers based on its annual revenue growth in 2015, 2016 and 2017. A total of $23.1 million was recorded at the acquisition date to reflect the fair value of the earn-out payments.
Modality's financial results since its acquisition date are included primarily in our Europe segment. Our consolidated results of operations include revenue of $6.1 million and a net loss of $2.8 million from Modality for the six months ended June 30, 2015. The primary assets acquired as part of the Modality acquisition were customer relationships totaling $5.4 million and other intangibles totaling $3.5 million. The recognized goodwill for Modality is not expected to be deductible for income tax purposes.
11.    COMMITMENT AND CONTINGENCIES
Litigation and Claims

In connection with the sale of our PGiSend messaging business in October 2010, we agreed to indemnify the purchaser, EasyLink (subsequently acquired by Open Text Corporation), for the tax-related matters described below. We have accrued an estimated loss for these matters totaling an aggregate of approximately $3.9 million. The possible loss or range of loss resulting from these matters, if any, in excess of the amounts accrued is inherently unpredictable and involves significant uncertainty and negotiations over an extended time period. Consequently, no estimate can be made of any possible loss or range of loss in excess of the above-mentioned accrual.

State Telecommunications Excise Tax Matter

On March 19, 2013, we received notice of deficiencies from the New York State Department of Taxation and Finance, dated March 15, 2013, for telecommunications franchise and gross excise taxes assessed on our former subsidiary, Xpedite Systems, LLC, or Xpedite, for the tax years ended December 31, 2001 - 2006. The assessments totaled approximately $4.3 million, including approximately $1.9 million in taxes and $2.4 million in accrued interest and penalties, on which interest continues to accrue. We believe we are adequately reserved for this matter. We are vigorously contesting these assessments. However, if the New York State Department of Taxation’s assessment is sustained, the amount assessed could result in a material adjustment to our consolidated financial statements which would impact our cash flows and results of operations. We agreed to indemnify EasyLink for this matter in connection with our PGiSend sale.

20


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


State Corporate Tax Matter

On August 6, 2010, our former subsidiary, Xpedite, received a final determination from the New Jersey Division of Taxation upholding a corporate business tax audit assessment for the tax years ended December 31, 1998 through December 31, 2000 and December 31, 2002. The assessment totaled approximately $6.2 million as of August 15, 2010, including approximately $2.4 million in taxes and $3.8 million in accrued interest and penalties, on which interest continues to accrue. The assessment relates to the sourcing of Xpedite’s receipts for purposes of determining the amount of its income that is properly attributable to, and therefore taxable by, New Jersey. We are vigorously contesting the determination through a timely appeal that we filed with the Tax Court of New Jersey on November 2, 2010. On April 24, 2015, we filed a motion for summary judgment with the Tax Court of New Jersey which, if resolved in our favor, may eliminate the entire amount of tax, interest and penalties related to the final determination. The motion was heard by the Tax Court on July 10, 2015; however, its decision has not yet been rendered. We believe we are adequately reserved for this matter. However, if the New Jersey Division of Taxation’s final determination is sustained, the amount assessed could result in a material adjustment to our consolidated financial statements which would impact our cash flows and results of operations. We agreed to indemnify EasyLink for this matter in connection with our PGiSend sale.

USF Contribution Matter

Our subsidiary, ATS, received a letter from the USAC dated August 21, 2013, rejecting ATS’ revised amended 2012 Annual Telecommunications Worksheet on Form 499-A as not timely filed. On October 29, 2013, ATS filed an appeal to USAC’s decision with the FCC, as it subjects ATS to true-up invoices related to USF contributions. ATS incorrectly reported foreign-to-foreign revenues within its amended 2012 Form 499-A, and, as a result, those revenues (and some newly-identified foreign revenues) were incorrectly subject to USF contribution. On June 9, 2015, the Deputy Chief of the Wireline Competition Bureau (who has the delegated power to handle routine USF appeals) denied our FCC appeal. We are vigorously contesting this decision through an Application for Review of the Decision filed on July 9, 2015 asking the full Commission to review the Deputy Chief’s determination. If the Deputy Chief’s determination is sustained, the amount could result in a material adjustment to our consolidated financial statements which could impact our results of operations.
Other Litigation and Claims
We are involved in other litigation matters and are subject to claims that we do not believe will have a material adverse effect upon our business, financial condition or results of operations, although we can offer no assurance as to the ultimate outcome of any such matters.
12.    SEGMENT REPORTING
We manage our operations on a geographic regional basis, with segments in North America, Europe and Asia Pacific. The accounting policies as described in the summary of significant accounting policies are applied consistently across our segments. Revenue from our North America segment is recognized in the United States and Canada, and revenue from our Europe segment is primarily recognized in Ireland and the United Kingdom. We present "Operating income" for each of our segments as a measure of segment profit. Our chief operating decision makers use operating income without the impact of income taxes and other non-operating items internally as a means of analyzing segment performance and believe that it more clearly represents our segment profit on an ongoing basis. No single customer accounted for more than 10% of net sales for the three and six months ended June 30, 2015 and 2014.

21


PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The sum of these regional results may not agree to the consolidated results due to rounding. Information concerning our continuing operations in our segments is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net revenue:
 
 
 
 
 
 
 
North America
$
91,651

 
$
89,392

 
$
182,396

 
$
179,522

Europe
37,299

 
38,289

 
74,559

 
75,417

Asia Pacific
15,354

 
16,606

 
29,671

 
32,587

Consolidated
$
144,304

 
$
144,287

 
$
286,626

 
$
287,526

Net revenue by type:
 
 
 
 
 
 
 
Conferencing services revenue
$
111,340

 
$
116,935

 
$
221,880

 
$
233,323

UC&C SaaS revenue
20,469

 
11,996

 
39,215

 
22,729

Resold services revenue
12,495

 
15,356

 
25,531

 
31,474

Net revenue
$
144,304

 
$
144,287

 
$
286,626

 
$
287,526

Operating income (loss):
 
 
 
 
 
 
 
North America
$
(542
)
 
$
1,078

 
$
(2,057
)
 
$
2,950

Europe
7,712

 
9,065

 
16,000

 
17,098

Asia Pacific
931

 
709

 
(1,034
)
 
1,171

Consolidated
$
8,101

 
$
10,852

 
$
12,909

 
$
21,219

13.    CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
Supplemental disclosures of cash flow information are as follows (in thousands):
 
Six Months Ended June 30,
 
2015
 
2014
Cash paid for interest
$
4,468

 
$
3,545

Income tax payments
$
2,811

 
$
3,794

Income tax refunds
$
1,791

 
$
492

Capital lease additions
$
906

 
$
884

Capitalized interest
$
136

 
$
143


At June 30, 2015 and 2014, we had accrued capital expenditures in “Total current liabilities” in our condensed consolidated balance sheets of $1.0 million and $3.3 million, respectively.


