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PREMIERE GLOBAL SERVICES, INC. 10-K 2005 Documents found in this filing:
Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004.
Commission file number: 0-27778
PREMIERE GLOBAL SERVICES, INC. (Exact name of registrant as specified in its charter)
3399 Peachtree Road, N.E., The Lenox Building, Suite 700, Atlanta, Georgia 30326 (address of principal executive office)
(Registrant’s telephone number, including area code): (404) 262-8400
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None (Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12-b-2) Yes x No ¨
The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant, based upon the closing sale price of common stock on June 30, 2004 as reported by The Nasdaq Stock Market’s National Market, was approximately $819,144,526. As of March 11, 2005, there were 70,813,001 shares of the registrant’s common stock outstanding.
List hereunder the documents incorporated by reference and the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: Portions of the registrant’s proxy statement for its 2005 annual meeting of shareholders are incorporated by reference in Part III of this Form 10-K.
Table of ContentsINDEX
Table of Contents
Item 1. Business
Overview
Premiere Global Services, Inc. is a global outsource provider of business communications services and business process solutions, with 2,230 employees in 19 countries in North America, Europe and Asia Pacific. Our mission is to help our enterprise customers automate and simplify their critical business processes with our communication technologies-based solutions.
We host our communication technologies on our proprietary platforms, which are comprised of server centers and network operations centers located in 17 countries. Enterprise customers apply these hosted technologies to automate and to simplify components of their business processes and to facilitate and enhance communications with their constituents. We believe our services enable enterprise customers to increase efficiency, to improve productivity and to raise customer satisfaction levels.
We offer data management and data delivery solutions through our Data Communications group and conferencing and collaboration services through our Conferencing & Collaboration group. Our strategy is to develop new services and enhancements to existing services to better address the needs of our enterprise customers and to increase the scope and size of the markets we address.
We have an established customer base of greater than 45,000 corporate accounts, including a majority of the Fortune 500. Customers use our hosted services for a variety of mission-critical communications and business processes, including investor calls, receivables collections, continuing education, confirmations of securities trades and travel reservations, electronic statement and invoice delivery, local-access international conferencing, document capture and automation, campaign marketing, mobile access and printing of documents, prescription renewals and other applications.
We have a multi-channel sales approach, selling directly to customers through our global sales and marketing professionals and indirectly through our distribution and strategic partners.
In addition to growing our business organically, we have utilized our operating cash flow and bank line of credit to acquire complementary companies that increase our market share and bring to us additional customers, technology, applications and sales personnel. By applying our scale and purchasing power to the acquired companies, we believe we can significantly reduce their operating costs and generate additional earnings.
On January 3, 2005, we changed our name from PTEK Holdings, Inc. to better communicate our focus on selling application service provider (ASP)-based business communication services to enterprises around the world, and we adopted Premiere Global Services as a single brand for both of our groups, or business segments. On that same date, we transferred the listing of shares of our common stock to the New York Stock Exchange® from the NASDAQ National Market®.
Segment revenue for Data Communications and Conferencing & Collaboration (formerly known as Xpedite and Premiere Conferencing, respectively) accounted for 54.9% and 45.1% of consolidated revenues in 2004. In 2004, sales in North America, Europe and Asia Pacific accounted for 65.3%, 18.7% and 16.0% of our consolidated revenues, respectively. Financial information about our two segments, and the geographic areas in which we operate can be found in Note 21 – Segment Reporting to our consolidated financial statements for the year ended December 31, 2004 included in this report.
We were incorporated in Florida in 1991 and reincorporated in Georgia in 1995. Our corporate headquarters are located at 3399 Peachtree Road, NE, The Lenox Building, Suite 700, Atlanta, GA 30326, and our telephone number is (404) 262-8400.
Industry Background
Today, nearly every stage of the business cycle is becoming communication-intensive. From the acquisition of customers, to customer care, to billing and collections, there are a myriad of distinct communications incumbent upon an enterprise. Businesses must communicate with customers, suppliers, investors, employees and other constituents in disparate locations, across various networks and technologies, all while focusing on the accuracy, speed, security and cost of delivery.
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Table of ContentsThe range and size of these communication management challenges is large and growing. Due to this complexity and constrained capital budgets, enterprises are increasingly outsourcing their communications management needs to providers like us. We offer a broad range of application-based business services, a scalable global platform and experience-based expertise, which our customers can access through our ASP business model.
As an outsource provider with the sole focus on delivering business communications services, we believe we can significantly decrease the cost, increase the security and accelerate the delivery time of our customers’ critical communications. For example, financial organizations, such as banks and brokerage firms, are required to provide periodic account updates to their customers, typically handled by mailing paper statements, a process that can be more cost-effective and secure with our electronic statement delivery services. Mortgage brokers are required to collect several disparate paper documents (such as driver licenses, surveys, contracts, etc.) for a typical mortgage application, a process that can be streamlined with our document automation services. Businesses typically outsource the collection of past due receivables to collections agencies or call centers, a process that can be accelerated and made more cost effective using our automated speech technologies. Finally, global enterprises are faced with training and managing employees in disparate locations often requiring attendance at seminars and management meetings, a process that can be improved and made more efficient through our audio and web-based conferencing and collaboration services.
Business Services
We market a full suite of communications services and solutions that enables enterprise customers to increase productivity through collaboration and to increase efficiency through the automation of labor- and paper-intensive business processes. We believe that our communication technologies-based services improve and enhance data delivery and critical business communications for global enterprises.
Our strategy has evolved toward a solutions-based sales model, marketing specific applications that target defined business processes within key vertical industries, such as automated statement delivery, service vehicle dispatch management, document automation and receivables collections. We believe offering hosted, turnkey solutions to business processes will help position us as a more valuable service provider to our customers and will be an important component of our future growth.
We market two groups of services, Data Communications and Conferencing & Collaboration:
Our Data Communications group offers a comprehensive suite of data communication services and business process solutions. Customers use our data communications services to deliver business critical, time-sensitive information, such as mortgage rate updates, equity research reports and regulatory updates to their customers, trading partners and constituents.
Our recent focus has been on developing and marketing solutions that enable our customers to automate and to simplify components of their critical business processes. These new solutions are delivered and enabled by our traditional communication technologies, including encrypted and high-volume transactional e-mail, enhanced fax, automated speech technologies and SMS services.
Examples of our new business process solutions include:
Statement Manager enables enterprises to realize significant savings and increase customer satisfaction by transitioning from costly paper statements to secure, electronic delivery.
Collections Accelerator enables enterprises to contact their past due customers using our advanced voice technology at a significant savings to call centers, helping to speed the collection of receivables, lower days sales outstanding and increase cash flow.
Dispatch Manager allows enterprises to confirm scheduled appointments prior to dispatching technicians and delivery crews, increasing the number of appointments kept and improving efficiency.
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Table of ContentsMortgage Processor empowers customers with an electronic repository for the disparate documents required for a typical mortgage application, improving security and reliability and accelerating the process.
Mobile Officer Manager increases the productivity of mobile workforces by enabling access to critical documents via any Internet connection.
Virtual Agent automates enterprise call center activities, delivering greater consistency with pre-recorded messages and faster delivery than live agents.
Rx Reminder helps pharmacies ensure that prescriptions are picked-up with automated customer reminders, reducing waste and cutting costs.
DocuManager helps automate paper-intensive business processes through the conversion of paper documents to electronic files, which can be forwarded, accessed and archived remotely through any existing e-mail account, with no additional software download required.
Our Conferencing & Collaboration group offers a full suite of traditional and voice-over-Internet-protocol (VoIP)-based audio conferencing and Web-based data collaboration services for all forms of group communications activities, from large events, such as investor relations calls and training sessions, to smaller meetings, such as sales planning calls and project team meetings.
Examples of our conferencing and collaboration services include:
ReadyConference® Plus, our automated conferencing and collaboration service which utilizes our proprietary software technology, allows users to conduct conference calls and to share slide presentations at anytime, without the assistance of an operator or the need of a reservation. This cost-effective service offers a simple, easy-to-use interface that enables the host to launch and control all aspects of a call, audio and visual, directly from the desktop.
ReadyConference® GlobalMeetSM saves our enterprise customers money by providing local numbers for participants to access international conference calls. This VoIP-backboned service lowers overall cost by eliminating expensive international long distance toll charges.
PremiereCallSM provides customers with operator assistance to monitor all facets of a group meeting, including the ability to work with customization requests. Typical customer applications of these services include sales meetings, investor relations calls, press conferences, customer seminars, product rollouts and continuing medical and legal education.
PremiereCallSM Auditorium® offers automated entry into an operator-assisted call. This service enables customers to start a larger-scale conference using automated passcode access, while still utilizing the resource of a dedicated operator during the entire call, at a cost savings from a traditional operator-assisted meeting.
VisionCast® enables customers to conduct large, interactive events, such as training, seminars, company meetings, focus groups and media conferences on the Web, and ReadyCast® combines similar data collaboration capabilities for smaller meetings. SoundCast®, an audio streaming technology offered as part of our Web-based services, provides live Internet streaming to simulcast a live conference call or recorded presentation over the Web.
Customers
We provide services to over 45,000 corporate accounts around the world, including a majority of the Fortune 500 and representing nearly every major industry. Each business day on average, nearly 160,000 individuals collaborate via our global conferencing platform, and we process and deliver nearly 14 million data communications. We believe customers choose Premiere Global for our advanced communications technologies and history of innovation, our global footprint and scale, our market-leading client services and support and the security and reliability of our platform.
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Table of ContentsOne of our customers, International Business Machines Corporation, has historically accounted for a significant amount of revenues. Sales to IBM accounted for approximately 11% of consolidated revenues (24% of Conferencing & Collaboration segment revenue) in 2004. Because IBM has chosen to insource most of its automated conferencing needs, we expect sales to IBM will account for approximately 2% to 3% of consolidated revenues in 2005.
We typically do not enter into long-term contracts with our customers, with most customer agreements having terms of one to three years. Customers may generally terminate without penalty, unless their agreement contains an annual minimum revenue commitment that would require payment by the customer of any unused shortfall amount upon termination.
While our business is generally not seasonal, we typically experience lower levels of sales and usage during periods which have reduced numbers of working days. For example, our operating results have historically decreased during the summer months (particularly in our international operations), as well as during Thanksgiving, December and New Years holidays. We expect our revenues during these periods will not grow at the same rates as compared with other periods of the year because of decreased use of our services by our enterprise customers.
Sales and Marketing
We have a multi-channel sales approach:
As a service organization, our customer service teams play a major role in managing customer relationships as well as selling additional value-added services to existing accounts. We currently employ more than 690 customer service professionals deployed in local markets around the world.
Platform and Network Infrastructure
We believe that our proprietary communication technologies platform is a key element of our success. We utilize various Internet and telecom-based communications networks that allow customers to access our platform-based services through the Internet, private data networks, and local and toll-free numbers and via VoIP.
Our strategy is to facilitate customer access to our platform by continuing to evolve toward open architecture, based on standard access protocols. We believe an open platform accelerates time to market for our new services and broadens our distribution opportunities by enabling strategic partners to augment their service offerings through direct integration with our services.
Data Communications provides services through our enhanced communications network with more than 80,000 delivery ports attached to servers around the world, which perform all primary processing and switching functions. Our proprietary platform supports multiple input methods including, but not limited to, PC-based software, e-mail gateways, extensible markup language (XML), application program interfaces (APIs) and high-speed IP-based interconnects. Outgoing communications are delivered through line group controllers, which are deployed in a decentralized fashion to provide sufficient redundancy. The remote line group controllers are connected to servers over a wide area network via either private lines, virtual private networks (VPNs) or carriers’ global transmission control protocols TCP/IP-based networks. Mission critical information is transported from one location domain to another using a proprietary (MCP)-to-MCP protocol. The current domains include Australia, Japan, South Korea, the United Kingdom, the United States and France. Remote nodes on the network are located in Germany, Switzerland, Canada, Spain, Italy, Malaysia, Hong Kong and Singapore.
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Table of ContentsConferencing & Collaboration operates over 80,000 conferencing ports worldwide. Services are provided from full-service operations centers in Colorado Springs, Colorado; Lenexa, Kansas; Sydney, Australia; and Clonakilty, Ireland. Automated bridging nodes are maintained in the U.S., Canada, Australia, Hong Kong, Singapore, Japan, Malaysia, South Korea and Ireland. Complex, operator-assisted calls are supported on various commercially available bridging platforms. Internally developed conference bridges are used to support automated conferencing services. Customers access these conferencing platforms through direct inward dialing, toll-free numbers, the Internet, VoIP-based data networks and virtual network access.
We currently utilize VoIP networks for origination and termination traffic for a number of our Data Communications services and for our ReadyConference GlobalMeet service. We intend to continue to convert additional traffic to VoIP networks.
Research and Development
We believe that our ability to design, develop, test and support new technology for service enhancements in a timely manner is an important contributor to our continued success. By innovating new services and enhancements to existing services, we can better meet our enterprise customers’ needs and position ourselves in larger market segments.
In 2004, we released DocuManager (formerly released and marketed in North America as Fax2MailSM), our document automation service, in our Europe and Asia Pacific regions and smsREACHSM, our short message service, in North America. In addition, we continued to enhance our proprietary Web-based data collaboration service with the recent launch of ReadyConference Plus 2.0. Our session initiation protocol (SIP)-based conferencing service and our prepaid conferencing service are scheduled to be released in the second quarter of 2005. We are currently developing a robust API using open standard XML/ simple object access protocol (SOAP) interfaces for our Data Communications platform, similar to the open standard API we released in 2004 for our global Conferencing & Collaboration platform. We believe the new interface will enable our customers and professional services team to more easily integrate transaction-based solutions from third-party systems.
We devote significant resources to the development of new services and enhancements to existing services and employ approximately 80 research and development professionals. Our research and development costs for 2004, 2003 and 2002 were $11.0 million, $8.6 million and $7.2 million, respectively.
Competition
We compete with a range of companies in both segments of our services. For conferencing and collaboration services, we compete with major telecommunications service providers around the world such as AT&T Corp., MCI Inc., Sprint Corporation, Global Crossing Limited and the international public telephone companies. Because these providers own the underlying telecommunications network, they may have lower per minute long distance costs than us. Although these providers hold a large market share, conferencing is not the primary focus of their bundled service offerings, and we believe we can compete effectively on the basis of quality of service and support to better meet customers’ specific conferencing needs. Additionally, we compete with companies like West Corporation, Raindance Communications, Inc., ACT Teleconferencing, Inc., WebEx Communications, Inc. and Genesys S.A. We also compete with traditional and IP-based equipment manufacturers and business suite software providers that sell various communications equipment and software applications that enable enterprises to host calls internally. We believe that we are the second largest independent audio conferencing provider in the world.
While the data communications industry is highly fragmented, we believe that we are the largest worldwide provider of these services. As we develop new services that automate additional business processes, we believe that we will be positioned to displace existing services provided by companies such as West Corporation, TeleTech Holdings, Inc. and others in the customer relationship management (CRM) category. We will continue to compete with EasyLink Services Corporation, Critical Path, Inc., DoubleClick Inc. and j2 Global Communications, Inc. in the Data Communications category. Additionally, we compete with a range of equipment and software providers that enable enterprises to address these requirements internally.
