UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________________ to ____________________
COMMISSION FILE NUMBER: 001-13577
PREMIERE GLOBAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
GEORGIA
(State or other jurisdiction of incorporation or organization)
59-3074176
(I.R.S. Employer Identification No.)
3280 PEACHTREE ROAD NW
THE TERMINUS BUILDING, SUITE 1000
ATLANTA, GEORGIA 30305
(Address of principal executive offices, including zip code)
(404) 262-8400
(Registrant's telephone number including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at November 5, 2007
----- -------------------------------
Common Stock, $0.01 par value 62,101,746 Shares
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
----
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 2007 and December 31, 2006 1
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 2007 and 2006 2
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2007
and 2006 3
Notes to Condensed Consolidated Financial Statements 4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 32
Item 4 Controls and Procedures 32
PART II OTHER INFORMATION
Item 1 Legal Proceedings 33
Item 1A. Risk Factors 34
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds 34
Item 3 Defaults Upon Senior Securities 34
Item 4 Submission of Matters to a Vote of Security Holders 34
Item 5 Other Information 34
Item 6 Exhibits 34
SIGNATURES 36
EXHIBIT INDEX 37
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2007 2006
------------- ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and equivalents $ 27,720 $ 18,977
Accounts receivable (less allowances of $5,145 and $7,551, respectively) 97,493 82,875
Prepaid expenses and other current assets 11,548 7,742
Deferred income taxes, net 8,770 11,972
--------- ---------
Total current assets 145,531 121,566
PROPERTY AND EQUIPMENT, NET 101,799 88,062
OTHER ASSETS
Goodwill 317,094 295,185
Intangibles, net of amortization 37,989 38,357
Deferred income taxes, net 556 --
Other assets 5,382 6,145
--------- ---------
$ 608,351 $ 549,315
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 54,886 $ 48,967
Income taxes payable 6,975 878
Accrued taxes 7,436 6,011
Accrued expenses 34,393 28,697
Current maturities of long-term debt and capital lease obligations 1,560 2,044
Accrued restructuring costs 2,366 4,800
--------- ---------
Total current liabilities 107,616 91,397
--------- ---------
LONG-TERM LIABILITIES
Long-term debt and capital lease obligations 258,198 136,738
Accrued restructuring costs 1,773 2,339
Accrued expenses 4,631 1,831
Deferred income taxes, net -- 719
--------- ---------
Total long-term liabilities 264,602 141,627
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 150,000,000 shares authorized, 61,880,328 and
70,151,998 shares issued and outstanding in 2007 and 2006, respectively 619 702
Additional paid-in capital 552,966 663,232
Notes receivable, shareholder (2,090) (2,004)
Cumulative translation adjustment 10,094 2,088
Accumulated deficit (325,456) (347,727)
--------- ---------
Total shareholders' equity 236,133 316,291
--------- ---------
$ 608,351 $ 549,315
========= =========
Accompanying notes are integral to these
condensed consolidated financial statements.