22




ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
PGi is the world’s largest dedicated provider of collaboration software and services. We created iMeet, an expanding portfolio of purpose-built applications designed to meet the daily collaboration and communications needs of business professionals, with solutions for web, video and audio conferencing, smart calendar management, webcasting, project management and sales acceleration. PGi's award-winning UC&C solutions help nearly 50,000 businesses in 25 countries in our three segments in North America, Europe and Asia Pacific.
During 2015, we are continuing our strategy to transition PGi to a software model, focusing our sales and marketing efforts on growing the market awareness and adoption of our UC&C software suite. The following discussion and analysis reflects our results from continuing operations.
Key highlights of our financial and strategic accomplishments for the second quarter ended June 30, 2015 include:
•
Grew our UC&C SaaS revenue to $20.7 million (or $20.5 million including the approximately $0.2 million impact of purchase accounting adjustments related to deferred revenue assumed in our acquisitions) for the three months ended June 30, 2015, an increase of approximately 72% compared to the same period in 2014; and
•
Increased our gross margin by approximately 150 basis points year-over-year to 60.6%, which was its highest level in five years.
Our primary corporate objectives for the remainder of 2015 are focused on continuing to:
•
Acquire new customers with our UC&C software suite, including our iMeet and GlobalMeet product portfolios;
•
Develop and release additional upgrades and enhancements to our UC&C products to increase their functionality, improve their competitive positioning and grow their market opportunities; and
•
Transition our phone-based audio conferencing customers to our UC&C products.
We believe these strategic initiatives will further increase the addressable market opportunity for PGi and our solutions.
In the first six months of 2015, approximately 40% of our net revenue was generated outside the United States. Because we generate a significant portion of our net revenue from our international operations, movements in foreign currency exchange rates affect our reported results. We estimate that changes in foreign currency exchange rates during the first six months of 2015 negatively affected our net revenue by approximately $11.0 million as compared to the same period in 2014.
    
We have historically generated net revenue growth in our collaboration solutions. Revenue growth is typically driven by the increase of total minutes sold, partially offset by the decrease in average rates per minute. We believe this trend is consistent within the industry, and we expect it to continue in the foreseeable future. Revenue increases during the first six months of 2015, which were primarily driven by our recent acquisitions, were offset by the negative effects of foreign currency exchange rates, resulting in a decrease in net revenue in the period to $286.6 million from $287.5 million in the same period in 2014.
We have historically used our cash flows from operating activities for debt repayments, capital expenditures, stock repurchases, acquisitions and strategic investments. As of June 30, 2015, borrowings under our $575.0 million credit facility, including the uncommitted $75.0 million accordion feature, were $338.5 million. See “- Results of Operations - Liquidity and Capital Resources - Capital resources” for a description of our credit facility.
The preparation of financial statements in conformity with GAAP requires us 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 net revenue and expenses during the reporting period. Actual results could differ from the estimates. See the section in this quarterly report entitled “- Critical Accounting Policies.” The following discussion and analysis provides information which we believe is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. The results of operations for the six months ended June 30, 2015 are not indicative of the results that may be expected for the full fiscal year of 2015 or for any other interim period. The financial information and discussion presented herein should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2014, which includes information and disclosures not included in this quarterly report. All significant intercompany accounts and transactions have been eliminated in consolidation.

23



RESULTS OF OPERATIONS
Net Revenue
The following tables present certain financial information about our segments for the periods presented (in thousands, except percentages):
 
Three Months Ended June 30,
 
Change
 
2015
 
2014
 
$
 
%
Net revenue:
 
 
 
 
 
 
 
North America
$
91,651

 
$
89,392

 
$
2,259

 
2.5

Europe
37,299

 
38,289

 
(990
)
 
(2.6
)
Asia Pacific
15,354

 
16,606

 
(1,252
)
 
(7.5
)
Consolidated
$
144,304

 
$
144,287

 
$
17

 
—

Percent of net revenue:
 
 
 
 
 
 
 
North America
63.5
%
 
62.0
%
 
 
 
 
Europe
25.8
%
 
26.5
%
 
 
 
 
Asia Pacific
10.7
%
 
11.5
%
 
 
 
 
Consolidated
100.0
%
 
100.0
%
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
North America
$
(542
)
 
$
1,078

 
$
(1,620
)
 


Europe
7,712

 
9,065

 
(1,353
)
 


Asia Pacific
931

 
709

 
222

 


Consolidated
$
8,101

 
$
10,852

 
$
(2,751
)
 


 
Six Months Ended June 30,
 
Change
 
2015
 
2014
 
$
 
%
Net revenue:
 
 
 
 
 
 
 
North America
$
182,396

 
$
179,522

 
$
2,874

 
1.6

Europe
74,559

 
75,417

 
(858
)
 
(1.1
)
Asia Pacific
29,671

 
32,587

 
(2,916
)
 
(8.9
)
Consolidated
$
286,626

 
$
287,526

 
$
(900
)
 
(0.3
)
Percent of net revenue:
 
 
 
 
 
 
 
North America
63.6
%
 
62.5
%
 
 
 
 
Europe
26.0
%
 
26.2
%
 
 
 
 
Asia Pacific
10.4
%
 
11.3
%
 
 
 