In all cases, our strategy is to gain a competitive advantage in winning and keeping customers by innovating new technology-driven services and supporting them with superior customer service. We believe our broad range of communications and data services provides Premiere Global an advantage over many of our
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Table of Contentscompetitors that have more limited service offerings. In addition, our global reach allows us to pursue contract opportunities with multinational enterprises providing an advantage over competitors that only focus on limited geographies.
Suppliers
We purchase telecommunications services and equipment for use in our operations from a variety of suppliers. Some of our telecommunications supply agreements contain commitments that require that we purchase a minimum amount of services through 2009. These costs total approximately $15.4 million, with annual costs of approximately $9.8 million, $3.5 million, $1.0 million, $0.9 million and $0.2 million in 2005 through 2009, respectively.
Government Regulation
Federal, state, local and international laws regulating the provision of traditional telecommunications services may adversely impact our business. We believe that our business segments operate as providers of unregulated information services. Consequently, we do not believe that we are subject to Federal Communications Commission (FCC) or state public utility commission regulations applicable to providers of traditional telecommunications services in the U.S However, we may be affected by regulatory decisions, trends or policies issued or implemented by such federal, state, local or international telecommunications regulatory authorities. In addition, those authorities may seek to regulate, or impose requirements with respect to, the services provided by us. For example, we recently received letters from the Investigations and Hearing Division of the FCC’s Enforcement Bureau regarding filing and remittance requirements applicable to traditional telephone companies. Management believes that we exercise reasonable efforts to monitor telecommunications laws, regulations, decisions and trends and to comply with any applicable legal requirements. However, if we fail to comply with any such government authorities as a provider of traditional telephone services, we could, nevertheless, be temporarily prohibited from providing portions of our services, be required to restructure portions of our services or be subject to ongoing reporting and compliance obligations, including being subject to litigation, fines or other penalties for any non-compliance. We monitor applicable legislation and regulatory developments to minimize the risk of our participation in activities that could contravene telemarketing, anti-spam and other applicable legal and regulatory requirements.
Federal, state and international laws regulate telemarketing practices, and may adversely impact our business and that of our customers and potential customers. The FCC promulgated rules in 1992 to implement the Telephone Consumer Protection Act of 1991 (TCPA). These rules, among others, regulate telemarketing methods and activities, including the use of pre-recorded messages, the time of day when telemarketing calls may be made, maintenance of company-specific “do not call” databases and restrictions on unsolicited facsimile advertising. Facsimile broadcast providers, such as our Data Communications business segment, generally are not liable for their customers’ violations of the TCPA, although facsimile broadcast providers that have a “high degree of involvement” in their customers’ facsimile advertisements or “actual knowledge” of a customer’s violation of the TCPA may be held liable under the TCPA. Although Data Communications has conducted its operations to meet the facsimile broadcaster provider exemption, third parties may seek to challenge this exemption, which could lead to litigation by private parties and governmental bodies, including governmental enforcement actions, and could result in damages, regulatory fines and penalties and the accompanying costs and uncertainties of such litigation and enforcement actions.
In 2003, the FCC amended its rules under the TCPA. The FCC retained an exemption from liability for sending unsolicited commercial facsimile advertisements for facsimile broadcast providers which solely transmit such advertisements on behalf of others. However, the FCC ordered that a sender may fax unsolicited commercial advertisements only to those from whom the sender has received prior express consent in writing. The 2003 rule amendments modified the FCC’s prior policy, which permitted such faxes when an “established business relationship” existed between the sender of a commercial unsolicited facsimile advertisement and the recipient. Several parties challenged the new rules, and the FCC has delayed the requirement to have prior written consent and the deletion of the established business relationship exemption until June 30, 2005. The FCC is also reviewing several appeals of these rules. We cannot predict the outcome of these proceedings. However, if the FCC decides to retain the rule amendments that deleted the established business relationship exemption, and requires advance written consent, these actions could have a material adverse effect on our customers’ use of our Data Communications’ services.
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Table of ContentsIn addition, our Data Communications’ operations may be subject to state laws and regulations regulating the unsolicited transmission of facsimiles. We monitor such federal and state laws and regulations, and our service agreement with customers generally state that our customers are responsible for their compliance with all applicable laws and regulations. We could, nevertheless, be subject to litigation, enforcement actions, fines, losses and possible other relief under such laws and regulations.
The FCC, with the Federal Trade Commission (FTC), has also instituted a national “do not call” registry for residential and wireless telephone numbers. Telemarketers are barred from calling consumers who register their telephone numbers in the national database. In summary, with certain exceptions, telemarketers are required to access the list before engaging in telemarketing in any particular area code. Data Communications, as a service provider to companies that engage in telemarketing, has subscribed to the federal do not call registry. Although we believe we have taken the necessary steps to ensure compliance with the do not call registry and other rule amendments, regulators or third parties could seek to challenge our compliance with the federal do not call registry, federal telemarketing laws, and FCC and FTC rules. The national do not call registry, while currently in effect, remains subject to legal challenges in federal court.
In addition, to the federal legislation and regulations, there are numerous state statutes and regulations governing telemarketing activities, including state do not call list requirements and state registration and bonding requirements. Data Communications has compliance policies in place with regarding to telemarketing laws and regulations; however, there can be no assurance that we would not be subject to litigation by private parties and governmental bodies, including governmental enforcement actions, alleging a violation of state or federal telemarketing laws or regulations, and could result in damages, regulatory fines and penalties and the accompanying costs and uncertainties of such litigation and enforcement actions.
A number of states have adopted laws restricting and/or governing the distribution of unsolicited e-mails, or spam. Other states are considering similar legislation. Federal legislation, also know as “Can Spam”, regulates unsolicited commercial e-mails. The Can Spam law requires unsolicited e-mail marketing messages to have a valid return address. E-mail marketers are also required to remove customers from their mailing lists if requested. The Can Spam law allows the FTC to impose fines, and gives state attorneys general the power to bring lawsuits. The Can Spam law also preempts state laws in many respects, although it allows states to continue to regulate deceptive e-mails. Data Communications provides a service for its customers to distribute e-mails, including e-mails that may be subject to these laws. We have implemented procedures that we believe comply with our obligations under the law. We have a policy that prohibits the use of our services to send spam and requires our customers to comply with all laws and regulations pertaining to spam, but there can be no assurance that we would not be subject to litigation alleging a violation of applicable federal and state laws.
A number of legislative and regulatory proposals are under consideration by federal and state lawmakers and regulatory bodies and may be adopted with respect to the Internet. Some of the issues that such laws or regulations may cover include user privacy, obscenity, fraud, pricing and characteristics and quality of products and services. The adoption of any such laws or regulations may decrease the growth of e-commerce, which could in turn decrease the projected demand for our Web-based services or increase our costs of doing business. In addition, the sending of unsolicited commercial e-mail through our network could result in third parties asserting claims against us. Moreover, the applicability to the Internet of existing U.S. and international laws governing issues such as property ownership, copyright, trade secret, libel, taxation and personal privacy is uncertain and developing. Any new legislation or regulation, or application or interpretation of existing laws, could have a material adverse effect on our business, financial condition and results of operations.
In conducting our business, we are also subject to various laws and regulations relating to commercial transactions generally, such as the Uniform Commercial Code and are also subject to the electronic funds transfer rules embodied in Regulation E promulgated by the Federal Reserve. It is possible that Congress, the states or various government agencies could impose new or additional requirements on the electronic commerce market or entities operating therein. If enacted, such laws, rules and regulations could be imposed on our business and industry and could have a material adverse effect on our business, financial condition or results of operations. Our international activities also are subject to regulation by various international authorities and the inherent risk of unexpected changes in such regulation.
In addition, our international activities also are subject to regulation by various international authorities and the inherent risk of unexpected changes in such regulation. For example, the European Privacy and Communication Directive imposes restrictions on sending unsolicited communications to individuals via automatic calling machines, fax and e-mail, including SMS messages. Generally, companies are required to obtain “prior explicit”, or opt-in, consent before they can contact users via this type of marketing.
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Table of ContentsProprietary Rights and Technology
Our ability to compete is dependent in part upon our proprietary rights and technology. We currently have three issued U.S. patents relating to our fax distribution services, each of which will expire in 2013. We also have two pending Canadian patent applications and one pending U.S. patent application relating to our document generation and delivery services. In addition, we have two issued U.S. patents, a Canadian patent, a UK patent and two pending U.S. patent applications relating to our conferencing services. Of the patents relating to conferencing services, one U.S. patent expires in 2007 and one in 2010, and the Canadian and UK patents each expire in 2008. In addition, we own and use a number of federally registered trademarks and pending applications for trademarks, including Premiere Global ServicesSM, PGI & DesignSM, ReadyConference®, Auditorium®, VisionCast®, ReadyCast®, SoundCast®, GlobalMeetSM, faxREACH®, voiceREACH®, messageREACH® and smsREACHSM. We own applications and registrations for many of these and other trademarks and service marks in the U.S. and in other countries. We rely primarily on a combination of intellectual property laws and contractual provisions to protect our proprietary rights and technology. These laws and contractual provisions provide only limited protection of our proprietary rights and technology, which include confidential information and trade secrets that we attempt to protect through confidentiality and nondisclosure provisions in our agreements. We typically attempt to protect our confidential information and trade secrets through these contractual provisions for the terms of the applicable agreement and, to the extent permitted by applicable law, for some negotiated period of time following termination of the agreement. Despite our efforts to protect our proprietary rights and technology, there can be no assurance that third parties will not misappropriate our proprietary rights or technology or independently develop technologies that are similar or superior to our technology.
Available Information
Our corporate Internet address is www.premiereglobal.com. We have made available free of charge through our Web site (follow the “Shareholder Information” tab to “SEC Filings”) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as practicable after such material was electronically filed with, or furnished to, the Securities and Exchange Commission (SEC).
Employees
As of December 31, 2004, we employed approximately 2,230 people. Our employees are not represented by a labor union or covered by any collective bargaining agreements. We consider our employee relations to be good.
Item 2. Properties
Our corporate headquarters occupy approximately 42,000 square feet of office space in Atlanta, Georgia under a lease expiring August 2007 and approximately 11,000 additional square feet of office space in the same location under a lease expiring August 2006. This office space also includes both Data Communications’ and Conferencing & Collaboration’s corporate headquarters. Data Communications occupies additional office space of approximately 45,000 square feet in Tinton Falls, New Jersey under a lease expiring in May 2016. Conferencing & Collaboration occupies additional office space of approximately 106,000 square feet in Colorado Springs, Colorado under a lease expiring August 2006, and approximately 46,000 square feet of office space in Lenexa, Kansas under a lease expiring August 2009.
We also lease various data and switching centers and sales offices within and outside the U.S. We believe that our current facilities and office space are sufficient to meet our present needs and do not anticipate any difficulty securing additional space, as needed, on terms acceptable to us.
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Table of ContentsItem 3. Legal Proceedings
We have several litigation matters pending, as described below, which we are defending vigorously. Due to the inherent uncertainties of the litigation process and the judicial system, we are unable to predict the outcome of such litigation matters. If the outcome of one or more of such matters is adverse to us, it could have a material adverse effect on our business, financial condition and results of operations.
A lawsuit was filed in November 1998 against us and certain of our officers and directors in the Southern District of New York. Plaintiffs were shareholders of Xpedite Systems, Inc., who acquired our common stock upon our acquisition of Xpedite. Plaintiffs allege causes of action against us for breach of contract, against all defendants for negligent misrepresentation, violations of Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, and against the individual defendants for violation of Section 15 of the Securities Act. Plaintiffs seek undisclosed damages together with pre- and post-judgment interest, recission or recissory damages as to violation of Section 12(a)(2) of the Securities Act, punitive damages, costs and attorneys’ fees. The defendants’ motion to transfer venue to Georgia has been granted. The defendants’ motion to dismiss has been granted in part and denied in part. By order dated September 26, 2003, the district court granted in its entirety the defendants’ motion for summary judgment and denied as moot the defendants’ motion in limine. On September 23, 2004, the U.S. Court of Appeals for the Eleventh Circuit affirmed as to the dismissal of the negligent misrepresentation claim and the claim under Section 12. The Eleventh Circuit reversed and remanded for further proceedings on the Section 11 claim. On October 14, 2004, defendants filed a motion for partial rehearing and partial rehearing en banc as to the Eleventh Circuit’s ruling on the Section 11 claim. That motion was denied by the Eleventh Circuit by Order dated November 22, 2004. Thereafter, we filed a motion to stay mandate pending filing of petition for writ of certiorari in the U. S. Supreme Court. That motion was also denied by the Eleventh Circuit by Order dated December 14, 2004. The case has now been remanded to the district court, with only the Section 11 claim remaining. In February 2005, we filed a petition for writ of certiorari in the U.S. Supreme Court for review of the Eleventh Circuit’s Order, which is pending. Also in February 2005, we filed a renewed motion for summary judgment and renewed motion in limine to exclude expert opinions in the district court. Those motions are also pending.
In December 2001, our subsidiary, Voice-Tel Enterprises, LLC, filed a complaint against Voice-Tel franchisees, JOBA, Inc. and Digital Communication Services, Inc. in the U.S. District Court for the Northern District of Georgia. The complaint sought injunctive relief and a declaratory judgment with respect to Voice-Tel’s right to terminate the franchise agreements with JOBA and Digital. In January 2002, JOBA and Digital answered the complaint and asserted counterclaims against Voice-Tel for alleged breach of franchise agreements and other alleged franchise-related agreements. JOBA and Digital also asserted third-party claims alleging tortious interference of contract against us and our subsidiary, Premiere Communications, Inc. In January 2002, plaintiffs and third-party defendants filed responses and answers to the counterclaims and third-party complaint, and Voice-Tel filed additional breach of contract and tort claims against JOBA and Digital. The Digital franchise agreement contained a mandatory arbitration provision, which was not found in the JOBA franchise agreement, and the breach of franchise claims pertaining to Digital were severed and sent to arbitration, which was concluded in the summer of 2003. In July 2002, Voicecom Telecommunications, LLC, which is not our affiliate, was added as a party plaintiff in the lawsuit against JOBA and Digital. In March 2003, the court granted our motion for summary judgment, and dismissed PCI and us from the case. The court also granted partial summary judgment in favor of each of the parties, narrowing the claims for trial. In 2004, JOBA requested that the court reconsider an earlier ruling that precluded JOBA from amending its counterclaim to add a claim for alleged constructive termination of the franchise agreement by Voice-Tel. In September 2004, the court granted JOBA’s request for leave to amend its counterclaim to add a claim for alleged constructive termination of the franchise agreement. In December 2004, Voice-Tel and Voicecom moved the court to consolidate this case with another pending franchisor-franchisee dispute between Voicecom and JOBA. No date has been set for trial.