1
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2007 2006 2007 2006
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Revenues $ 139,845 $ 122,118 $ 413,490 $ 369,411
Operating Expenses:
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 57,428 49,571 168,106 147,171
Selling and marketing 34,136 31,382 104,996 97,941
General and administrative 15,928 15,442 49,798 44,021
Research and development 3,625 3,118 10,404 8,768
Depreciation 7,239 6,208 21,554 17,973
Amortization 4,081 3,279 11,226 9,526
Restructuring costs -- 928 3,747 4,018
Net legal settlements and related expenses -- -- 284 --
--------- --------- --------- ---------
Total operating expenses 122,437 109,928 370,115 329,418
--------- --------- --------- ---------
Operating income 17,408 12,190 43,375 39,993
--------- --------- --------- ---------
Other (Expense) Income:
Interest expense (4,253) (2,548) (9,159) (6,454)
Interest income 202 74 443 305
Other, net 295 (228) 968 (197)
--------- --------- --------- ---------
Total other (expense) income (3,756) (2,702) (7,748) (6,346)
--------- --------- --------- ---------
Income from continuing operations before income taxes 13,652 9,488 35,627 33,647
Income tax expense 4,884 2,771 12,078 13,264
--------- --------- --------- ---------
Income from continuing operations $ 8,768 $ 6,717 $ 23,549 $ 20,383
--------- --------- --------- ---------
Net income $ 8,768 $ 6,717 $ 23,549 $ 20,383
========= ========= ========= =========
BASIC AND DILUTED EARNINGS:
Income from continuing operations $ 8,768 $ 6,717 $ 23,549 $ 20,383
========= ========= ========= =========
Net income $ 8,768 $ 6,717 $ 23,549 $ 20,383
========= ========= ========= =========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 59,327 67,919 63,669 69,375
========= ========= ========= =========
Basic earnings per share:
Continuing operations $ 0.15 $ 0.10 $ 0.37 $ 0.29
========= ========= ========= =========
Net income $ 0.15 $ 0.10 $ 0.37 $ 0.29
========= ========= ========= =========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 60,402 68,611 64,949 70,147
========= ========= ========= =========
Diluted earnings per share:
Continuing operations $ 0.15 $ 0.10 $ 0.36 $ 0.29
========= ========= ========= =========
Net income $ 0.15 $ 0.10 $ 0.36 $ 0.29
========= ========= ========= =========
Accompanying notes are integral to these
condensed consolidated financial statements.
2
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
---------------------------
2007 2006
--------- ---------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 23,549 $ 20,383
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 21,554 17,973
Amortization 11,226 9,526
Amortization of deferred financing costs 385 366
Net legal settlements and related expenses 284 --
Payments for legal settlements and related expenses -- (2,496)
Deferred income taxes, net of effect of acquisitions 500 (74)
Restructuring costs 3,747 4,018
Payments for restructuring costs (6,543) (3,534)
Payments for discontinued operations (650) (733)
Equity-based compensation 7,908 7,830
Excess tax benefits from share-based payment arrangements 2,510 --
Payments for state sales tax (480) (1,204)
Loss on disposal of assets 146 278
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net (11,343) (5,260)
Prepaid expenses and other current assets (866) (1,503)
Accounts payable and accrued expenses 13,822 (4,477)
--------- ---------
Total adjustments 42,200 20,710
--------- ---------
Net cash provided by operating activities 65,749 41,093
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (30,545) (26,824)
Business acquisitions, net of cash acquired (20,958) (43,291)
--------- ---------
Net cash used in investing activities (51,503) (70,115)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under borrowing arrangements (254,934) (63,098)
Principal proceeds under borrowing arrangements 371,469 120,900
Excess tax benefits for share-based payment arrangements (2,510) --
Purchase of treasury stock, at cost (127,177) (29,566)
Exercise of stock options 7,249 2,168
--------- ---------
Net cash (used in) provided by financing activities (5,903) 30,404
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 400 719
--------- ---------
NET INCREASE IN CASH AND EQUIVALENTS 8,743 2,101
--------- ---------
CASH AND EQUIVALENTS, beginning of period 18,977 20,508
--------- ---------
CASH AND EQUIVALENTS, end of period $ 27,720 $ 22,609
========= =========
Accompanying notes are integral to these
condensed consolidated financial statements.
3
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY AND ITS BUSINESS
We are a global provider of on-demand business process improvement
solutions. Our Premiere Global Communications Operating System (PGiCOS) offers
hundreds of industry specific business applications within the following
solutions: Conferencing, Desktop Fax, Document Delivery, Accounts Receivable
Management, Notifications & Reminders and eMarketing. The unaudited condensed
consolidated balance sheet as of September 30, 2007, the unaudited condensed
consolidated statements of operations for the three and nine months ended
September 30, 2007 and 2006, the unaudited condensed consolidated statements of
cash flows for the nine months ended September 30, 2007 and 2006 and related
footnotes have been prepared in accordance with accounting principles generally
accepted in the United States (GAAP) for interim financial information and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the U.S.
for complete financial statements. The results of operations for the three and
nine months ended September 30, 2007 are not indicative of the results that may
be expected for the full fiscal year of 2007 or for any other interim period.