 
Consolidated
100.0
%
 
100.0
%
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
North America
$
(2,057
)
 
$
2,950

 
$
(5,007
)
 
 
Europe
16,000

 
17,098

 
(1,098
)
 
 
Asia Pacific
(1,034
)
 
1,171

 
(2,205
)
 
 
Consolidated
$
12,909

 
$
21,219

 
$
(8,310
)
 
 

24



Consolidated Net Revenue
The following tables detail the changes in consolidated net revenue from the three and six months ended June 30, 2014 to the three and six months ended June 30, 2015 (in thousands):
 
Three Months Ended
 
Consolidated
 
North America
 
Europe
 
Asia
Pacific
June 30, 2014
$
144,287

 
$
89,392

 
$
38,289

 
$
16,606

Change in volume
(795
)
 
(540
)
 
(1,219
)
 
964

Change in average selling prices and product mix
(4,023
)
 
(4,742
)
 
1,513

 
(794
)
Acquisitions
10,552

 
7,953

 
2,563

 
36

Impact of fluctuations in foreign currency exchange rates
(5,717
)
 
(412
)
 
(3,847
)
 
(1,458
)
June 30, 2015
$
144,304

 
$
91,651

 
$
37,299

 
$
15,354

 
Six Months Ended
 
Consolidated
 
North America
 
Europe
 
Asia
Pacific
June 30, 2014
$
287,526

 
$
179,522

 
$
75,417

 
$
32,587

Change in volume
(692
)
 
(2,366
)
 
(390
)
 
2,064

Change in average selling prices and product mix
(8,739
)
 
(8,546
)
 
2,271

 
(2,464
)
Acquisitions
19,485

 
14,616

 
4,751

 
118

Impact of fluctuations in foreign currency exchange rates
(10,954
)
 
(830
)
 
(7,490
)
 
(2,634
)
June 30, 2015
$
286,626

 
$
182,396

 
$
74,559

 
$
29,671

Net revenue was relatively flat during the three and six months ended June 30, 2015 as compared to prior year periods primarily due to increased revenue from our recent acquisitions offset by the negative effects of fluctuations in foreign currency exchange rates and decreased average selling prices as a result of price reductions to current customers. Revenue from our UC&C SaaS solutions, which generate higher average gross margins than our traditional audio conferencing services, increased to $39.7 million (or $39.2 million, including the approximately $0.5 million impact of purchase accounting adjustments related to deferred revenue assumed in our acquisitions) during the six months ended June 30, 2015, compared to $22.7 million during the same period in 2014.
Net revenue increased slightly in our North America segment during the three and six months ended June 30, 2015 from the comparable prior year periods due to our acquisitions, partially offset by decreased volume, which was primarily due to the previously disclosed partial loss of one of our larger enterprise audio conferencing customers, and decreased average selling prices. Fluctuations in foreign exchange rates negatively impacted North America by $0.4 million and $0.8 million during the three and six months ended June 30, 2015, respectively. Net revenue decreased slightly in Europe during the same periods. This decrease in Europe was primarily driven by negative fluctuations in foreign exchange rates of $3.8 million and $7.5 million during the three and six months ended June 30, 2015, respectively, partially offset by increases due to recent acquisitions and average selling prices and product mix. Net revenue decreased in Asia Pacific during the three and six months ended June 30, 2015 from the comparable prior year periods primarily due to negative fluctuations in foreign exchange rates of $1.5 million and $2.6 million during the three and six months ended June 30, 2015, respectively, and decreases in average selling prices and product mix during the periods. These decreases were partially offset by increased volume in the region, which was driven by newly acquired and existing large customers.

25



Cost of Revenue
 
Three Months Ended June 30,
 
Change
 
2015
 
2014
 
$
 
%
 
(in thousands)
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
North America
$
36,391

 
$
38,868

 
$
(2,477
)
 
(6.4
)
Europe
12,540

 
11,711

 
829

 
7.1

Asia Pacific
7,954

 
8,422

 
(468
)
 
(5.6
)
Consolidated
$
56,885

 
$
59,001

 
$
(2,116
)
 
(3.6
)
 
Six Months Ended June 30,
 
Change
 
2015
 
2014
 
$
 
%
 
(in thousands)
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
North America
$
73,348

 
$
78,344

 
$
(4,996
)
 
(6.4
)
Europe
25,117

 
23,432

 
1,685

 
7.2

Asia Pacific
15,576

 
16,767

 
(1,191
)
 
(7.1
)
Consolidated
$
114,041

 
$
118,543

 
$
(4,502
)
 
(3.8
)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
% of Revenue
 
% of Revenue
Cost of revenue:
 
 
 
 
 
 
 
North America
39.7
 
43.5
 
40.2
 
43.6
Europe
33.6
 
30.6
 
33.7
 
31.1
Asia Pacific
51.8
 
50.7
 
52.5
 
51.5
Consolidated
39.4
 
40.9
 
39.8
 
41.2
Consolidated cost of revenue as a percentage of net revenue decreased during the three and six months ended June 30, 2015 compared to the same periods in 2014. This decrease was primarily due to the growth in sales of our higher margin UC&C SaaS solutions in all regions as well as additional cost reductions driven by fewer sales of our lower margin third-party products and reduced telecommunications expenses as a result of cost savings initiatives. Fluctuations in foreign currency exchange rates resulted in a $2.5 million and $4.7 million decrease in cost of revenue on a consolidated basis during the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014.
The decrease in cost of revenue as a percentage of net revenue in North America for the three and six months ended June 30, 2015 compared to the same periods in 2014 was primarily due to the growth in sales of our higher margin UC&C SaaS solutions as well as additional cost reductions driven by decreased sales of our lower margin third-party products and reduced telecommunications expenses as a result of cost savings initiatives. The increase in cost of revenue as a percentage of revenue in Europe was attributable primarily to the impact of our Modality acquisition, which has higher cost of revenue due to the service nature of its business. The increase in cost of revenue as a percentage of revenue in Asia Pacific was primarily a result of the decrease in revenue in the region by $1.3 million and $2.9 million during the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014, while cost of revenue only decreased by $0.5 million and $1.2 million, respectively, over the same periods. Fluctuations in foreign currency exchange rates resulted in a decrease in cost of revenue of $0.1 million, $1.5 million and $0.9 million in North America, Europe and Asia Pacific, respectively, during the three months ended June 30, 2015 compared to the three months ended June 30, 2014. Fluctuations in foreign currency exchange rates resulted in a decrease in cost of revenue of $0.3 million, $3.0 million and $1.5 million in North America, Europe and Asia Pacific, respectively, during the six months ended June 30, 2015 compared to the same period in 2014.