In March 2004, in a separate action, JOBA filed a third-party complaint against PCI, Voice-Tel and us. The claims were filed in a lawsuit pending in the State Court of Fulton County, Georgia, between JOBA, and its current franchisor, Voicecom, in which Voicecom sought a declaratory judgment with respect to its rights and/or responsibilities under an equipment, sales and service term sheet. Voice-Tel had served as the franchisor to JOBA from 1997 until March 2002, when Voicecom acquired substantially all of the assets of PCI and Voice-Tel, including the JOBA franchise agreement. The third-party claims by JOBA against PCI, Voice-Tel and us purport to arise out of the same transactions and occurrences that form the subject matter of litigation currently pending (or which had been dismissed) in federal court in the Northern District of Georgia. In April 2004, we answered and responded to the third-party complaint in State Court of Fulton County, and, among other things, filed motions to dismiss the third-party complaint, strike portions of the third-party complaint and stay proceedings. JOBA
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Table of Contentsresponded to our motions and filed certain offensive motions to which the third-party defendants responded and objected. No discovery has been taken in that case, and the court has not yet ruled on any pending motions. A hearing is scheduled on all pending motions on March 31, 2005.
We have received letters from A2D, L.P., an affiliate of Ronald A. Katz Technology Licensing, L.P. informing us of the existence of certain of Katz’s patents and the potential applicability of those patents to certain of our services. The letters also include an offer to us of a non-exclusive license to the Katz portfolio of patents. We are currently considering the matter raised in these letters, and no legal proceedings have been instituted at this time. If the Katz patents are valid, enforceable and apply to certain of our services, we may seek a license from A2D. If we decide to seek such a license, it is uncertain as to the terms upon which we may be able to negotiate and obtain a license, if at all, as well as to the amount of the possible one-time and recurring license fees which we may be required to pay.
In September 2004, Captaris, Inc. filed suit against our Data Communications’ subsidiary, Xpedite, in the U.S. District Court for the Western District of Washington alleging breach of contract in connection with license and reseller agreements for Captaris’ e-document delivery technology executed by the parties in September 2003. The agreements provided that the parties would cooperate in providing mutual resale opportunities for each other’s services and provide for minimum compensation to Captaris of $2.0 million over a three-year period. Captaris seeks damages of in an unspecified amount, not less than $250,000, plus interest. We withheld this amount, which was the initial payment due in September 2004, from the amounts owing to Captaris under the agreements on the grounds that Captaris had not performed its obligations under such agreements. In January 2005, we answered the complaint denying that any money is due as a result of Captaris’ failure to perform its obligations under the agreements, and filed a counterclaim against Captaris alleging that the license agreement was unenforceable because the parties did not reach agreement on its essential terms, and alternatively, for breach of contract, breach of Captaris’ duty of good faith and fair dealing and contractual warranties and anticipatory repudiation. We seek damages in an amount to be determined at trial.
On February 22, 2005, Paul Worsham filed a purported class action in the Circuit Court for Montgomery County, Maryland against our Data Communications subsidiary, Xpedite. The complaint alleges that we transmitted prerecorded telephone calls advertising Data Communications’ services to telephone numbers in Maryland, including to Mr. Worsham’s telephone number, in violation of the federal TCPA and applicable FCC rules. The complaint also alleges violations of federal caller identification requirements under FCC rules and violations of the Maryland Telephone Consumer Protection Act. The complaint seeks statutory damages under the federal and Maryland statutes for each violation and injunctive relief. We have 30 days from the date of service to file an answer in this matter, and the court has scheduled a scheduling conference for May 27, 2005. We may be entitled to indemnification or contribution from other non-parties to this action. The outcome of these matters, including the plaintiff’s success in achieving class certification, is uncertain at this time.
The previously disclosed claims between our Data Communications’ subsidiary, Xpedite, and Cable &Wireless USA, Inc. have been resolved by the parties in connection with C&W’s bankruptcy case’s claim resolution process.
We are also involved in various other legal proceedings which we do not believe will have a material adverse effect upon our business, financial condition or results of operations, although no assurance can be given as to the ultimate outcome of any such proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the fourth quarter of the fiscal year covered by this report.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock, $.01 par value per share, traded on the Nasdaq National Market under the symbol “PTEK” since our initial public offering on March 5, 1996 until January 3, 2005 when we transferred the listing of our common stock to the NYSE under the symbol “PGI”. The following table sets forth the high and low closing sales prices of our common stock as reported on the Nasdaq National Market for the periods indicated.
The closing price of our common stock as reported on the NYSE on March 11, 2005 was $10.41. As of March 1, 2005 there were 535 record holders of our common stock.
We have never paid cash dividends on our common stock, and the current policy of our board of directors is to retain any available earnings for use in the operation and expansion of our business. The payment of cash dividends on our common stock is unlikely in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board and will depend upon our earnings, capital requirements, financial condition and any other factors deemed relevant by our board.
In June 2004, we entered into a three-year, senior secured revolving credit facility with Bank of America, N.A., as agent, which we amended in February 2005 to increase the line to $180.0 million, among other things. See “Management’s Discussion and Analysis.” The credit agreement related to our line of credit contains customary prohibitions on our ability to declare any cash dividends on our common stock until all obligations under the line of credit are paid in full and all letters of credit have been terminated.
Issuer Purchases of Equity Securities
In the fourth quarter of 2004, we did not purchase any shares under our stock repurchase plan. The remaining maximum number of shares that may yet be purchased under the plan as of December 31, 2004 was 4,452,038.
Item 6. Selected Financial Data
The following selected consolidated statement of operations data, balance sheet data, and cash flow data as of and for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 have been derived from our audited consolidated financial statements. The selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes hereto.
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Table of Contents
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Table of Contentspreferred stock, convertible subordinated notes (using the if-converted method), unvested restricted stock and from stock options (using the treasury stock method). Net income available to common shareholders was adjusted for the interest expense related to our convertible notes prior to conversion.
Our results of operations include revenues and associated costs for all acquisitions as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” from the effective date of each acquisition.
On March 26, 2002, we sold substantially all of the assets of our Voicecom operating segment, exclusive of its Australian operations, to Gores Technology Group, for a total purchase price of approximately $22.4 million, comprised of cash and the assumption of certain liabilities. In accordance with Statement of Financial Accounting Standards (“SFAS”) 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the transaction was accounted for as a discontinued operation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Discontinued Operations.”
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a global outsource provider of business communications services and business process solutions. Our Data Communications business segment offers a comprehensive suite of data communications services and business process solutions for the delivery of our customers’ business critical, time-sensitive information. Our Conferencing & Collaborations business segment offers a full suite of traditional and VoIP-based audio conferencing and Web-based data collaboration services. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, we discontinued our Voicecom segment, exclusive of its Australian operations, through an asset sale, effective March 26, 2002. The Australian operations were subsequently discontinued in December 2002. Voicecom offered a suite of integrated communications services, including voice messaging services, interactive voice response services and unified communications services.
In 2004, we continued to focus on revenue growth, both organically, including through growth in our transactional and Web-based services and international revenues, as well as through accretive acquisitions. In addition, we remained focused on reducing our operating costs to generate additional earnings through cost saving initiatives, including re-negotiations of our telecommunications service provider contracts and network consolidation at both business segments.
Key highlights of our financial and strategic accomplishments for our year ended December 31, 2004 include:
In 2004, we utilized our operating cash flow and credit facility to eliminate all of our convertible debt, acquire complementary companies and repurchase shares of our common stock. We also adopted a solutions-based sales model and devoted significant resources to the introduction of a number of specific applications within key vertical markets, as well as enhancements to our existing services. In addition, we transitioned some of our services to VoIP delivery. We believe that expenditures associated with these efforts were needed in order to better respond to technological changes and customer demands.
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Table of ContentsWe believe that our financial results remained strong despite challenges we faced in 2004 and will continue to face in 2005, including competitive and price factors, potential regulatory changes, market acceptance of our new services and decreased sales to one of our historically largest customers.
At the beginning of 2005, we adopted a single brand, Premiere Global Services, for both of our segments to better reflect our business focus and transferred of listing of our common stock to the NYSE. We intend to continue offering innovative services and implementing open access to our communications technologies platform via standard protocols. In addition, we intend to use our improved liquidity to take advantage of consolidation opportunities in the industries in which we compete, including with the announcement of our pending acquisition of the conferencing services business of Citizens Communications. We believe that these efforts will assist us in our 2005 focus to continue to increase our market share.
Revenues are recognized when persuasive evidence of an arrangement exists, services have been rendered, the price to the buyer is fixed or determinable, and collectibility is reasonably assured. Revenues consist of fixed monthly fees and usage fees generally based on per minute or transaction rates. Our revenue recognition policies are consistent with the guidance in Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 101A, 101B and SAB 104.
“Cost of revenues” includes network telecommunication costs and direct operating costs exclusive of depreciation as defined below. Network telecommunication costs consist primarily of per minute based and fixed telecommunication costs incurred in providing our services. Direct operating costs consist primarily of customer service, information technology and network engineering wages, benefits, travel, consulting fees and facility costs. Additionally, we include in cost of revenues the cost of international ship-to-shore messaging services and per minute costs of providing Web conferencing services.
“Selling and marketing” costs consist primarily of salaries and wages, benefits, travel and entertainment, advertising, commissions and facility costs associated with selling or marketing our services.
“General and administrative” costs consist primarily of salaries and wages, benefits, travel, consulting fees and facility costs associated with corporate governance, executive management, finance and human resources. Bad debt expense is also included in this line item.
“Research and development” costs consist primarily of salaries and wages, benefits, travel, consulting fees and facilities costs associated with developing service enhancements, maintaining product and new product development.
“Depreciation” and “amortization” includes depreciation of computer server, Internet and telecommunications equipment, furniture and fixtures, office equipment, leasehold improvements and amortization of intangible assets, patent costs and trademark costs. We provide for depreciation using the straight-line method of depreciation over the estimated useful lives of property and equipment, generally two to ten years, with the exception of leasehold improvements which are depreciated on a straight-line basis over the shorter of the term of the lease or the useful life of the asset. Amortization consists of customer lists, patents, trademarks and covenants not to compete. Customer lists, patents, trademarks and covenants not to compete, which comprise intangible assets, are amortized over the useful life of the asset generally ranging from three to seven years.
“Restructuring costs” represent severance, exit costs and contractual obligation costs associated with the realignment of workforces, unutilized lease space and the exit of certain operations.
“Equity based compensation” relates primarily to expense for stock options that have been modified and the cost of stock options and restricted stock issued to employees, directors, advisors and consultants for services rendered. Commencing in 2004, equity based compensation which is awarded as part of sales incentive programs are included as part of selling and marketing expense.
“Asset impairments” represent the adjustment of the carrying value of long-lived assets to current fair value under Statement of Financial Accounting Standards (SFAS) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” Long-lived assets subject to this fair value assessment were goodwill, customer lists, developed technology and property, plant and equipment, trademarks and patents.
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Table of Contents“Net legal settlements and related expenses” represent the costs incurred or management’s estimate of probable costs that can be reasonably estimated with regard to legal contingencies and related matters.
“Interest expense” includes interest costs, amortized debt issue costs and unused line of credit fees associated with our convertible subordinated notes, line of credit and capital lease obligations.
“Interest income” includes interest earned on highly liquid investments with a maturity at date of purchase of three months or less and interest on employee loans.
“(Loss) gain on sale of marketable securities” includes proceeds less commissions in excess of original cost on the sale of marketable securities available for sale. These marketable securities are traded on a national exchange with a readily determinable market price.
“Gain on repurchase of bonds” includes proceeds on the early retirement of our 2004 convertible subordinated notes purchased in the open market, net of unamortized debt issuance costs.
“Debt conversion costs” includes the cost of early conversion of our 2008 convertible notes with related deferred financing costs and deferred financing costs associated with the replacement of our $60 million line of credit with a $120 million line of credit in 2004.
“Pre-payment of note receivable” includes the amount we received for pre-payment of our note receivable due from EasyLink in excess of the carrying amount recorded.
“Other, net” includes gains and losses from other non-operating activities.
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 revenues and expenses during the reporting period. Actual results could differ from the estimates. See the section entitled “—Critical Accounting Policies.” The following discussion and analysis provides information which we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion should be read in conjunction with our consolidated financial statements contained herein and notes thereto.
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Table of ContentsResults of Operations
The following table presents the percentage relationship of certain statements of operations line items to total revenues for our consolidated operating results for the periods indicated:
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Table of ContentsThe following table presents certain financial information about our Data Communications and Conferencing & Collaboration business segments and for unallocated corporate costs for the periods presented (in millions), with amortization expense and asset impairments allocated to the appropriate operating segment:
The following table presents financial information based on our continuing geographic segments for the years ended December 31, 2004, 2003 and 2002 (in millions):
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Table of ContentsRevenues
Consolidated revenues from continuing operations were $449.4 million in 2004, $381.3 million in 2003 and $341.3 million in 2002. Consolidated revenues in 2004 and 2003 increased from the previous year by 17.9% and 11.7%, respectively.
Data Communications revenue was 54.9%, 58.7%, and 59.5% of consolidated revenues for 2004, 2003 and 2002, respectively. Data Communications revenue was $246.9 million in 2004, $223.8 million in 2003 and $202.9 million in 2002. Revenues in both 2004 and 2003 increased from the previous year by 10.3%. These increases were associated with growth in our transactional messaging, desktop fax and e-mail services. Additionally, these increases were augmented by our acquisitions of Cable & Wireless USA, Inc. (C&W), BillWhiz, Inc. d/b/a Linkata Technologies and MediaLinq, an outsource division of Captaris, Inc. operated by Captaris’ wholly-owned subsidiary, MediaTel Corporation (Delaware) in 2003 and of Adval Communications, Inc. and its affiliates, Unimontis AG and its affiliates, and I-Media, SA and its affiliates in 2004, and the positive effect of foreign exchange rates to the U.S. dollar. An analysis of the effect of foreign exchange rate changes to the U.S. dollar can be found in “Quantitative and Qualitative Measures.” Total billable Data Communications minutes were 3.4 billion in 2004, 2.9 billion in 2003 and 2.2 billion in 2002.
Conferencing & Collaboration revenue was 45.1%, 41.4% and 40.6% of consolidated revenues for 2004, 2003 and 2002, respectively. Conferencing & Collaboration revenue was $202.8 million in 2004, $157.7 million in 2003 and $138.5 million in 2002. Revenues in 2004 and 2003 increased from the previous year by 28.6% and 13.9%, respectively. These increases were associated with growth in our Web collaboration and automated audio conferencing services. Additionally, these increases were augmented by our acquisitions of Affinity Conferencing Services, Inc. in 2003 and Resource Communications, Inc. (RCI), the conferencing services division of ClearOne Communications, Inc., Connect-us Communications, LLC and Conference Call Services, Inc. (CCS) in 2004, and the positive effect of foreign exchange rates to the U.S. dollar. An analysis of the effect of foreign exchange rate changes to the U.S. dollar can be found in “Quantitative and Qualitative Measures.” Total billable Conferencing & Collaboration minutes were 1.9 billion in 2004, 1.3 billion in 2003 and 0.9 billion in 2002.