The financial information presented herein should be read in conjunction with
our annual report on Form 10-K for the year ended December 31, 2006, which
includes information and disclosures not included herein. All significant
intercompany accounts and transactions have been eliminated in consolidation.
2. SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable
Included in accounts receivable at September 30, 2007 and December 31,
2006 was earned but unbilled revenue of approximately $7.3 million and $4.7
million, respectively. Unbilled revenue consists of earned but not yet billed
revenue which results from non-calendar month billing cycles and the one-month
lag time in billing related to certain of our services. Unbilled revenue is
billed within 30 days of calendar month end.
Software Development Costs
Pursuant to the American Institute of Certified Public Accountants
Statement of Position (SOP) 98-1, "Accounting for the Costs of Software
Developed or Obtained for Internal Use," we capitalized development costs
incurred on software associated with new services and enhancements to existing
services. For the three months ended September 30, 2007 and 2006, we capitalized
approximately $4.3 million and $2.5 million, respectively, of software
development costs. For the nine months ended September 30, 2007 and 2006, we
capitalized approximately $10.0 million and $9.9 million, respectively, of
software development costs. These capitalized costs are amortized on a
straight-line basis over the estimated life of the applicable software, not to
exceed three years. Depreciation expense recorded for completed phases of
software development in the three and nine months ended September 30, 2007 was
$0.8 million and $2.3 million, respectively. Depreciation expense recorded for
completed phases of software development in the three and nine months ended
September 30, 2006 was $0.6 million and $1.8 million, respectively.
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 primarily of usage fees
generally based on per minute, per fax page or per transaction methods. To a
lesser extent, we charge subscription fees and fixed period minimum revenue
commitments. Unbilled revenue consists of earned but not yet billed revenue
which results from non-calendar month billing cycles and the one-month lag time
in billing related to certain of our services. Deferred revenue consists of
payments made by customers in advance of the time services are rendered. 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 101A, 101B and SAB 104.
4
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
State sales taxes
We have reserves for certain state sales tax contingencies based on the
likelihood of obligation in accordance with Statement of Financial Accounting
Standards (SFAS) No. 5, "Accounting for Contingencies" (SFAS No. 5).
Historically, we have not collected and remitted state sales tax from our
Conferencing Solutions customers. We were audited by the Commonwealth of
Massachusetts Department of Revenue claiming that our audio conferencing
services are subject to sales tax in Massachusetts. In March 2006, we began
assessing sales tax to our customers in Massachusetts as a result of this audit.
In July 2006, we paid an initial payment of approximately $1.2 million to the
Commonwealth of Massachusetts Department of Revenue for taxable years prior to
2005. Amounts associated with 2005 and early 2006 are still under review and
have yet to be settled. In March 2007, we were approached by the State of
Illinois regarding the taxability of conferencing services in the state. In
April 2007, we began assessing sales tax to our customers in Illinois. Returns
were filed and approximately $0.5 million was paid to the Illinois Department of
Revenue for taxable period prior to March 2007. Additional amounts may be due as
these returns are audited. More states may claim that we are subject to an
assessment of sales taxes. As of September 30, 2007 and December 31, 2006, we
had reserved approximately $4.8 and $4.3 million, respectively, for certain
state sales tax contingencies. These amounts are included in "Accrued taxes" in
the accompanying condensed consolidated balance sheets. We believe we have
appropriately accrued for these contingencies. In the event that actual results
differ from these reserves, we may need to make adjustments which could
materially impact our financial condition and results of operations.
Historically, we have collected and remitted sales tax from our non-Conferencing
Solutions customers in applicable states. However, it is possible states may
disagree with our method of assessing and remitting these state sales taxes.