26



Selling and Marketing Expenses
 
Three Months Ended June 30,
 
Change
 
2015
 
2014
 
$
 
%
 
(in thousands)
 
 
 
 
Selling and marketing expenses:
 
 
 
 
 
 
 
North America
$
24,513

 
$
21,678

 
$
2,835

 
13.1

Europe
8,710

 
11,256

 
(2,546
)
 
(22.6
)
Asia Pacific
3,847

 
4,659

 
(812
)
 
(17.4
)
Consolidated
$
37,070

 
$
37,593

 
$
(523
)
 
(1.4
)

 
Six Months Ended June 30,
 
Change
 
2015
 
2014
 
$
 
%
 
(in thousands)
 
 
 
 
Selling and marketing expenses:
 
 
 
 
 
 
 
North America
$
48,225

 
$
43,473

 
$
4,752

 
10.9

Europe
18,112

 
22,769

 
(4,657
)
 
(20.5
)
Asia Pacific
7,788

 
9,187

 
(1,399
)
 
(15.2
)
Consolidated
$
74,125

 
$
75,429

 
$
(1,304
)
 
(1.7
)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
% of Revenue
 
% of Revenue
Selling and marketing expenses:
 
 
 
 
 
 
 
North America
26.7
 
24.3
 
26.4
 
24.2
Europe
23.4
 
29.4
 
24.3
 
30.2
Asia Pacific
25.1
 
28.1
 
26.2
 
28.2
Consolidated
25.7
 
26.1
 
25.9
 
26.2
Consolidated selling and marketing expenses as a percentage of net revenue decreased slightly during the three and six months ended June 30, 2015 compared to the same periods in the previous year. The decrease was driven by cost reductions in Europe and Asia Pacific as a result of efforts to reduce personnel related costs and fluctuations in foreign exchange rates in Europe and reduced headcount in Asia Pacific. This decrease was partially offset by increased selling and marketing expenses in North America due to increased headcount of sales professionals in the region and the launch of advertising initiatives to further promote and drive broader awareness of our products. Fluctuations in foreign currency exchange rates resulted in decreased selling and marketing expenses of $0.2 million, $1.4 million and $0.5 million in North America, Europe and Asia Pacific, respectively, over the three months ended June 30, 2015 compared to the three months ended June 30, 2014. Fluctuations in foreign currency exchange rates resulted in decreased selling and marketing expenses of $0.3 million, $2.6 million and $0.9 million in North America, Europe and Asia Pacific, respectively, during the six months ended June 30, 2015 compared to the same period in 2014.

27



General and Administrative Expenses
 
Three Months Ended June 30,
 
Change
 
2015
 
2014
 
$
 
%
 
(in thousands)
 
 
 
 
General and administrative expenses:
 
 
 
 
 
 
 
North America
$
15,997

 
$
13,911

 
$
2,086

 
15.0

Europe
3,179

 
3,046

 
133

 
4.4

Asia Pacific
1,845

 
2,113

 
(268
)
 
(12.7
)
Consolidated
$
21,021

 
$
19,070

 
$
1,951

 
10.2


 
Six Months Ended June 30,
 
Change
 
2015
 
2014
 
$
 
%
 
(in thousands)
 
 
 
 
General and administrative expenses:
 
 
 
 
 
 
 
North America
$
31,079

 
$
26,918

 
$
4,161

 
15.5

Europe
6,117

 
6,163

 
(46
)
 
(0.7
)
Asia Pacific
3,977

 
3,924

 
53

 
1.4

Consolidated
$
41,173

 
$
37,005

 
$
4,168

 
11.3



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
% of Revenue
 
% of Revenue
General and administrative expenses:
 
 
 
 
 
 
 
North America
17.5
 
15.6
 
17.0
 
15.0
Europe
8.5
 
8.0
 
8.2
 
8.2
Asia Pacific
12.0
 
12.7
 
13.4
 
12.0
Consolidated
14.6
 
13.2
 
14.4
 
12.9
General and administrative expenses on a consolidated basis increased during the three and six months ended June 30, 2015 as compared to the same periods in 2014 primarily as a result of increased personnel-related expenses due to higher headcount and our acquisitions of TalkPoint, Central Desktop and Modality. General and administrative expenses in North America increased during the three and six months ended June 30, 2015 as compared to the same periods in 2014 as a result of increased personnel-related expenses due to higher headcount and our acquisitions of TalkPoint and Central Desktop. General and administrative expenses in Europe remained flat during the three and six months ended June 30, 2015 compared to the same periods in 2014 primarily as a result of increased headcount offset by a decrease due to fluctuations in foreign exchange rates. General and administrative expenses in Asia Pacific decreased during the three months ended June 30, 2015, but increased slightly in the region during the six months ended June 30, 2015 as compared to the same periods in 2014 due to the timing of professional fees and other miscellaneous costs. Fluctuations in foreign currency exchange rates did not have a significant effect on general and administrative expenses in North America during the three and six months ended June 30, 2015 as compared to the same periods in 2014. Fluctuations in foreign currency exchange rates resulted in decreased general and administrative expenses in Europe of $0.5 million and $0.8 million during the three and six months ended June 30, 2015, respectively, as compared to the same periods in 2014. Fluctuations in foreign currency exchange rates resulted in decreased general and administrative expenses in Asia Pacific of $0.2 million and $0.4 million during the three and six months ended June 30, 2015, respectively, as compared to the same periods in 2014.