Geographically, we have experienced revenue growth in North America, Europe and Asia Pacific as a result of existing service revenue growth, acquisitions as mentioned above and the favorable effect of foreign exchange rates to the U.S. dollar. North America revenue was $293.3 million in 2004, $246.9 million in 2003 and $228.8 million in 2002. North America revenue in 2004 and 2003 increased 18.8% and 7.9% from the previous year, respectively. European revenue was $84.0 million in 2004, $69.4 million in 2003 and $56.6 million in 2002. European revenue in 2004 and 2003 increased from the previous year by 21.0% and 22.7%, respectively. Asia Pacific revenue was $72.1 million in 2004, $65.0 million in 2003 and $55.9 million in 2002. Asia Pacific revenue in 2004 and 2003 increased from the previous year by 10.9% and 16.2%, respectively. At current foreign exchange rates and with our continued international expansion effort, we expect continued growth in Europe and Asia Pacific.
Cost of revenues
Consolidated cost of revenues were 35.8%, 38.1%, and 37.5% of consolidated revenues in 2004, 2003 and 2002, respectively. Consolidated cost of revenues from continuing operations increased 10.4% to $160.7 million in 2004 from $145.5 million in 2003 and increased 13.8% in 2003 from $127.9 million in 2002. The decrease in cost of revenues as a percentage of revenues from 2003 to 2004 is the result of our contract re-negotiations with telecommunications service providers and network consolidation at both Data Communications and Conferencing & Collaboration. Total annual estimated cost savings from these initiatives were approximately $18.0 million. These costs savings were offset in part by reductions in the average selling price per minute of the service offerings of both Data Communications and Conferencing & Collaboration. The increase in cost of revenues as a percentage of revenues from 2002 to 2003 was the result of reductions in the average selling price per minute at a greater rate than reductions in cost of revenues. We expect cost of revenues as a percentage of revenues to remain stable or to slightly decline as a result of continued contract re-negotiations with our telecommunications service providers, continued network consolidation and our introduction of new technologies. Data Communications cost of revenues represented $87.0 million in 2004, $81.8 million in 2003 and $71.7 million in 2002, or 35.2%, 36.6% and 35.3% of segment revenue, in 2004, 2003 and 2002, respectively. Conferencing & Collaboration cost of revenues represented $73.9 million in 2004, $63.9 million in 2003 and $56.3 million in 2002, or 36.5%, 40.5% and 40.7% of segment revenue, in 2004, 2003 and 2002, respectively.
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Table of ContentsSelling and marketing
Consolidated selling and marketing costs from continuing operations as a percent of consolidated revenues were 26.2%, 26.6%, and 26.2% in 2004, 2003 and 2002, respectively. Consolidated selling and marketing costs from continuing operations increased 16.2% to $117.7 million in 2004 from $101.3 million in 2003, and increased 13.9% in 2003 from $89.0 million in 2002. The growth in selling and marketing costs and the consistency in the percent of revenues is the result of increased direct selling headcount, indirect selling channel expansion, acquisitions and costs associated with marketing programs to promote new service offerings. We expect selling and marketing expenses as a percentage of revenue will continue to grow as IBM becomes a smaller percentage of our consolidated revenues. Selling and marketing costs related to IBM as a percentage of revenue are significantly lower than for our other customers. We continue to re-invest in selling and marketing resources to expand distribution channels and geographic reach for our various service offerings. Data Communications selling and marketing expense represented $67.9 million in 2004, $64.3 million in 2003 and $61.6 million in 2002, or 27.5%, 28.7% and 30.4% of segment revenue, in 2004, 2003 and 2002, respectively. Conferencing & Collaboration selling and marketing expense represented $49.8 million in 2004, $37.0 million in 2003 and $27.4 million in 2002, or 24.6%, 23.4% and 19.8% of segment revenue, in 2004, 2003 and 2002, respectively. Included in selling and marketing costs for 2004 is $0.3 million of sales incentive compensation which was awarded in the form of non-cash restricted shares.
General and administrative
Consolidated general and administrative costs from continuing operations as a percentage of consolidated revenues were 11.1%, 11.6% and 13.4% in 2004, 2003 and 2002, respectively. Consolidated general and administrative costs from continuing operations increased 12.6% to $50.1 million in 2004 from $44.5 million in 2003, and decreased 2.4% in 2003 from $45.6 million in 2002. The increase in general and administrative costs on an absolute dollar basis in 2004 compared to 2003 is the result of corporate governance costs associated with our Sarbanes-Oxley compliance initiatives of approximately $2.8 million and temporary administrative functional costs associated with the acquisitions we made in 2004. These increases were offset by a reduction in bad debt experience in Conferencing & Collaboration. The decrease in general and administrative costs in 2003 compared to 2002 is the result of reductions in general and administrative support headcount in the two business segments and Corporate and reduced bad debt experience at Conferencing & Collaboration. As a percentage of revenues, general and administrative costs have declined from 2002 to 2004 as a result of the benefit of increased revenues leveraging the semi-fixed cost structure of our general and administrative costs. We expect general and administrative costs to continue to decline as a percentage of revenues as we continue to increase revenues over this semi-fixed cost structure. Data Communications general and administrative expense represented $21.4 million in 2004, $20.8 million in 2003 and $17.3 million in 2002, or 8.7%, 9.3% and 8.5% of segment revenue, in 2004, 2003 and 2002, respectively. Conferencing & Collaboration general and administrative expense represented $14.7 million in 2004, $12.1 million in 2003 and $12.5 million in 2002, or 7.2%, 7.7% and 9.1% of segment revenue, in 2004, 2003 and 2002, respectively. Unallocated corporate general and administrative expense represented $14.0 million in 2004, $11.4 million in 2003 and $15.8 million in 2002.
Research and development
Consolidated research and development costs from continuing operations as a percentage of consolidated revenues were 2.4%, 2.2% and 2.1% in 2004, 2003 and 2002, respectively. Consolidated research and development costs from continuing operations increased 28.0% to $11.0 million in 2004 from $8.6 million in 2003, and increased 18.4% in 2003 from $7.2 million in 2002. In absolute dollars, research and development costs increased as a result of our expanded service offerings and the transition of some of our services to VoIP delivery at Data Communications and Conferencing & Collaboration. As our service offerings and modalities expand, we expect continued expansion in this area of our business as required to meet our customers’ needs. Data Communications research and development expense represented $8.8 million in 2004, $6.5 million in 2003 and $5.4 million in 2002, or 3.6%, 2.9% and 2.7% of segment revenue, in 2004, 2003 and 2002, respectively. Conferencing & Collaboration research and development expense represented $2.2 million in 2004, $2.1 million in 2003 and $1.8 million in 2002, or 1.1%, 1.3% and 1.3% of segment revenue, in 2004, 2003 and 2002, respectively.
Depreciation
Consolidated depreciation costs from continuing operations as a percentage of consolidated revenues were 5.9%, 6.2% and 6.3% in 2004, 2003 and 2002, respectively. Consolidated depreciation costs from continuing
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Table of Contentsoperations increased 11.9% to $26.4 million in 2004 from $23.6 million in 2003 and increased 9.5% from $21.5 million in 2002. Depreciation costs as a percentage of revenue have remained relatively stable to slightly down as we have invested in our infrastructure prudently to meet growth in our business and at the same time have found more cost effective ways to provide for these capacity needs through the use of new technologies. Data Communications depreciation expense represented $15.3 million in 2004, $14.2 million in 2003 and $13.1 million in 2002, or 6.2%, 6.4% and 6.5% of segment revenue, in 2004, 2003 and 2002, respectively. Conferencing & Collaboration depreciation expense represented $10.1 in 2004, $8.4 million in 2003 and $7.5 million in 2002, or 5.0%, 5.3% and 5.4% of segment revenue, in 2004, 2003 and 2002, respectively. Unallocated corporate depreciation costs remained relatively constant at $0.9 million for 2004, 2003 and 2002. These costs represent leasehold costs and the cost of shared back-office systems.
Amortization
Consolidated amortization from continuing operations as a percentage of consolidated revenues was 2.0%, 1.8% and 3.2% in 2004, 2003 and 2002, respectively. Consolidated amortization from continuing operations was $8.9 million, $6.7 million and $10.9 million in 2004, 2003 and 2002, respectively. Amortization expense has increased in absolute dollars as a result of our acquisitions, and as a percentage of revenues remained stable as a result of the above-mentioned accretive acquisitions and the organic revenue growth of both business segments.
Restructuring costs
Consolidated restructuring costs from continuing operations as a percentage of consolidated revenues was 0.0%, 2.9% and 0.5% in 2004, 2003 and 2002, respectively. Consolidated restructuring costs from continuing operations were $0.0 million, $10.9 million and $1.8 million in 2004, 2003 and 2002, respectively.
During 2003, management executed a plan to reduce annual operating expenses through a reduction in personnel costs related to our operations, sales and administration and the abandonment of certain facilities deemed to have no future economic benefit on us, net of estimated sublease payments. Data Communications incurred expenses of approximately $9.3 million, comprised of severance and exit costs of approximately $3.7 million and contractual lease obligations of approximately $5.6 million, including estimated sublease income of $3.1 million. Conferencing & Collaboration incurred expenses of approximately $1.0 million, including approximately $0.6 million in severance and exits costs and approximately $0.4 million in contract termination and other associated costs. Corporate incurred expenses of approximately $0.7 million relating to severance obligations due to our former chief legal officer. We expect future cash payments for these activities of approximately $0.4 million for each of the next five years.
During 2002, Data Communications and Corporate terminated employees pursuant to a plan to reduce headcount and sales and administration costs. The combined costs associated with the restructuring plan total $1.5 million. Also, in the fourth quarter of 2002, Data Communications decided to exit the voice messaging business in Australia due to declining revenue and the need to make substantial capital investments. The costs associated with exiting this business of $0.3 million are primarily non-cash and represent the loss on disposal of these voice messaging assets. We expect no future cash payments for these activities.
Asset impairments
Asset impairments were $3.2 million in 2002. During the fourth quarter of 2002, we assessed the carrying value of the customer lists at Data Communications pursuant to SFAS No. 144. Using the best estimate approach, the fair value of certain customer lists associated with the Asia Pacific markets of Data Communications experiencing a decline in previously acquired real-time fax businesses were determined to be less than the carrying value at December 31, 2002, resulting in a $3.2 million asset impairment.
Equity based compensation
Consolidated equity based compensation charges from continuing operations as a percentage of consolidated revenues were 0.7%, 0.8% and 0.5% in 2004, 2003 and 2002, respectively. Consolidated equity based compensation charges from continuing operations were $3.3 million, $2.9 million and $1.9 million in 2004, 2003 and 2002, respectively. This expense is comprised of several components including the vested portion of the shares tendered in our 2001 option exchange offer, which resulted in an expense of $0.3 million, $0.6 million and $1.3 million in 2004, 2003 and 2002, the vested portion of restricted shares issued to management in 2001 which resulted
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Table of Contentsin an expense of $0.5 million, $0.4 million and $0.5 million in 2004, 2003 and 2002, respectively, and the variable compensation expense associated with options not tendered in the exchange for restricted shares which resulted in an expense of approximately $0.4 million and $1.1 million in 2004 and 2003, respectively, because the market value of our common stock was greater than the exercise price of a portion of the options. At December 31, 2002, no expense was recorded because the exercise price of each of these options was greater than the market value of our common stock. In addition to the above items, in 2004 and 2003, we recognized approximately $2.1 million and $0.9 million in non-cash stock compensation expense, respectively. In 2004, $1.6 million of this expense related to employees, and $0.5 million was as a result of the modification of a director stock option grant in connection with the resignation of a member of our board of directors in June 2004. In 2003, $0.4 million of this expense related to non-employees, $0.2 million related to employees and $0.3 million relates to the acceleration of options associated with the resignation of several board members.
Net legal settlements and related expenses
Net legal settlements and related expenses were $7.3 million in 2002. Net legal settlements and related expenses in 2002 consisted of approximately $3.3 million attributable to the settlement of the shareholder class action lawsuit and $4.0 million for a shareholder lawsuit relating to the acquisition of our Conferencing & Collaboration business segment.
Interest expense
Interest expense from continuing operations was $4.7 million, $9.6 million and $11.5 million in 2004, 2003 and 2002, respectively. Interest expense decreased in 2004 as a result of the conversion of our 2008 convertible notes. See “—Liquidity and Capital Resources.” This decrease in interest expense was offset in part by average outstanding borrowings of $35.9 million on our credit facility which carries a variable interest rate tied to LIBOR plus a pre-determined margin or the prime lending rate. Interest expense decreased in 2003 as a result of the repurchase and redemption of $157.5 million of our 2004 convertible notes and $4.1 million of term loans offset by the interest expense associated with our 2008 convertible notes issued in August 2003. For a description of our convertible notes, see “—Liquidity and capital resources.”
Interest income
Interest income was $0.6 million, $0.9 million and $1.5 million in 2004, 2003 and 2002, respectively. The decrease in interest income in 2004 was the result of maintaining lower average cash and cash equivalents and using that excess capital to fund acquisitions or invest in our infrastructure. Average cash and cash equivalents were $20.6 million in 2004, $35.1 million in 2003 and $54.5 million in 2002. The decrease in interest income in 2003 was the result of a decrease in cash and cash equivalents of $44.8 million as a result of our repurchase and/or redemption of the 2004 convertible notes and the pay-off of several employee loans during 2003.
Debt conversion costs
In May 2004, we called for early redemption of our 2008 convertible notes shortly after the closing price of our common stock had exceeded 150% of the conversion price for 20 trading days within a period of 30 consecutive trading days. All holders of our 2008 convertible notes elected to convert these notes into our common stock prior to the redemption date. All holders received accrued and unpaid interest and the interest make-whole amount. We funded the interest make-whole cash payment from our line of credit. $17.0 million of debt conversion costs, comprised of $16.3 million of interest make-whole payment and $0.7 million of deferred financing costs, related to the refinancing of our previous $60.0 million credit facility with our June 2004 $120.0 million line of credit. For a discussion of our line of credit, see “—Liquidity and capital resources—Capital resources.”
(Loss) gain on sale of marketable securities
(Loss) gain on marketable securities was $(16,000), $1.6 million and $0.9 million in 2004, 2003 and 2002, respectively. During 2004, we bought and sold securities of various companies in the same industry as Data Communications and Conferencing & Collaboration for aggregate proceeds less commission of $1.8 million and realized losses of approximately $16,000. During 2003, we sold all of our remaining shares of our investment in WebMD Corporation for aggregate proceeds less commissions of $0.8 million and realized gains of approximately $0.6 million. In addition, we sold all of our investment in EasyLink common stock for aggregate proceeds less commissions of $2.1 million and realized gains of approximately $1.0 million. During 2002, we sold 133,857 shares of our investment in WebMD for aggregate proceeds less commissions of approximately $1.0 million and realized gains of approximately $0.9 million.