28



Research and Development Expenses
Consolidated research and development expense as a percentage of net revenue was 3.4% for the three months ended June 30, 2015 and 3.2% for the three months ended June 30, 2014. Consolidated research and development expense as a percentage of net revenue was 3.7% for the six months ended June 30, 2015 and 3.2% for the six months ended June 30, 2014. We incurred the majority of research and development costs in North America. The increase was primarily driven by additional resources to develop our UC&C software products.
Equity-Based Compensation Expense
Equity-based compensation expense for restricted stock awards is included in operating expenses. The expense was recorded in the line items below (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Cost of revenue
$
103

 
$
166

 
$
266

 
$
338

Selling and marketing
684

 
681

 
1,367

 
1,417

Research and development
180

 
173

 
446

 
300

General and administrative
2,126

 
1,637

 
3,986

 
2,829

Equity-based compensation expense
$
3,093

 
$
2,657

 
$
6,065

 
$
4,884

Equity-based compensation expense increased for the three and six months ended June 30, 2015 as compared to the same periods in 2014 as a result of additional awards granted in the second half of 2014 related to our acquisitions of TalkPoint and Central Desktop.
Depreciation Expense
 
Three Months Ended June 30,
 
Change
 
2015
 
2014
 
$
 
%
 
(in thousands)
 
 
 
 
Depreciation expense:
 
 
 
 
 
 
 
North America
$
7,213

 
$
7,045

 
$
168

 
2.4

Europe
1,019

 
1,280

 
(261
)
 
(20.4
)
Asia Pacific
660

 
560

 
100

 
17.9

Consolidated
$
8,892

 
$
8,885

 
$
7

 
0.1


 
Six Months Ended June 30,
 
Change
 
2015
 
2014
 
$
 
%
 
(in thousands)
 
 
 
 
Depreciation expense:
 
 
 
 
 
 
 
North America
$
14,057

 
$
13,874

 
$
183

 
1.3

Europe
2,069

 
2,549

 
(480
)
 
(18.8
)
Asia Pacific
1,338

 
1,128

 
210

 
18.6

Consolidated
$
17,464

 
$
17,551

 
$
(87
)
 
(0.5
)


29



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
% of Revenue
 
% of Revenue
Depreciation expense:
 
 
 
 
 
 
 
North America
7.9
 
7.9
 
7.7
 
7.7
Europe
2.7
 
3.3
 
2.8
 
3.4
Asia Pacific
4.3
 
3.4
 
4.5
 
3.5
Consolidated
6.2
 
6.2
 
6.1
 
6.1
Consolidated depreciation expense remained flat for the three and six months ended June 30, 2015 as compared to the same periods in 2014. Fluctuations in Europe and Asia Pacific were due to the timing of asset additions and retirements.
Amortization Expense
 
Three Months Ended June 30,
 
Change
 
2015
 
2014
 
$
 
%
 
(in thousands)
 
 
 
 
Amortization expense:
 
 
 
 
 
 
 
North America
$
2,581

 
$
1,215

 
$
1,366

 
112.4

Europe
1,729

 
1,187

 
542

 
45.7

Asia Pacific
77

 
82

 
(5
)
 
(6.1
)
Consolidated
$
4,387

 
$
2,484

 
$
1,903

 
76.6


 
Six Months Ended June 30,
 
Change
 
2015
 
2014
 
$
 
%
 
(in thousands)
 
 
 
 
Amortization expense:
 
 
 
 
 
 
 
North America
$
5,218

 
$
2,431

 
$
2,787

 
114.6

Europe
3,069

 
2,373

 
696

 
29.3

Asia Pacific
150

 
163

 
(13
)
 
(8.0
)
Consolidated
$
8,437

 
$
4,967

 
$
3,470

 
69.9


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
% of Revenue
 
% of Revenue
Amortization expense:
 
 
 
 
 
 
 
North America
2.8
 
1.4
 
2.9
 
1.4
Europe
4.6
 
3.1
 
4.1
 
3.1
Asia Pacific
0.5
 
0.5
 
0.5
 
0.5
Consolidated
3.0
 
1.7
 
2.9
 
1.7
Consolidated amortization expense increased for the three and six months ended June 30, 2015 as compared to the same periods in 2014 as a result of amortization recognized on intangible assets related to our recent acquisitions. Refer to Notes 5 and 10 of our condensed consolidated financial statements for additional information on our related intangible assets and acquisitions.

30



Restructuring Costs
No restructuring costs were incurred during the three months ended June 30, 2015. Consolidated restructuring costs for the six months ended June 30, 2015 were $4.1 million, representing approximately 1.4% of net revenue for the period. There were no restructuring costs for the three and six months ended June 30, 2014.

Realignment of Workforce – 2015

For the 2015 alignment, we recorded restructuring expenses of $4.3 million during the six months ended June 30, 2015. Of these expenses, $3.9 million relate to severance costs. We eliminated approximately 85 positions in an effort to realign our international operations and ensure that our organizational structure is optimally aligned to take full advantage of our market opportunities. We also recorded $0.4 million in contract termination costs associated with this realignment. On a segment basis, these restructuring costs totaled $1.5 million in North America, $1.0 million in Europe and $1.8 million in Asia Pacific. Our reserve for the 2015 realignment was $1.1 million at June 30, 2015, which we anticipate will be paid within one year.

Realignment of Workforce – 2014

During 2014, we eliminated approximately 15 positions in an effort to consolidate and streamline various functions of our workforce. To date, we have recorded $0.5 million of severance costs, including a $(0.1) million adjustment recorded in 2015, and $0.1 million in contract termination costs associated with this realignment. On a segment basis, these restructuring costs totaled $0.1 million in North America and $0.5 million in Europe. There is no remaining reserve for the 2014 realignment at June 30, 2015.

Realignment of Workforce – 2013
 
During 2013, we eliminated approximately 60 positions in an effort to consolidate and streamline various functions of our workforce. To date, we have recorded $3.3 million of severance costs and $0.2 million in contract termination costs associated with this realignment. On a segment basis, these restructuring costs totaled $1.3 million in North America, $2.0 million in Europe and $0.2 million in Asia Pacific. Our reserve for the 2013 realignment was $0.2 million at June 30, 2015, which we anticipate will be paid within one year.
Acquisition-related Costs
Acquisition-related costs reflected in our condensed consolidated statements of operations include, but are not limited to, transaction costs such as banking, legal, accounting and other professional fees directly related to acquisitions, termination and related costs for transitional and certain other employees, integration-related professional fees and other post-business combination expenses associated with our acquisitions.
The following table summarizes acquisition-related costs, the majority of which were incurred in North America, during the three and six months ended June 30, 2015 and 2014 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Professional fees
$
60

 
$
750

 
$
371

 
$
1,713

Integration-related costs
1,625

 
1,036

 
2,560

 
1,978

Earn-out adjustments, net
1,342

 
—

 
669

 
—

Total acquisition-related costs
$
3,027

 
$
1,786

 
$
3,600

 
$
3,691

Included in Integration-related costs above in 2015 is a lease abandonment charge of approximately $0.8 million related to a facility in the United Kingdom that will no longer be utilized due to recent acquisition activities in that country. For further discussion of these costs, see Note 10 to our condensed consolidated financial statements.



31



Interest Expense
Interest expense was $2.9 million and $2.4 million in the three months ended June 30, 2015 and 2014, respectively, and was $5.5 million and $4.5 million for the six months ended June 30, 2015 and 2014, respectively. The increase is due to higher balances outstanding on our credit facility as a result of our recent acquisitions. The weighted-average outstanding balance on our credit facility was $362.1 million and $273.9 million for the three months ended June 30, 2015 and 2014, respectively, and $358.5 million and $279.3 million for the six months ended June 30, 2015 and 2014, respectively. Our effective interest rate on LIBOR loans, which comprised materially all of our outstanding borrowings, was 2.72% and 2.44% at June 30, 2015 and 2014, respectively.
Income Tax Expense
Income tax expense for the three and six months ended June 30, 2015 was $1.0 million and $1.6 million, respectively compared to $2.3 million and $5.6 million for the three and six months ended June 30, 2014, respectively. The decrease in income tax expense during the six months ended June 30, 2015 compared to the same period in the prior year is primarily related to the decrease in income from continuing operations before income taxes for the three and six months ended June 30, 2015 compared to the same periods of 2014.
We had $8.2 million of unrecognized tax benefits as of both June 30, 2015 and December 31, 2014. Upon resolution, $6.8 million and $6.9 million of unrecognized tax benefits would affect our annual effective tax rate as of June 30, 2015 and December 31, 2014, respectively. The unrecognized tax benefits are included in “Accrued expenses” under “Long-Term Liabilities” in our condensed consolidated balance sheets.
Our valuation allowance at June 30, 2015 primarily relates to certain foreign and state net operating loss and capital loss carryforwards that, in the opinion of management, are more likely than not to expire unutilized. During the six months ended June 30, 2015, the net change in our valuation allowance was not material.
Discontinued Operations
The following amounts associated with our discontinued businesses have been segregated from continuing operations and are reflected as discontinued operations for the three and six months ended June 30, 2015 and 2014 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Operating loss
$
(102
)
 
$
(124
)
 
$
(390
)
 
$
(166
)
Interest expense
(65
)
 
(60
)
 
(130
)
 
(119
)
Income tax benefit
59

 
66

 
186

 
102

Loss from discontinued operations, net of taxes
$
(108
)
 
$
(118
)
 
$
(334
)
 
$
(183
)
The results of discontinued operations for the three and six months ended June 30, 2015 and 2014 reflect ongoing administration and resolution of issues associated with residual liabilities not assumed by the purchaser of our PGiSend messaging business, which was sold in 2010.
Liquidity and Capital Resources
Cash provided by operating activities
Consolidated operating cash flows decreased to $29.3 million for the six months ended June 30, 2015 as compared to $39.1 million for the six months ended June 30, 2014. This decrease was attributable to an $11.0 million reduction in cash generated from working capital, net of business acquisitions, for the six months ended June 30, 2015 as compared to the same period in 2014. The primary driver of the negative fluctuation in working capital, net of business acquisitions, is the reduction in accounts payable. This reduction was partially offset by increases in accrued payroll.