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Table of ContentsGain on prepayment of note receivable
In October 2003, we paid AT&T approximately $1.9 million in cash and issued to AT&T a seven-year warrant to purchase 250,000 shares of our common stock at $9.36 per share in exchange for a secured promissory note issued by EasyLink in the original principal amount of $10.0 million and 1,423,980 shares of EasyLink’s Class A common stock, as well as costs associated with the investment. The warrant was recorded at its fair market value under the Black-Scholes method. We modified the payment terms of the EasyLink note at the time of transfer. The EasyLink note issued in favor of AT&T was payable in 13 quarterly installments commencing in June 2003 and accrued interest at a rate of 12%. Under the amended payment schedule, we were entitled to receive aggregate payments of approximately $13.8 million, consisting of ten quarterly payments of $0.8 million which commenced December 1, 2003, and a balloon payment of approximately $5.8 million on June 1, 2006. During the fourth quarter of 2004, EasyLink re-financed our note receivable with funding from a third party and pre-paid the remaining outstanding amounts due of approximately $8.5 million. Accordingly, we recorded a pre-payment gain of approximately $8.5 million because we did not have any remaining carrying value recorded. Prior to the pre-payment of this note receivable, management determined that we were not able to reasonable estimate the future cash payments to be received on the EasyLink note due to the financial condition of EasyLink. The EasyLink note was accounted for in accordance with AICPA Statement of Position 03-03 “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.”
Gain on repurchase of bonds
Our board of directors authorized our management to repurchase or redeem our 2004 convertible notes in the open market or in privately negotiated transactions, at management’s discretion. During 2003, we used existing cash, borrowings on our line of credit and the net proceeds from our 2008 convertible notes offering to repurchase or redeem approximately $157.5 million in face value of the 2004 convertible notes, resulting in a gain of approximately $41,000. See “—Capital resources.”
Other, net
Other, net was $2.4 million, $0.1 million and $(8,000) in 2004, 2003 and 2002, respectively. We have recorded gains of $2.0 million for the year ended December 31, 2004 as a result of the quarterly EasyLink payment received, as discussed above, in excess of the original estimated carrying value of the note receivable of $1.9 million. The residual increase of approximately $0.4 million in 2004 was the result of the acceptance of early payment of the remaining deferred purchase price owed to C&W’s successor in interest, SAVVIS, Inc., at a discount resulting in a gain.
Effective income tax rate
In 2004, 2003 and 2002, our effective income tax rate varied from the statutory rate, primarily as a result of non-deductible asset impairments associated with acquisitions that have been accounted for under the purchase method of accounting and changes in calculating valuation allowances and estimates. Changes in valuation allowances and estimates are required when facts and circumstances indicate that realization of tax benefits or the actual amount of taxes expected to be paid has changed. During 2003 and 2004, we reviewed our provision for uncertain tax matters associated with our former PTEK Ventures operating segment. The results of our review indicated it was appropriate to reduce certain provisions by approximately $3.3 million and $9.0 million for the years ended December 31, 2004 and 2003, respectively. We do not expect any future adjustments for uncertain tax matters associated with our former PTEK Ventures operating segment. In addition, during 2003, we utilized certain tax planning strategies to reduce taxes and additional exposures were identified associated with revenue agent examinations. The net effect of these tax strategies and additional exposures was a benefit of approximately $0.2 million. During the year ending December 31, 2002, we realized tax benefits of approximately $5.6 million that consisted of approximately $3.4 million related to foreign taxes and approximately $2.2 million related to revised estimates of deferred tax asset and liability values.
Without this tax benefit, income from continuing operations for the years ended December 31, 2004 and 2003 would have been $37.4 million and $17.9 million, respectively. Net income for the years ended December 31, 2004 and 2003 would have been $38.6 million and $16.9 million, respectively. Basic income per share from
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Table of Contentscontinuing operations for the years ended December 31, 2004 and 2003 would have been $0.59 and $0.33, respectively. Diluted income per share from continuing operations would have been $0.54 and $0.31 for the years ended December 31, 2004 and 2003, respectively. Basic net income per share for the years ended December 31, 2004 and 2003 would have been $0.60 and $0.31, respectively. Diluted net income per share would have been $0.56 and $0.29 for the years ended December 31, 2004 and 2003, respectively.
We believe we are appropriately accrued for income taxes. If we are required to pay an amount less than or exceeding our provisions for uncertain tax matters, the financial impact will be reflected in the period in which the matter is resolved. In the event that actual results differ from these estimates, we may need to adjust our tax accounts which could materially impact our financial condition and results of operations.
Discontinued operations
Consistent with our focus on increasing our market leadership, we retained a financial advisor to assist in evaluating strategic alternatives for portions of our business during 2001. As a result of that evaluation, we decided to pursue the separation of Voicecom from our consolidated group. On March 26, 2002, we sold substantially all the assets of Voicecom to an affiliate of Gores Technology Group for a total purchase price of approximately $22.4 million, comprised of cash and the assumption of certain Voicecom liabilities. In accordance with SFAS No. 144, the transaction was accounted for as a discontinued operation in the first quarter of 2002. The Voicecom discontinued operations included the loss from operations through the closing date and the loss on disposal.
During 2004, we changed the estimated liability for certain lease obligations associated with the discontinued operations of our former Voicecom reportable segment. This change in estimate is attributable to certain sublease arrangements that we entered into with regard to former Voicecom facilities and, as a result, we recorded a gain on discontinued operations of $1.2 million, net of taxes.
During 2003, an arbitrator issued his ruling relating to franchise disputes brought by Digital, a former franchisee of the Voicecom business segment. The arbitrator found that the Digital franchise was constructively terminated in December 2001 and that the franchise value was approximately $1.0 million. The arbitrator rejected other pending claims, except a $15,000 award to the franchisor for equipment that was ordered and used by the franchisee for which no payment was made. This settlement amount and related legal fees of approximately $0.5 million has been included in the discontinued operations line item in the income statement. See Note 18— “Commitments and Contingencies” to the consolidated financial statements.
During 2002, we assessed the Voicecom liabilities that were retained at the time of the sale and determined, based upon the activity in these accounts and the passage of time, that certain of these liabilities were no longer required. Thus, an adjustment was made to these estimates reducing the loss on discontinued operations of approximately $2.9 million, net of taxes.
Acquisitions
We acquire companies that increase our market share and bring us additional customers, technology, applications and sales personnel. All revenues and related costs from these transactions have been included in our consolidated financial statements as of the effective date of each acquisition.
Conferencing & Collaboration
In November 2004, Conferencing & Collaboration acquired the outstanding stock ofCCS, a U.S.-based provider of audio and Web-conferencing services. We paid $15.0 million in cash at closing and expect to pay $1.2 million in non-compete fees, transaction fees and closing costs. We funded the purchase through our line of credit. We followed SFAS No. 141, “Business Combinations” (SFAS No. 141), and approximately $1.4 million of the aggregate purchase price has been allocated to acquired working capital, $2.1 million has been allocated to acquired fixed assets, $1.5 million has been allocated to severance and lease termination costs and certain other acquisition liabilities, $1.0 million has been allocated to a non-compete agreement which is being amortized over a five-year contractual term and $3.0 million has been allocated to identifiable customer lists which are being amortized over a five-year useful life. In addition, $1.5 million has been allocated to long-term deferred tax liabilities to record the step up in basis for the non-complete and customer lists. The residual $11.7 million of the aggregate purchase price has been allocated to goodwill which is subject to a periodic impairment assessment in accordance with SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets” (SFAS 142).
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Table of ContentsIn September 2004, Conferencing & Collaboration acquired substantially all of the assets and assumed certain liabilities of Connect-us, a U.S.-based provider of audio and Web-conferencing services. We paid $9.0 million in cash at closing and $0.1 million in transaction fees and closing costs. We funded the purchase through our line of credit. We followed SFAS No. 141 and approximately $0.5 million of the aggregate purchase price has been allocated to acquired working capital, $0.7 million has been allocated to severance and lease termination costs and certain other acquisition liabilities, $0.2 million has been allocated to acquired fixed assets, $0.6 million has been allocated to a non-compete agreement which is being amortized over a five-year contractual term and $2.5 million has been allocated to identifiable customer lists which are being amortized over a five-year useful life. The residual $6.0 million of the aggregate purchase price has been allocated to goodwill which is subject to a periodic impairment assessment in accordance with SFAS No. 142.
In July 2004, Conferencing & Collaboration acquired substantially all of the assets and assumed certain liabilities of the conference calling services operating segment of ClearOne, a U.S.-based provider of audio and Web-conferencing services, broadcast messaging services and conference calling telephony equipment. We paid $21.2 million in cash at closing and $0.3 million in transaction fees and closing costs. We funded the purchase through our line of credit. We followed SFAS No. 141 and approximately $1.1 million of the aggregate purchase price has been allocated to acquired working capital, $0.5 million has been allocated to severance and lease termination costs and certain other acquisition liabilities, $3.1 million has been allocated to acquired fixed assets and $4.5 million has been allocated to identifiable customer lists which are being amortized over a five-year useful life. The residual $13.3 million of the aggregate purchase price has been allocated to goodwill which is subject to a periodic impairment assessment in accordance with SFAS No. 142.
In April 2004, Conferencing & Collaboration acquired substantially all of the assets and assumed certain liabilities of RCI, a U.S.-based provider of audio and Web-conferencing services and broadcast messaging services. We paid $20.5 million in cash at closing and $0.4 million in transaction fees and closing costs. We funded the purchase through our line of credit. We followed SFAS No. 141 and approximately $0.5 million of the aggregate purchase price has been allocated to acquired working capital, $0.6 million has been allocated to severance and lease termination costs and certain other acquisition liabilities, $0.3 million has been allocated to acquired fixed assets and $5.0 million has been allocated to identifiable customer lists which are being amortized over a five-year useful life. The residual $15.7 million of the aggregate purchase price has been allocated to goodwill which is subject to a periodic impairment assessment in accordance with SFAS No. 142.
In July 2003, Conferencing & Collaboration acquired substantially all of the assets and assumed certain liabilities of Affinity Conferencing, a reseller of our conferencing and collaboration services. We were required to pay a minimum of approximately $0.3 million up to a maximum of approximately $0.5 million in cash purchase price over a one-year earn-out period based on the achievement of specified revenue targets. In July 2004, the earn-out targets were achieved, and the purchase price was adjusted $0.2 million in accordance with SFAS No. 141. We funded the purchase through existing working capital.
Data Communications
In November 2004, Data Communications acquired the outstanding stock of I-Media and its affiliates, a facsimile and e-mail messaging service provider in France and Spain. We paid approximately $24.0 million in cash at closing and $1.2 million in transaction fees and closing costs. We funded the purchase through our line of credit. We followed SFAS No. 141 and approximately $5.9 million of the aggregate purchase price has been allocated to acquired working capital, $0.5 million has been allocated to acquired fixed assets, $2.9 million has been allocated to severance and certain other acquisition liabilities, $0.5 million has been allocated to a non-compete agreement which is being amortized over a one-year period and $4.0 million has been allocated to identifiable customer lists which are being amortized over a five-year useful life. In addition, $1.4 million has been allocated to long-term deferred tax liabilities to record the step up in basis for the customer lists. The residual $18.6 million of the aggregate purchase price has been allocated to goodwill which is subject to a periodic impairment assessment in accordance with SFAS No. 142.
In May 2004, Data Communications, through its local subsidiary, acquired the outstanding stock of Unimontis and its affiliates, a facsimile and e-mail messaging service provider in Switzerland and Germany. We paid $5.0 million in cash at closing and will pay an additional $0.4 million associated with transaction fees, closing costs and non-compete agreements. We funded the purchase through existing working capital. We followed SFAS No. 141 and approximately $0.6 million of the aggregate purchase price has been allocated to acquired working
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Table of Contentscapital, $0.5 million has been allocated to severance and lease termination costs and certain other acquisition liabilities, approximately $2.0 million has been allocated to identifiable customer lists which are being amortized over a five-year useful life and $0.2 million has been allocated to a non-compete agreement which is being amortized over two years. The residual $3.2 million has been allocated to goodwill which is subject to a periodic impairment assessment in accordance with SFAS No. 142.
In February 2004, Data Communications acquired substantially all of the assets and assumed certain liabilities of Adval and its affiliates, a U.S.-based facsimile and e-mail document delivery service provider, for a total purchase price of $1.5 million. We paid $1.3 million in cash at closing and $0.2 million in transaction fees and closing costs. We funded the purchase through existing working capital. We followed SFAS No. 141 and approximately $0.4 million of the aggregate purchase price has been allocated to acquired working capital, and $1.1 million of the aggregate purchase price has been allocated to identifiable customer lists which are being amortized over a five-year useful life.
In September 2003, Data Communications entered into an asset purchase agreement with Captaris and its wholly-owned subsidiary MediaTel, whereby we purchased substantially all of the assets and assumed certain liabilities of MediaLinq, an outsource division of Captaris operated by MediaTel. The aggregate purchase price for MediaLinq was approximately $16.0 million, including $15.4 million paid at closing, subject to a post-closing net working capital adjustment, and approximately $0.6 million is estimated transaction fees and closing costs. We funded the purchase through our existing working capital. We followed SFAS No. 141 and approximately $2.5 million was allocated to acquired working capital and $2.1 million was allocated to acquired fixed assets. The remaining balance was allocated to developed technology of approximately $1.8 million and customer lists of approximately $9.2 million, both of which have an estimated useful life of five years.
In April 2003, Data Communications and its local subsidiary acquired substantially all of the assets and assumed certain liabilities of Linkata, a Canadian company. We will pay a minimum of approximately $0.4 million, up to a maximum of approximately $0.8 million, in cash purchase price at the end of a three-year earn-out period based on the achievement of specified revenue targets. We funded the initial purchase price through existing working capital. The earn-out targets for 2004 were not achieved. If any future earn-out targets are achieved, the purchase price will be adjusted in accordance with SFAS No. 141.
In January 2003, Data Communications acquired substantially all of the assets and assumed certain liabilities related to the U.S.-based e-mail and facsimile messaging business of C&W for a total purchase price of $11.4 million. We paid $6.0 million in cash at closing, $0.4 million in transaction fees and closing costs and were scheduled to pay $5.0 million in 16 equal quarterly installments commencing with the quarter ended March 31, 2003, which was secured by a letter of credit issued under our credit facility. In September 2004, C&W’s successor in interest, SAVVIS, accepted early payment of the remaining acquisition payable owed at a discount, resulting in a gain which we recorded in our third quarter of 2004 of approximately $0.4 million. The letter of credit was terminated and we were released from any further obligation for the deferred purchase price. We funded the purchase through existing working capital.
Liquidity and capital resources
As of December 31 2004, we had $25.9 million in cash and cash equivalents compared to $23.9 million at December 31, 2003. Cash balances residing outside of the U.S. at December 31, 2004 were $18.8 million compared to $19.3 million at December 31, 2003. We repatriate cash for repayment of royalties and management fees charged to international locations from the U.S. Intercompany loans with foreign subsidiaries generally are considered to be permanently invested for the foreseeable future. Therefore, all foreign exchange gains and losses are recorded in the cumulative translation adjustment account on the balance sheet. Based on our potential cash position and potential conditions in the capital markets, we could require repayment of these loans despite the long-term intention to hold them as permanent investments. Net working capital at December 31, 2004 was $27.1 million compared to $8.6 million at December 31, 2003. At December 31, 2004, we had $51.3 million of unused credit available under our line of credit.
Cash provided by operating activities
Consolidated operating cash flows from continuing operations were $82.5 million, $59.8 million and $37.2 million in 2004, 2003 and 2002, respectively. Consolidated operating cash flows from continuing operations increased $22.7 million in 2004 from 2003 and $22.6 million in 2003 from 2002. In 2004, net income from
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Table of Contentscontinuing operations, adjusted for the non-cash items of depreciation, amortization and loss on sale of marketable securities, generated cash of $76.0 million. Working capital changes increased in 2004 to $7.9 million. This change was attributable to growth in our receivables due to revenue growth and acquisitions and reductions in payables associated with the settlement of various disputed payables and our initiative to reduce days payables outstanding. Additional items affecting cash provided by operating activities were payments of various state and international income taxes, payments for previous year’s restructuring activities and payments for obligations resulting from the discontinuance of our Voicecom business segment. In 2003, net income from continuing operations, adjusted for the non-cash items of depreciation, amortization and gain on sale of marketable securities, generated cash of $55.6 million. Working capital changes decreased from $16.5 million in 2002 to $3.4 million in 2003. This change was attributable to reductions in payables associated with the settlement of various disputed payables. Additional items effecting cash provided by operating activities were payments of various state and international income taxes, payments for previous year’s restructuring activities and payments for obligations resulting from the discontinuance of our Voicecom business segment. In 2002, net income from continuing operations, adjusted for the non-cash items of depreciation, amortization and gain on sale of marketable securities, generated cash of $45.9 million.
Cash used in investing activities
Consolidated investing activities from continuing operations used cash of approximately $111.1 million, $41.9 million and $6.2 million in 2004, 2003 and 2002, respectively. Cash used in 2004 was primarily associated with $1.9 million paid for the Adval acquisition, $21.0 million paid for the RCI acquisition, $5.0 million paid for the Unimontis acquisition, $21.5 million paid for the ClearOne acquisition, $9.0 million paid for the Connect-us acquisition, $13.3 million paid for the CCS acquisition, $21.8 million paid for the I-media acquisition and $2.7 million paid for the early payment of the deferred purchase price obligation for C&W. Additionally, we paid $24.8 million in capital expenditures and received $11.7 million from EasyLink related to their note receivable refinancing. Cash used in 2003 was primarily associated with the $7.0 million paid in the C&W acquisition, $15.3 million paid in the MediaLinq acquisition, payments for two smaller acquisitions exceeding payments for prior year acquisitions by $0.2 million, an increase in capital expenditures of $4.7 million and the purchase of marketable securities of $1.6 million. These uses were offset slightly by the incremental proceeds from the sale of marketable securities of $1.9 million over 2002. Also included in the use of cash from investing activities was $1.4 million composed of the $2.2 million in cash paid to AT&T and in outside legal fees related to the EasyLink note, net of $0.8 million in proceeds received from EasyLink.
Cash provided by (used in) financing activities
Consolidated financing activities provided or (used) cash of approximately $30.5 million, $(62.6) million, and $(5.9) million in 2004, 2003 and 2002, respectively. Cash provided by financing activities during 2004 was the result of net borrowings on our credit facility of $63.0 million to fund our acquisition activity, $11.6 million received from stock option exercises, offset in part by the redemption of the remaining outstanding balance on our 2004 convertible notes of $15.0 million, the interest make-whole payment associated with the early conversion of our 2008 convertible notes of $16.3 million and treasury stock purchases of $12.8 million. The increase in cash used of $(56.7) million from 2002 to 2003 is primarily the result of the repurchase and redemption of $157.5 million of our 2004 convertible notes and incremental debt payments for equipment loans and capital leases of $7.0 million in 2003. These uses were offset by the $82.7 million in proceeds from the issuance of our 2008 convertible notes, the net borrowings on our line of credit of $5.0 million, the incremental proceeds from stock option exercises of $15.0 million and a $5.1 million decrease in the amount of treasury stock purchased in 2003 as compared to 2002.
Off-balance sheet arrangements
As of December 31, 2004, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Commitments and contingencies
At December 31, 2004, we had the following contractual obligations. We are primarily obligated under operating leases for network facilities and office space, outstanding balances, LIBOR interest and commitment fees under our line of credit, remaining cash payments on current and prior year acquisitions and telecommunications service contractual minimum purchase agreements.
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Table of ContentsThe following table displays contractual obligations as of December 31, 2004 (in thousands):
State sales taxes
We recorded provisions for certain state sales tax contingencies based on the likelihood of obligation, when needed in accordance with SFAS No. 5. “Accounting for Contingencies,” (SFAS No. 5). Historically, we have not assessed to our Conferencing & Collaboration customers these sales taxes or remitted those sales taxes to various state jurisdictions. As of December 31, 2004 and 2003, we had approximately $5.7 million and $4.9 million, respectively, accrued for this potential exposure comprised of sales taxes, penalties and interest. This amount is classified as Accrued Taxes on the face of the consolidated balance sheet. We believe we are appropriately accrued for this potential exposure. In the event that actual results differ from these estimates, we may need to adjust sales tax accounts which could materially impact our financial condition and results of operations.
Income taxes
We recorded provisions for certain asserted international and state income tax contingencies based on the likelihood of obligation, when needed in accordance with SFAS No. 5. As of December 31, 2004, we had approximately $4.0 million accrued for this potential exposure comprised of income taxes, penalties and interest. This amount is classified as Income Taxes Payable on the face of the consolidated balance sheet. In the normal course of business, we are subject to challenges from U.S. and non-U.S. tax authorities regarding the amount of taxes due. These challenges may result in adjustments of the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. Further, during the ordinary course of business, other changing facts and circumstances may impact our ability to utilize income tax benefits as well as the estimated taxes to be paid in future periods. We believe we are appropriately accrued for income tax exposures. In the event that actual results differ from these estimates, we may need to adjust income tax accounts which could materially impact our financial condition and results of operations.
Capital resources
In September 2004, Data Communications entered into a capital lease for the purchase of network equipment. This capital lease has an implied interest rate of 3.3% and a term of 60 months. The principal balance at December 31, 2004 is $0.2 million.
In June, 2004, we entered into a three-year, senior secured revolving credit facility with Bank of America, N.A. as agent. The credit agreement provides for borrowings up to $120.0 million and is subject to customary covenants for secured credit facilities of this nature. This line of credit replaces our previous $60.0 million credit facility with LaSalle Bank. Certain of our material domestic subsidiaries have guaranteed our obligations 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 our material foreign subsidiaries. At December 31, 2004, we believe that we were in compliance with all covenants under our line of credit. Proceeds drawn under this credit agreement may be used for refinancing of existing debt, working
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Table of Contentscapital, capital expenditures, acquisitions and other general corporate purposes. The annual interest rate applicable to borrowings under the line of credit at our option, the base rate (the greater of the federal funds rate plus 0.5% or the Bank of America prime rate) or LIBOR, plus, in each case, an applicable margin which will vary based upon our leverage ratio at the end of each fiscal quarter. At December 31, 2004, the applicable margin with respect to base rate loans was 0.0%, and the applicable margin with respect to LIBOR loans was 1.5%. At December 31, 2004, our interest rate on LIBOR loans was 3.9%. As of December 31, 2004, we had approximately $68.0 million of borrowings outstanding and $0.7 million in letters of credit outstanding under our line of credit.
In May 2004, we exercised our right to redeem our 2008 convertible notes in whole shortly after the closing price of our common stock had exceeded 150% of the conversion price for 20 trading days within a period of 30 consecutive trading days. All holders of our 2008 convertible notes elected to convert their notes into our common stock in advance of the redemption date in lieu of accepting the cash redemption price. All holders received accrued and unpaid interest and the interest make-whole amount. The interest make-whole amount that we paid in cash was funded from our line of credit.
In July 1997, we issued convertible subordinated notes of $172.5 million that matured on July 1, 2004 and bore interest at 5 3/4%. Our 2004 convertible notes were convertible at the option of the holder into our common stock at a conversion price of $33 per share, through the date of maturity, subject to adjustment in certain events. On July 1, 2004, we paid the principal obligation due of $15.0 million with the use of our previous line of credit.
At December 31, 2004, we had no other indebtedness outstanding except for the borrowings under our line of credit and a capital lease obligation for network equipment at Data Communications.
Liquidity
As of December 31, 2004, we had $25.9 million of cash and cash equivalents. We generated positive operating cash flows from each of our operating segments for the year ended December 31, 2004. Each business segment had sufficient cash flows from operations to service existing debt obligations, corporate office expenses and to fund capital expenditure requirements, which are historically 4% to 6% of annual consolidated revenues, and research and development costs for new services and enhancements to existing services, which are historically 2% to 3% of annual consolidated revenues. 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, research and development needs, corporate expenses and contractual commitments and to satisfy our indebtedness and fund our liquidity needs for at least the next 12 months. We obtained our line of credit in June 2004, the proceeds of which were initially used to repay the unpaid balance of our 2004 convertible notes that were due on July 1, 2004 and the interest make-whole payment on our 2008 convertible notes converted in June 2004. We have subsequently drawn on our line of credit in order to fund certain acquisitions. In February 2005, we amended our credit facility to provide for a four-year, $180.0 million revolving line of credit. We intend to fund the approximately $41 million, net of working capital, purchase price of our pending acquisition of the conferencing services business of Citizens Communications with our credit facility. See —“Subsequent Events.” At December 31, 2004, we had $51.3 million of undrawn available credit on our line of credit.
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 operating 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.
Critical Accounting Policies
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” are based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with generally accepted accounting principles in the U.S The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, allowance for uncollectible accounts, goodwill and other intangible assets, income taxes, investments, restructuring costs and legal contingencies.
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Table of ContentsManagement bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.
We have identified the policies below as critical to our business operations and the understanding of our results of operations. For a detailed discussion on the application of these and other accounting policies, see Note 1 to our consolidated financial statements.
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 collectibility is reasonably assured. Revenues consist of fixed monthly fees and usage fees generally based on per minute or transaction rates. Unbilled revenue consists of earned but unbilled revenue which results from the weekly billing cycle that was implemented at the Conferencing & Collaboration business segment during the third quarter of 2002. Deferred revenue consists of payments made by customers in advance of the time services are rendered. Our revenue recognition policies are consistent with the guidance in Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 101A and 101B.
Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.
Allowance for uncollectible accounts receivable. Prior to the recognition of revenue, we make a decision that collectibility is reasonably assured. Over time, management analyzes accounts receivable balances, historical bad debts, customer concentrations, customer creditworthiness, current economic trends, changes in our customer payment terms and trends when evaluating the adequacy of the allowance for uncollectible accounts receivable. Significant management judgment and estimates must be made and used in connection with establishing the allowance for uncollectible accounts receivable in any accounting period. The accounts receivable balance was $72.1 million and $57.8 million, net of allowance for uncollectible accounts receivable of $5.7 million and $4.5 million, as of December 31, 2004 and 2003, respectively.
If the financial condition of our customers were to deteriorate, resulting in an impairment to their ability to make payments, additional allowances may be required.
Goodwill and other intangible assets. Purchase accounting requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair market value of the assets acquired and liabilities assumed. We evaluate acquired businesses for potential impairment indicators whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that management considers important which could trigger an impairment review include the following:
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Table of ContentsIn 2002, Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” became effective and as a result, we ceased to amortize approximately $123.1 million of goodwill. In lieu of amortization, we were required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. Reviews were completed in 2004, 2003 and 2002 and no impairment was identified. Other intangible assets with finite lives that do not meet the criteria of SFAS No. 142 continue to be amortized. We recognize an impairment loss when the fair value is less than the carrying value of such assets and the carrying value of these assets is not recoverable. The impairment loss, if applicable, is calculated based on the estimated future cash flows compared to the carrying value of the long-lived asset. See— “Asset impairments” for a discussion of impairments recorded during 2002. Net intangible assets, long-lived assets and goodwill amounted to $232.7 million and $147.6 million as of December 31, 2004 and 2003, respectively.
Future events could cause us to conclude that the current estimates used should be changed and that goodwill and intangible assets associated with acquired businesses is impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
Income taxes. As part of the process of preparing our consolidated financial statements we are required to estimate our taxes in each of the jurisdictions of operation. This process involves management estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. We must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increases this allowance in a period, an expense is recorded within the tax provision in the consolidated statement of operations.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. The net deferred tax asset as of December 31, 2004 and 2003 was $21.1 million and $31.5 million, net of a valuation allowance of $7.1 million and $10.4 million, respectively. We have recorded the valuation allowance due to uncertainties related to our ability to utilize some of the deferred tax assets, primarily consisting of certain net operating losses carried forward and foreign tax credits, before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which it operates and the period over which the deferred tax assets will be recoverable.
In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance that could materially impact our financial condition and results of operations.
We also record a provision for certain asserted international, federal and state tax contingencies based on the likelihood of obligation, when needed. In the normal course of business, we are subject to challenges from U.S. and non-U.S. tax authorities regarding the amount of taxes due. These challenges may result in adjustments of the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. Further, during the ordinary course of business other changing facts and circumstances may impact our ability to utilize tax benefits as well as the estimated taxes to be paid in future periods. Management believes it has appropriately accrued for tax exposures. If we are required to pay an amount less than or exceeding its provisions for uncertain tax matters, the financial impact will be reflected in the period in which the matter is resolved. In the event that actual results differ from these estimates, we may need to adjust tax accounts which could materially impact its financial condition and results of operations.
Investments. We have investments in equity securities of companies with readily determinable fair values accounted for in accordance with Financial Accounting Standards Board (FASB) SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” SFAS No. 115 mandates that a determination be made of the appropriate classification for equity securities with a readily determinable fair value and all debt securities at the time of purchase and re-evaluation of such designation as of each balance sheet date. Total investments, in the form of marketable securities available for sale, as of December 31, 2004 and 2003 were $0.6 million.
Restructuring costs. The restructuring accruals are based on certain estimates and judgments related to contractual obligations and related costs. The restructuring accruals related to contractual lease obligations could be materially affected by factors such as our ability to secure sublessees, the creditworthiness of sublessees and the success at negotiating early termination agreements with lessors.
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Table of ContentsIn the event that actual results differ from these estimates, we may need to establish additional restructuring accruals or reverse accrual amounts accordingly.
Legal contingencies. We are currently involved in certain legal proceedings as disclosed in Item 3. “Legal Proceedings,” of this report. Management has accrued an estimate of the probable costs for the resolution of these claims. This estimate has been developed in consultation with outside counsel handling these matters and is based upon an analysis of potential results, assuming a combination of litigation and settlement strategies.
In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. Our estimates are subject to change and we adjust the financial impact in the period in which they are resolved. See the audited consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by generally accepted accounting principles.