32



Cash used in investing activities
Consolidated investing activities used cash of $36.4 million and $13.4 million for the six months ended June 30, 2015 and 2014, respectively. The principal uses of cash in investing activities for the six months ended June 30, 2015 were $19.8 million for capital expenditures and $16.3 million for acquisitions, net of cash acquired. The principal use of cash in investing activities for the six months ended June 30, 2014 was $15.5 million for capital expenditures partially offset by proceeds received from the sale of investments as described in Note 2 to our condensed consolidated financial statements.
Cash used in financing activities
Consolidated financing activities used cash of $10.8 million for the six months ended June 30, 2015 and used $39.1 million over the same period in 2014. The primary uses of cash provided by financing activities in the six months ended June 30, 2015 was $55.3 million of principal payments under borrowing arrangements and $15.3 million in treasury stock purchases, which includes the value of shares of our common stock redeemed to satisfy employees’ tax withholdings due upon the vesting of their restricted stock grants, as well as payment of $1.8 million to settle the Powwownow earn-out liability. This was partially offset by $61.5 million of net proceeds on borrowing arrangements. The primary uses of cash for financing activities in the six months ended June 30, 2014 were $21.4 million of net payments on borrowing arrangements and $19.0 million in treasury stock purchases.
Off-balance sheet arrangements
At June 30, 2015, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Capital resources
Our credit facility consists of a $350.0 million revolver, a $150.0 million Term A loan and an uncommitted $75.0 million accordion feature, which allows for additional credit commitments up to a maximum of $575.0 million, subject to the credit facility terms and conditions. Our subsidiary, ATS, is the borrower under our credit facility, with PGi and certain of our material domestic subsidiaries guaranteeing the obligations of ATS under the credit facility, which is secured by substantially all of our assets and the assets of our material domestic subsidiaries. In addition, we have pledged as collateral all of the issued and outstanding stock of our material domestic subsidiaries and 65% of the issued and outstanding stock of our material foreign subsidiaries. Proceeds drawn under our credit facility can be used for working capital, capital expenditures, acquisitions and other general corporate purposes. The annual interest rate applicable to borrowings under our credit facility, at our option, is (1) the base rate (the highest of the federal funds rate plus one-half of one percent, the prime rate or one-month LIBOR plus one and one-half percent) plus an applicable percentage that varies based on our consolidated leverage ratio at quarter end, or (2) LIBOR (or, if applicable, the rate designated in the credit facility for certain foreign currencies) for one, two, three or six months adjusted for a percentage that represents the Federal Reserve Board’s reserve percentage plus an applicable percentage that varies based on our consolidated leverage ratio at quarter end. The applicable percentages for base rate loans and LIBOR loans were 1.50% and 2.50%, respectively, at June 30, 2015 under our credit facility. Our interest rate on LIBOR loans, which comprised materially all of our outstanding borrowings as of June 30, 2015, was 2.72%. In addition, we pay a commitment fee on the unused portion of our credit facility that is based on our consolidated leverage ratio at quarter end. As of June 30, 2015, the rate applied to the unused portion of our credit facility was 0.40%. Our credit facility contains customary terms and restrictive covenants, including financial covenants. At June 30, 2015, we were in compliance with the covenants under our credit facility.
At June 30, 2015, we had utilized $341.7 million of our credit facility, with $338.5 million in borrowings and $3.2 million in letters of credit outstanding. From time to time, we may enter into interest rate swaps to reduce our exposure to market risk from changes in interest rates on interest payments associated with our credit facility. As of June 30, 2015, we have no outstanding interest rate swaps.
At the scheduled maturity of our credit facility in August 2019, or in the event of an acceleration of the indebtedness under our credit facility following an event of default, the entire outstanding principal amount of the indebtedness under the facility, together with all other amounts payable thereunder, will become due and payable. We may not have sufficient funds to pay such obligations in full at maturity or upon such acceleration. If we default and are not able to pay any such obligations due, our lenders have liens on substantially all of our assets and could foreclose on our assets in order to satisfy our obligations.
We regularly review our capital structure and evaluate potential alternatives in light of current conditions in the capital markets. Depending upon conditions in these markets, cash flows from our segments and other factors, we may engage in other capital transactions. These capital transactions include, but are not limited to, debt or equity issuances or credit facilities with banking institutions.

33



Liquidity
As of June 30, 2015, we had $20.7 million in cash and equivalents compared to $40.2 million as of December 31, 2014. Cash balances residing outside of the United States were $17.6 million and $38.2 million as of June 30, 2015 and December 31, 2014, respectively. As we generate positive cash flows in the United States, we currently do not foresee a requirement to repatriate the cash and cash equivalents held by our foreign subsidiaries to fund domestic operations or repay domestic obligations. Included in these cash flows are repayments of royalties and management fees charged to international locations from the United States which were not included in segment operating income. We also utilize a variety of tax planning and financing strategies with the objective of having our worldwide cash and cash equivalents available in the locations where they are needed, and, when advantageous, may access foreign cash or cash equivalents in a tax efficient manner. However, if these funds are needed for our operations in the United States, we could be required to pay additional U.S. taxes to repatriate these funds.
At June 30, 2015, we had $158.3 million of available credit on our credit facility, without regard to the uncommitted $75.0 million accordion feature. We have historically borrowed on our credit facility in order to fund stock repurchases and acquisitions. We had sufficient cash flows from consolidated operations to service existing debt obligations, to fund capital expenditure requirements and to fund research and development expenses for new services and enhancements to existing services. Assuming no material change to these costs, which we do not anticipate, we believe that we will generate adequate operating cash flows for capital expenditures and contractual commitments and to satisfy our indebtedness and fund our liquidity needs for at least the next 12 months.




34



CRITICAL ACCOUNTING POLICIES
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based upon our condensed consolidated financial statements and the notes thereto, which have been prepared in accordance with GAAP. The preparation of the condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. We review the accounting policies used in reporting our financial results on a regular basis and review critical accounting policies and related disclosures with the audit committee of our board of directors. We have identified the policies below as critical to our business operations and the understanding of our financial condition and results of operations:
•
Revenue recognition;
•
Allowance for uncollectible accounts receivable;
•
Goodwill and other intangible assets;
•
Income taxes;
•
Restructuring costs; and
•
Legal contingencies.
For a detailed discussion on the application of these accounting policies, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our annual report on Form 10-K for the fiscal year ended December 31, 2014.

35



FORWARD LOOKING STATEMENTS
When used in this quarterly report on Form 10-Q and elsewhere by us or by management 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. 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 our forward-looking statements, including, but not limited to, the following factors:
•
Competitive pressures, including pricing pressures;
•
Technological changes and the development of alternatives to our services;
•
Market acceptance of our UC&C software suite, including our iMeet and GlobalMeet product portfolios;
•
Our ability to attract, retain and expand the products and services we provide to existing customers;
•
Our ability to establish and maintain strategic reseller and distribution relationships;
•
Risks associated with global economic or market conditions;
•
Price increases from our telecommunications service providers;
•
Service interruptions and network downtime, including undetected errors or defects in our software;
•
Technological obsolescence and our ability to upgrade our equipment or increase our network capacity;
•
Concerns regarding the security and privacy of our customers' confidential information;
•
Future write-downs of goodwill or other intangible assets;
•
Greater than anticipated tax and regulatory liabilities;
•
Restructuring and cost reduction initiatives and the market reaction thereto;
•
Our level of indebtedness;
•
Risks associated with acquisitions and divestitures;
•
Indemnification claims from our PGiSend sale;
•
Our ability to protect our intellectual property rights, including possible adverse results of litigation or infringement claims;
•
Regulatory or legislative changes, including further government regulations applicable to traditional telecommunications service providers and data privacy;
•
Risks associated with international operations and market expansion, including fluctuations in foreign currency exchange rates;
•
Factors described under the caption Part I, Item 1A. “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2014; and
•
Factors described from time to time in our press releases, reports and other filings made with the SEC.
We caution that these factors are not exclusive. Consequently, all of the forward-looking statements made in this quarterly report on Form 10-Q and in other documents filed with the SEC 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 quarterly report. We undertake no obligation to publicly update or revise these forward-looking statements for any reason.