New Accounting Pronouncements
In December 2004, the FASB, issued a revision to SFAS 123, “Share-Based Payment” (SFAS No. 123R), that amends existing accounting pronouncements for share-based payment transactions in which an enterprise receives employee and certain non-employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using APB 25 and generally requires such transactions be accounted for using a fair-value-based method. SFAS No. 123R’s effective date would be applicable for awards that are granted, modified, become vested, or settled in cash in interim or annual periods beginning after June 15, 2005. SFAS No. 123R includes three transition methods: one that provides for prospective application and two that provide for retrospective application. We intend to adopt SFAS No. 123R prospectively commencing in the third quarter of the fiscal year ending December 31, 2005; it is expected that the adoption of SFAS No. 123R will cause us to record, as expense each quarter, a non-cash accounting charge approximating the fair value of such share based compensation meeting the criteria outlined in the provisions of SFAS No. 123R; as of December 31, 2004, we have approximately 2.1 million granted stock options and 0.5 million granted restricted shares outstanding which had not yet become vested. There are two acceptable methods of valuing options under the revision, the black-sholes method and the binomial method. We are currently assessing the impact on our 2005 earnings using the two acceptable methods of valuing these options, and the ability to discount the fair value of unvested restricted shares.
In December 2004, the FASB issued FASB Staff Position 109-1 (FSP 109-1) and 109-2 (FSP 109-2). FSP 109-1 provides guidance on the application of SFAS 109, “Accounting for Income Taxes,” with regard to the tax deduction on qualified production activities provision within H.R. 4520 The American Jobs Creation Act of 2004 (Act) that was enacted on October 22, 2004. FSP 109-2 provides guidance on a special one-time dividends received deduction on the repatriation of certain foreign earnings to qualifying U.S. taxpayers. The Act contains numerous provisions related to corporate and international taxation. In FSP 109-2, the Financial Accounting Standards Board acknowledged that, due to the proximity of the Act’s enactment date to many companies’ year-ends and the fact that numerous provisions within the Act are complex and pending further regulatory guidance, many companies may not be in a position to assess the impacts of the Act on their plans for repatriation or reinvestment of foreign earnings. Therefore, the FSP provided companies with a practical exception to the permanent reinvestment standards of SFAS No. 109 and APB No. 23 by providing additional time to determine the amount of earnings, if any, that they intend to repatriate under the Act’s provisions. We are not yet in a position to decide whether, and to what extent, we might repatriate foreign earnings to the U.S. Therefore, under the guidance provided in FSP 109-2, no deferred tax liability has been recorded in connection with the repatriation provisions of the Act. We are currently analyzing the impact of the temporary dividends received deduction provisions contained in the Act.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS No. 151 to have any effect on our consolidated financial position or results of operations.
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Table of ContentsIn December 2003, the FASB issued a revision to FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46-R). FIN 46 is an Interpretation of Accounting Research Bulletin 51, “Consolidated Financial Statements,” and addresses consolidation by business enterprises of variable interest entities (VIEs) that possess certain characteristics. The revision clarifies the definition in the original release than potentially could have classified any business as a VIE. The revision also delays the effective date of the Interpretation from the first reporting period following December 15, 2003 to the first reporting period ending after March 15, 2004. The revision was effective for us in the first quarter of fiscal 2004. We have not identified any VIEs and, accordingly, the application of this Interpretation did not have an effect on our results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 had no impact on our results of operations or financial position as we did not have any financial instruments with characteristics of both liabilities and equity as of December 31, 2004.
Subsequent Events
In February 2005, we closed an amendment to our credit facility that provides for a four-year, $180 million revolving line of credit. The new facility, with a syndicate led by Bank of America, N.A, increases our existing $120 million line and will be available for working capital and expansion opportunities.
In February and March 2005, we repurchased an aggregate of 635,000 shares of our common stock in open market transactions under our stock repurchase program for approximately $6.5 million.
In February 2005, we announced that Conferencing & Collaboration signed a definitive agreement to acquire the conferencing services business of Citizens Communications, for approximately $41 million, net of working capital. This acquisition is expected to close late in the first quarter of 2005, and we plan to fund the purchase with our credit facility.
Risk Factors Affecting Future Performance
Risks Relating to Our Industry
The markets for our services are intensely competitive, and we may not be able to compete successfully against existing and future competitors that may make it difficult to maintain or increase our market share and revenues.
The markets for our services are intensely competitive, and we expect competition to increase in the future. For information regarding the markets in which each of our business units compete, see the section entitled “Business – Competition.” Many of our current and potential competitors, such as major telecommunications service providers, have longer operating histories, greater name recognition, more robust product offerings, more comprehensive support organizations, larger customer bases and substantially greater financial, personnel, marketing, engineering, technical and other resources than we do. As a result, our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in customer demands. They may also be able to devote greater resources than we can to the development, promotion and sale of their products and services. We believe that our current competitors are likely to expand their service offerings and new competitors are likely to enter our markets. Some of our existing and potential competitors may enter into or expand their positions in the markets in which we compete through acquisitions, strategic alliances and the development of integrated service offerings. For example, West Corp. acquired InterCall and ConferenceCall.com and Microsoft Corp., acquired PlaceWare, Inc. and integrated PlaceWare’s services into Microsoft Office System. Increased competition could result in price pressure on our products and services and a decrease in our market share in the various markets in which we compete, either of which could hinder our ability to grow our revenues.
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Table of ContentsTechnological changes and the development of alternatives to our services may cause us to lose customers and market share and may hinder our ability to maintain or grow our revenues.
The market for our services is characterized by rapid technological change, frequent new service introductions and evolving industry standards. We expect new services, and enhancements to existing services, to be developed and introduced that will compete with our services. Technological advances may result in the development and commercial availability of alternatives to or new methods of delivering, our services and pricing options that could be more attractive to our customers. These developments could cause our existing services to become obsolete, result in significant pricing pressure on our services or allow our existing and potential customers to meet their own business communications needs without using our services. For example, if customers more rapidly adopt IP-based conferencing services or IP-based PBX systems, our results of operations could be adversely affected. We do not typically have long-term contractual agreements with our customers, and any of these developments could result in significant customer loss.
We must continually introduce new services in response to technological changes, evolving industry standards and customer demands for enhancements to our existing services. For example, in response to evolving industry standards, we recently released DocuManager in Europe and Asia Pacific and smsREACH in North America and enhancements to our existing services with the launch of ReadyConference Plus 2.0, but these services may not be as successful as those of our competitors. We will not be able to gain market share and increase our revenues if we are unable to develop new services, or if we experience delays in the introduction of new services. Our ability to successfully develop and market new services and enhancements that respond to technological changes, evolving industry standards or customer demands, is dependent on our ability to:
We are subject to pricing pressures for our services which could cause us to lose market share and decrease revenues and profitability.
We compete for customers based on several factors, including price. A decrease in the rates charged for services by our competitors could cause us to reduce the rates we charge for our services. If we cannot compete based on price, we may lose market share. If we reduce our rates without increasing our volume or our market share, our revenues could decrease. For example, in 2004 and 2003, increased competition and decreased demand for Data Communications’ traditional store and forward fax business resulted in a decrease in Data Communications revenue. In some cases, our competitors may offer their services at reduced rates or for free on a trial basis in order to win customers. In addition, telecommunications service providers own the underlying telecommunications network and can offer services similar to ours at reduced rates as a result of these reduced telecommunications costs. Further, if we reduce our rates and our costs of providing our services do not decrease proportionately, or if they increase, this could have a material adverse effect on our results of operations.
Risks Relating to Our Business
Our future success depends on market acceptance of our new services.
Market acceptance of our new services often requires that individuals and enterprises accept new ways of communicating and exchanging information. Our growth depends on the successful development and introduction of new services and enhancements to our existing services. For example, we recently released DocuManager in Europe and Asia Pacific and smsREACH in North America and intend to launch our SIP-based and prepaid conferencing services in the second quarter of 2005. A decline in the demand for, or the failure to achieve broad market acceptance of, our new services could hinder our ability to maintain and increase our revenues. We believe that broad market acceptance of our new services will depend on several factors, including:
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If we do not meet these challenges, our new services may not achieve broad market acceptance or market acceptance may not occur quickly enough to justify our investment in these services.
If we cannot successfully integrate new technologies, services and systems, we may not generate sufficient revenues and operational synergies may not develop.
We continuously integrate new technologies, service offerings and systems. We have experienced and may continue to experience difficulty integrating new technologies into our networks. For example, we have experienced delays in our testing of our SIP-based conferencing service that we intend to launch in the second quarter of 2005. These delays resulted from our underlying carrier’s inability to properly support this service in the time periods we initially anticipated. In addition, we have experienced system integration issues in connection with some of our acquisitions which resulted in higher than normal telecommunications costs for certain periods of time. If we cannot successfully integrate new technologies, services and systems, we may not generate sufficient revenues and operational synergies may not develop.
Concerns regarding security of transactions and transmitting confidential information over the Internet and public networks may have an adverse impact on the use of our Web-enabled services.
We must securely receive and transmit confidential information for our customers over the Internet and public networks. Concerns regarding the security of confidential information transmitted over the Internet and public networks may prevent customers from using our Web-based services. Despite the measures we have taken, our infrastructure is potentially vulnerable to physical or electronic break-ins, viruses or similar problems. If a person circumvents our security measures, he or she could misappropriate proprietary information or cause interruption in our operations. Security breaches that result in access to confidential information could damage our reputation and expose us to a risk of loss or liability. We may be required to make significant investments in efforts to protect against and remedy these types of security breaches. Additionally, as electronic commerce becomes more widespread, our customers will become more concerned about security. If we are unable to adequately address these concerns, our business and results of operations could suffer.
Technological obsolescence of our equipment could result in substantial capital expenditures.
Technological advances may result in the development of new equipment and changing industry standards, which could cause our equipment to become obsolete. These events could require us to invest significant capital in upgrading or replacing our equipment. For example, we are currently in the process of introducing IP-based equipment into our bridges and may need to increase our number of ports if adoption of VoIP is more rapid than expected.
If we fail to increase our network capacity to meet customer demands, the quality of our service offerings may suffer.
As network usage grows, we will need to add capacity to our hardware, software and facilities with telecommunications equipment that route telephone calls. We continuously attempt to predict growth in our network usage and add capacity accordingly. If we do not accurately predict and efficiently manage growth in our network usage, the quality of our service offerings may suffer and we may lose customers.
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Table of ContentsDowntime in our network infrastructure could result in the loss of significant customers and revenues.
We currently maintain facilities with telecommunications equipment that routes telephone calls and computer telephony equipment in locations throughout the world. The delivery of our services is dependent, in part, upon our ability to protect the equipment and data at our facilities against damage that may be caused by fire, power loss, technical failures, unauthorized intrusion, natural disasters, sabotage and other similar events. Despite taking a variety of precautions, we have experienced downtime in our networks from time to time and we may experience downtime in the future. We have implemented changes to prevent this in the future, however, these types of service interruptions could result in the loss of significant customers, which could cause us to lose revenues. We take substantial precautions to protect ourselves and our customers from events that could interrupt delivery of our services. These precautions include physical security systems, uninterruptible power supplies, on-site power generators, upgraded back-up hardware, fire protection systems and other contingency plans. In addition, some of our networks are designed so that the data on each network server is duplicated on a separate network server. We also maintain business interruption insurance providing for aggregate coverage of approximately $80.6 million per policy year. However, we may not be able to maintain insurance for this risk in the future, or it may not continue to be available at reasonable prices. Even if we maintain insurance for this risk, it may not be sufficient to compensate us for losses that we experience due to our inability to provide services to our customers.
Interruption in third party services that we use could result in service delays and disruptions and a loss of significant customers and revenues.
Our ability to maintain and expand our business depends, in part, on our ability to continue to obtain telecommunications and Web-based services on favorable terms from long distance telecommunications service providers, local exchange carriers and Internet service providers. We do not own a transmission network. As a result, we depend on a variety of third party providers for long-distance telecommunications services, call origination and termination local transmission and Internet access. We have experienced delays and disruptions in our services in the past due to service interruptions from these providers. For example, we have experienced interruptions in service as a result of our underlying carriers’ network outages and as a result of increased traffic volumes. Any interruptions in the delivery of our services could result in a loss of significant customers and revenues.
If we cannot increase revenues from existing or new Conferencing & Collaboration customers to make up for lost revenues from one of our historically largest customers, our financial performance may be negatively impacted.
One of Conferencing and Collaboration’s customers, IBM, historically accounted for a significant amount of our revenues. Of our consolidated revenues from continuing operations, sales to IBM accounted for approximately 12% in 2002, 11% in 2003 and 11% in 2004. Of Conferencing and Collaboration segment revenue from continuing operations, sales to IBM accounted for approximately 29% in 2002, 27% in 2003 and 24% in 2004. Because IBM has chosen to insource most of its automated conferencing needs, we expect sales to IBM will account for approximately 2% to 3% of consolidated revenues in 2005. If we are unable to increase revenues from other existing and new Conferencing & Collaboration customers or retain IBM as a customer at the levels currently forecasted, the decrease in IBM revenues going forward could result in a material adverse effect on our business, financial condition and results of operations.
Our inability to efficiently utilize or re-negotiate minimum purchase requirements in our long distance telecommunications supply agreements could decrease our profitability.
Our ability to maintain and expand our business depends, in part, on our ability to continue to obtain telecommunications services on favorable terms from telecommunications service providers. Agreements with some of our telecommunications service providers contain minimum purchase requirements through 2009. In addition, certain circuits that we purchase are subject to term requirements, including penalties for early termination of such circuits. The total amount of the minimum purchase requirements in 2004 was approximately $9.2 million, and we incurred telecommunications costs in excess of these minimums. It is possible that other telecommunications suppliers may provide similar services at lower prices, and we may not be able to re-negotiate our current supply agreements to achieve comparable lower rates. Further, we can give no assurance that we will be able to utilize the minimum amount of services that we are required to purchase under these agreements. If we are unable to obtain telecommunications services on favorable terms, or if we are required to purchase more services than we are able to utilize in the operation of our business, the costs of providing our services would likely increase, which could decrease our profitability and have a material adverse effect on our business, financial condition and results of operations.
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Table of ContentsOur level of indebtedness may harm our financial condition and results of operations.
We have incurred a substantial amount of indebtedness under our credit facility. As of December 31, 2004, we had approximately $68.7 million of outstanding debt under our credit facility, with approximately $68.0 million in borrowings and $0.7 million in letters of credit outstanding. In addition, we anticipate borrowing additional funds from our credit facility to fund the approximately $41 million, net of working capital purchase price for our pending acquisition of the conferencing services division of Citizens. In February 2005, we increased our line of credit from $120.0 million to $180.0 million. Our level of indebtedness will have several important effects on our future operations, including, without limitation:
At the maturity of our credit facility or in the event of an acceleration of the indebtedness under the 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 from time to time, will become due and payable. However, it is possible that 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.
Our dependence on our subsidiaries for cash flow may negatively affect our business and our ability to meet our debt service obligations.
We conduct substantially all of our business through our subsidiaries. Our ability to pay amounts due under our indebtedness in the future will be dependent upon the ability of our subsidiaries to make cash distributions of earnings, loans or other payments to us based on their earnings and cash flows. The ability of our subsidiaries to make these distributions is and will continue to be restricted by, among other limitations, applicable provisions of governing law and contractual provisions. Our subsidiaries may not have sufficient funds or may not be able to distribute sufficient funds to us to enable us to service or repay such indebtedness.
Our financial performance could cause future write-downs of goodwill or other intangible assets in future periods.
We adopted SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets,” effective January 1, 2002. With the adoption of SFAS No. 142, we ceased amortizing approximately $123.1 million of goodwill. In lieu of amortization, we were required to perform an initial impairment review of our goodwill in 2002 and are required to perform an annual impairment review thereafter. The review in 2002 resulted in an impairment of certain other intangible assets at Data Communications of approximately $3.2 million. Subsequent reviews could result in impairment write-downs to goodwill and/or other intangible assets. As of December 31, 2004, we had $192.1 million of goodwill and $40.6 million of other intangible assets reflected on our financial statements for which amortization will continue.
We may be subject to assessment of income, state sales and other taxes for which we have not accrued.
We may have to pay past international and state income, state sales or other taxes that we have not accrued for. As of December 31, 2004, we had approximately $4.0 million and $5.7 million accrued for potential exposure for asserted international and state income taxes and for state sales taxes, respectively, including penalties and interest. If international or state taxing authorities assess taxes, penalties and interest in amounts greater than our current accruals, our financial results would be adversely impacted. We do not currently assess or collect sales taxes
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Table of Contentson sales of our services to our Conferencing & Collaboration customers. Some states may claim that some of our Conferencing & Collaboration services are subject to sales taxes. If these taxing authorities were to require us to pay sales or other taxes on the past sales of these services, we may have to pay these taxes out of our own funds because we may not be able to go back to our customers to collect these taxes. Subjecting our services to any such taxes would increase our operating costs and could have a material adverse affect on our financial results.
If our quarterly results do not meet the expectations of public market analysts and investors, our stock price may decrease.
Our quarterly revenues are difficult to forecast because the market for our services is rapidly evolving. Our expense levels are based, in part, on our expectations as to future revenues. If our revenue levels are below expectations, we may be unable or unwilling to reduce expenses proportionately, and our operating results would likely be adversely affected. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. It is likely that in some future quarter our operating results may fail to meet the expectations of public market analysts and investors. In this event, the market price of our common stock will likely decline.
Our operating results have varied significantly in the past and may vary significantly in the future. Specific factors that may cause our future operating results to vary include:
Our pending shareholder litigation could be costly, time consuming and a diversion to management and, if adversely determined, could result in substantial liabilities.
Regardless of the ultimate outcome of our pending shareholder litigation, this matter could be costly, time consuming and a diversion to management and other resources. If the outcome of this matter is adverse to us, it could result in substantial damages. For a description of this shareholder litigation, please see Part I, Item 3. “Legal Proceedings” of this annual report on Form 10-K.
The performance of our business depends on attracting and retaining qualified key personnel.
Our performance depends on attracting and retaining key personnel, including executive, sales and marketing personnel and customer support, product development and other technical personnel. Failure to do so could have a material adverse effect on the performance of our business and the results of our operations.
Our articles and bylaws and Georgia corporate law may inhibit a takeover which may not be in the interests of our shareholders.
There are several provisions in our articles and bylaws and under Georgia corporate law that may inhibit a takeover, even when a takeover may be in the interests of our shareholders. For example, our board of directors is empowered to issue preferred stock without shareholder action. The existence of this “blank-check” preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a tender offer, merger, proxy contest or otherwise. Our articles also divide our board into three classes, as nearly equal in size as possible, with staggered three-year terms. The classification of the board could make it more difficult for a third party to acquire control of us because our shareholders elect only one-third of the members of the board each year. We are also subject to provisions of the Georgia corporate law that relate to business combinations with interested
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Table of Contentsshareholders, which can serve to inhibit a takeover. In addition to considering the effects of any action on us and our shareholders, our articles permit our board to consider the interests of various constituencies, including employees, customers, suppliers and creditors, communities in which we maintain offices or operations and other factors which they deem pertinent, in carrying out and discharging their duties and responsibilities and in determining what is believed to be in our best interests.
Risks Related to Acquisitions
We face risks in connection with completed or potential acquisitions.
Our growth has been enhanced through acquisitions of businesses, products and technologies that we believe will complement our business. We regularly evaluate acquisition opportunities, frequently engage in acquisition discussions, conduct due diligence activities in connection with possible acquisitions, and, where appropriate, engage in acquisition negotiations. We may not be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired operations into our existing operations or expand into new markets. In addition, we compete for acquisitions and expansion opportunities with companies that have substantially greater resources, and competition with these companies for acquisition targets could result in increased prices for possible targets. Acquisitions also involve numerous additional risks to us and our investors, including:
For example, we experienced some additional development costs for the implementation of NMS ports from the I-Media acquisition. We are currently integrating the operations of I-Media and are in the process of completing the integration of MediaLinq’s operations with Data Communications’ operations. In addition, upon the closing of our pending acquisition of Citizens conferencing services division, we will need to focus our efforts on the integration of that division’s operations with Conferencing & Collaboration’s operations. If we fail to adequately manage these acquisition risks, the acquisitions may not result in revenue growth, operational synergies or service or technology enhancements, which could adversely affect out financial results.
Risks Related to Intellectual Property
We may not be able to protect our proprietary technology and intellectual property rights, which could result in the loss of our rights or increased costs.
We rely primarily on a combination of intellectual property laws and contractual provisions to protect our proprietary rights and technology, brand and marks. These laws and contractual provisions provide only limited protection of our proprietary rights and technology. If we are not able to protect our intellectual property and our proprietary rights and technology, we could lose those rights and incur substantial costs policing and defending those rights. Our means of protecting our intellectual property, proprietary rights and technology may not be adequate, and our competitors may independently develop similar or competitive technologies. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the U.S
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Table of ContentsIf claims alleging patent, copyright or trademark infringement are brought against us and successfully prosecuted against us, they could result in substantial costs.
Many patents, copyrights and trademarks have been issued in the general areas of information services, telecommunications, computer telephony and the Internet. From time to time, in the ordinary course of our business, we have been and expect to continue to be subject to third party claims that our current or future products or services infringe the patent, copyright or trademark rights or other intellectual property rights of third parties. If these types of claims are brought, we ultimately may not prevail and any claiming parties may have significantly greater resources than we have to pursue litigation of these types of claims. Any infringement claim, whether with or without merit, could:
We have received letters from Ronald A. Katz Technology Licensing, L.P., informing us of the existence of its respective patents and the potential applicability of those patents on our services. We are currently considering this matter. In addition, certain of our former Voicecom customers have alleged that we are obligated to indemnify them against patent infringement claims made by Katz against such customers. We do not believe that we have an obligation to indemnify such customers. However, due to the inherent uncertainties of litigation, we are unable to predict the outcome of any potential litigation as a result of any of these claims, and any adverse outcome could have a material effect on our business, financial condition and results of operations.
Risks Related to Government Regulation
Recent regulatory changes may discourage certain customers from using some of our Data Communications services and could adversely impact our results of operations.
Recent legislative and regulatory changes have imposed additional restrictions that may impact our business. Such changes include the passage of federal legislation to curb unsolicited commercial e-mail, or “spam,” and additional restrictions on telemarketing and advertising via facsimile. These changes include the establishment of a nationwide “do not call” registry for residential and wireless telephone numbers. The Telephone Consumer Protection Act of 1991 and associated rules promulgated by the FCC prohibit the sending of unsolicited advertisements via facsimiles, and proscribe certain telemarketing practices. Other recent federal laws are being implemented by the FTC that also substantially regulate telemarketing. Compliance with the new legislation and regulations could have an adverse impact on the volume of facsimile, e-mail and voice messages sent utilizing Data Communications’ platforms. For example, the FCC has delayed the effective date for amendments to its rules requiring prior written consent and deleting the established business relationship exemption for unsolicited facsimile advertisements until June 30, 2005. If the FCC decides to retain these amendments to its rules that require prior written consent, it may discourage use by some of our Data Communications customers of our facsimile services and could adversely impact our Data Communications revenue. In addition, we could be subject to litigation concerning our compliance and our customers’ compliance with these laws and regulations, as well as governmental enforcement actions, regulatory fines and penalties.
Government regulations in the U.S. and internationally and the legal uncertainties related to the Internet and electronic communications may adversely affect the demand for our services and place financial burdens on our business related to compliance.
Our operations are, and may be, subject to laws and regulations in the U.S. and internationally regulating the unsolicited transmission of facsimile communications and e-mail and telemarketing laws and regulations. We monitor such laws and regulations, and our service agreements with customers state that customers are responsible for their compliance with all applicable laws and regulations. We could, nevertheless, be subject to litigation, fines, losses or other penalties under such laws and regulations.
New laws and regulations directed specifically at electronic commerce and the Internet may be adopted at the federal, state and international levels. These laws and regulations may cover issues such as collection and use of
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Table of Contentsdata from Web sites, privacy, e-mail, network and information security, “spamming,” pricing, content, copyrights and other intellectual property, VoIP, changes in telecommunications regulations, online gambling and distribution and quality of goods and services. The enactment of any additional laws or regulations may impede the growth of our Web-enabled products and services and place additional financial burdens on our business in order to comply with new laws and regulations.
We may become subject to various government regulations applicable to traditional telecommunictions service providers, which could impair our ability to deliver our services and adversely impact our results of operations.
Our business is affected by regulatory decisions, trends and policies made by federal, state, local and international telecommunications regulatory agencies, including the FCC and state public service commissions. We do not believe that our services are subject to the same regulations as those applicable to traditional telecommunications service providers in the U.S. However, regulatory authorities may take a different position and may seek to regulate our services, or to impose requirements, including filing and fee requirements, applicable to providers of traditional telephone services upon our services. For example, we recently received letters from the Investigations and Hearing Division of the FCC’s Enforcement Bureau regarding filing and remittance requirements applicable to traditional telephone companies. We use reasonable efforts to ensure that our operations comply with applicable regulatory requirements. However, if we fail to comply with any applicable government regulations, or if we were required to submit to the jurisdiction of such government authorities as providers of traditional telephone services, we could be temporarily prohibited from providing portions of our services, may have to restructure portions of our services, could become subject to ongoing reporting and compliance obligations or could be subject to fines, forfeitures or other penalties for noncompliance. Subjecting our services to these regulations would increase our operating costs and could have a material adverse affect on our financial results.
We may become subject to new laws and regulations involving services and transactions in the areas of electronic commerce, which could increase costs of compliance.
In conducting our business, we are subject to various laws and regulations relating to commercial transactions generally, such as the Uniform Commercial Code, and we are also subject to the electronic funds transfer rules embodied in Regulation E promulgated by the Board of Governors of the Federal Reserve System. Congress has held hearings regarding, and various agencies are considering, whether to regulate providers of services and transactions in the electronic commerce market. It is possible that Congress, the states or various government agencies could impose new or additional requirements on the electronic commerce market or entities operating therein. If enacted, these laws, rules and regulations could be imposed on our business and industry and could result in substantial compliance costs.
Risks Related to International Operations and Expansion
There are risks inherent in international operations that could hinder our international growth strategy.
Our ability to achieve future success will depend in part on the expansion of our international operations. There are difficulties and risks inherent in doing business on an international level that could prevent us from selling our services in other countries or hinder our expansion once we have established international operations, including, among other things, the following:
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We could experience losses from fluctuations in currency exchange rates.
Because we conduct business outside the U.S., some of our expenses and revenues are derived in foreign currencies. In particular, a significant portion of our Data Communications business is conducted outside the U.S., and a significant portion of our revenues and expenses from that business are derived in foreign currencies. Accordingly, we could experience material losses due to fluctuations in foreign currencies. We have not experienced any material losses from fluctuations in currency exchange rates, but we could in the future. We typically denominate foreign transactions in foreign currency and have not regularly engaged in hedging transactions, although we may engage in hedging transactions from time to time in the future.
FORWARD-LOOKING STATEMENTS
When used in this annual report on Form 10-K 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 the following factors:
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We caution that these factors are not exclusive. Consequently, all of the forward-looking statements made in this annual report on Form 10-K 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 Form 10-K. We take on no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Form 10-K, or the date of the statement, if a different date.
Item 7A. 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. Derivative instruments are not currently used and, if utilized, are employed as risk management tools and not for trading purposes.
At December 31, 2004, we had borrowings of $68.0 million outstanding on our line of credit that were subject to interest rate risk. Each 100 basis point increase in interest rates relative to these borrowings would impact annual pretax earnings and cash flows by approximately $0.1 million based on the December 31, 2004 debt level.
Approximately 34.7% and 35.3% of our consolidated revenues from continuing operations and 36.1% and 36.2% of our operating expenses from continuing operations were transacted in foreign currencies in 2004 and 2003, respectively. As a result, fluctuations in exchange rates impact the amount of our reported sales and operating income. A hypothetical positive or negative change of 10% in foreign currency exchange rates would positively or negatively change revenues for 2004 and 2003 by approximately $15.6 million and $13.4 million, respectively, and operating expenses for 2004 and 2003 by approximately $12.2 million and $10.9 million, respectively. Historically, our principal exposure has been related to local currency sales, operating costs and expenses in Europe and Asia Pacific (principally the United Kingdom, Australia, Germany and Japan). We have not used derivatives to manage foreign currency exchange risk, and no foreign currency exchange derivatives were outstanding at December 31, 2004.
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Table of ContentsItem 8. Financial Statements and Supplementary Data
PTEK Holdings, Inc. and Subsidiaries Index to Consolidated Financial Statements
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Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Premiere Global Services, Inc.
We have audited the accompanying consolidated balance sheets of Premiere Global Services, Inc. and subsidiaries (the “Company” formerly PTEK Holdings, Inc.) as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of the Company for the year ended December 31, 2002 were audited by other auditors whose report, dated March 27, 2003, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 2004 and 2003 consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Atlanta, Georgia March 14, 2005
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Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Premiere Global Services, Inc.:
In our opinion, the accompanying consolidated statements of operations, of cash flows and shareholders’ equity for the year ended December 31, 2002 present fairly, in all material respects, the results of operations and cash flows of Premiere Global Services, Inc. (f/k/a PTEK Holdings, Inc.) and its subsidiaries for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Statement No. 142 on January 1, 2002.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia March 27, 2003
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Table of ContentsPREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2004 and 2003 (in thousands, except share data)
Accompanying notes are integral to these consolidated financial statements
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Table of ContentsPREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2004, 2003 and 2002 (in thousands, except share and per share data)
Accompanying notes are integral to these consolidated financial statements.
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Table of ContentsPREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Years Ended December 31, 2004, 2003 and 2002 (in thousands)
Accompanying notes are integral to these consolidated financial statements.
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Table of ContentsPREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2004, 2003 and 2002 (in thousands)
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