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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign currency exchange rates. We manage our exposure to these market risks through our regular operating and financing activities and the timing of intercompany payable settlements. From time to time, we may enter into interest rate swaps to reduce our exposure to market risk from changes in interest rates on interest payments associated with our credit facility. As of June 30, 2015, we had no outstanding interest rate swaps.
At June 30, 2015, we had borrowings of approximately $338.5 million outstanding under our credit facility that are subject to interest rate risk. Each 1% increase or decrease in interest rates relative to these borrowings would impact our annual pre-tax earnings and cash flows by approximately $3.4 million based on our June 30, 2015 debt level.
We generated approximately 40% of our consolidated net revenue and 35% of our operating expenses in countries outside of the United States in the six months ended June 30, 2015. Additionally, we have foreign currency denominated debt as part of our credit facility. At June 30, 2015, we had foreign debt outstanding of £2.5 million. As a result, fluctuations in exchange rates impact the amount of our reported consolidated net revenue, operating income and debt. A hypothetical positive or negative change of 10% in foreign currency exchange rates would positively or negatively change our consolidated net revenue, operating expenses and outstanding debt for the six months ended June 30, 2015 by approximately $11.4 million, $9.6 million and $0.4 million, respectively. Our principal exposure has been related to local currency sales and operating costs in Australia, Canada, the Euro Zone, India, Japan, Norway, Singapore and the United Kingdom. We have not used derivatives to manage foreign currency exchange risk, and we did not have any foreign currency exchange derivatives outstanding at June 30, 2015.
ITEM 4
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of June 30, 2015. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2015, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended, or the Exchange Act), were effective and designed to ensure that (a) information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and (b) information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
State Corporate Tax Matter

On August 6, 2010, our former subsidiary, Xpedite, received a final determination from the New Jersey Division of Taxation upholding a corporate business tax audit assessment for the tax years ended December 31, 1998 through December 31, 2000 and December 31, 2002. The assessment totaled approximately $6.2 million as of August 15, 2010, including approximately $2.4 million in taxes and $3.8 million in accrued interest and penalties, on which interest continues to accrue. The assessment relates to the sourcing of Xpedite’s receipts for purposes of determining the amount of its income that is properly attributable to, and therefore taxable by, New Jersey. We are vigorously contesting the determination through a timely appeal that we filed with the Tax Court of New Jersey on November 2, 2010. On April 24, 2015, we filed a motion for summary judgment with the Tax Court of New Jersey which, if resolved in our favor, may eliminate the entire amount of tax, interest and penalties related to the final determination. The motion was heard by the Tax Court on July 10, 2015; however, its decision has not yet been rendered. We believe we are adequately reserved for this matter. However, if the New Jersey Division of Taxation’s final determination is sustained, the amount assessed could result in a material adjustment to our consolidated financial statements which would impact our cash flows and results of operations. We agreed to indemnify EasyLink for this matter in connection with our PGiSend sale.
Other Litigation and Claims
We are involved in other litigation matters and are subject to claims arising in the ordinary course of business that we do not believe will have a material adverse effect upon our business, financial condition or results of operations, although we can offer no assurance as to the ultimate outcome of any such matters.
ITEM 1A
RISK FACTORS
Part I, Item 1A. “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2014 includes a detailed discussion of risk factors that could materially affect our business, financial condition or results of operations. There have been no material changes from the risk factors disclosed in that report.
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES

Period
 
Total Number of Shares
Purchased(1)
 
Average
Price Paid
per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs(2)
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs(2)
April 1 - 30, 2015
 
—

 
$
—

 
—

 
2,046,748

May 1 - 31, 2015
 
—

 
$
—

 
—

 
2,046,748

June 1 - 30, 2015
 
30,300

 
$
10.29

 
—

 
2,046,748

Total
 
30,300

 
$
10.29

 
—

 
2,046,748


(1)
The total number of shares purchased includes shares purchased pursuant to our board-approved stock repurchase program described below and shares surrendered by employees to the company to satisfy tax withholding obligations in connection with the vesting of restricted stock totaling 30,300 shares in June 2015, which do not count against shares authorized under our stock repurchase program.
(2)
In December 2012, our board approved a stock repurchase program authorizing the repurchase of up to 5.0 million shares of our common stock. As of June 30, 2015, we have purchased approximately 3.0 million shares pursuant to this stock repurchase program. This stock repurchase program has no expiration date.
ITEM 6
EXHIBITS
The exhibits filed with this report are listed on the “Exhibit Index” following the signature page of this quarterly report on Form 10-Q, which are incorporated by reference.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 7, 2015
PREMIERE GLOBAL SERVICES, INC.
 /s/ David E. Trine                           
David E. Trine
Chief Financial Officer
(principal financial and accounting officer and
duly authorized signatory of the registrant)

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EXHIBIT INDEX

Exhibit
Number

Description
 
 
3.1
Amended and Restated Articles of Incorporation of the Registrant dated March 15, 2006 (incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005, filed on March 16, 2006).
 
 
3.2
Third Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on October 21, 2010).
 
 
4.1
See Exhibits 3.1 and 3.2. for provisions of the Amended and Restated Articles of Incorporation and Bylaws defining the rights of the holders of common stock of the Registrant.
 
 
4.2
Specimen Stock Certificate (incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005, filed on March 16, 2006).
 
 
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
 
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
 
32.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
 
 
32.2
Certification of Chief Financial Officer, as required by Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document




 


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PREMIERE GLOBAL SERVICES, INC. Reports