Income taxes
Income tax expense, income taxes payable and deferred tax assets and
liabilities are determined in accordance with SFAS No. 109. Under SFAS No. 109,
the deferred tax liabilities and assets are determined based on temporary
differences between the basis of certain assets and liabilities for income tax
and financial reporting purposes, in addition to net operating loss
carryforwards which will more likely than not be utilized. These differences are
primarily attributable to differences in the recognition of depreciation and
amortization of property, equipment and intangible assets, allowances for
doubtful accounts and certain employee benefit accruals. Deferred tax assets and
liabilities are measured by applying enacted statutory tax rates applicable to
future years in which the deferred tax assets or liabilities are expected to be
settled or realized. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Permanent
differences are primarily attributable to non-deductible employee compensation
under Section 162(m) of the Internal Revenue Code of 1986, as amended.
On July 13, 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -An
Interpretation of FASB Statement No. 109" (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entity's financial
statements in accordance with FASB Statement No. 109, "Accounting for Income
Taxes" and prescribes a recognition threshold and measurement attributes for
financial statement disclosures of tax positions taken or expected to be taken
on an income tax return. Under FIN 48, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that
is more-than-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN 48 provides
guidance on derecognition, classification, interest, penalties and disclosures.
FIN 48 is effective for fiscal years beginning after December 15, 2006.
We adopted the provisions of FIN 48 on January 1, 2007. We recorded
provisions for certain asserted international and state income tax uncertain tax
positions based on the recognition and measurement standards of FIN 48. As a
result of our adoption of FIN 48, approximately $1.3 million was recorded as a
reduction to retained earnings as an increase to reserves for uncertain tax
positions. At the adoption date of January 1, 2007, we had approximately $7.3
million of unrecognized tax benefits. Included in the balance of unrecognized
tax benefits at January 1, 2007 is approximately $5.6 million, all of which
would affect our effective tax rate if recognized. This amount is classified as
"Income taxes payable" in the accompanying condensed consolidated balance sheet.
We file
5
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
federal income tax returns and income tax returns in various states and
international jurisdictions. In major tax jurisdictions, tax years from
1997-2006 remain subject to income tax examinations by tax authorities.
As permitted with the adoption of FIN 48, we have changed our
classification of interest and penalties related to uncertain tax positions and
recognize these costs in interest and penalties expense. As of January 1, 2007,
we had accrued interest and penalties of approximately $0.9 million related to
uncertain tax positions.
In the normal course of business, we are subject to inquiries from U.S.
and non-U.S. tax authorities regarding the amount of taxes due. These inquiries
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
taxes. In the event that actual results differ from these estimates, we may need
to adjust "Income taxes payable" which could materially impact our financial
condition and results of operations.
Treasury Stock
All treasury stock transactions are recorded at cost. As part of our April
2007 settlement agreement with Crescendo Partners II, L.P., Series E and related
parties, among other things, Crescendo Partners withdrew its proxy contest
related to our 2007 annual meeting of shareholders, and we commenced a $150.0
million self-tender offer to acquire up to 11,857,707 shares of our common stock
at a fixed price of $12.65 per share. During the nine months ended September 30,
2007, we repurchased 9,687,847 shares of our common stock in the open market
pursuant to our self-tender offer for approximately $122.5 million and incurred
costs associated with the tender offer of approximately $0.9 million that
included legal, printing and dealer manager fees that were included in
"Additional paid-in capital." We also repurchased during the nine months ended
September 30, 2007 144,400 shares of our common stock in the open market
pursuant to our Board-approved stock repurchase program for approximately $1.6
million. In addition, we withheld approximately 225,000 shares of our common
stock to satisfy certain of our employees' tax withholdings due upon the vesting
of their restricted stock grants and remitted approximately $2.2 million to the
Internal Revenue Service on their behalf. During the nine months ended September
30, 2006, we repurchased 3,662,038 shares of our common stock in the open market
for approximately $28.0 million pursuant to our Board-approved stock repurchase
programs. In addition, during the nine months ended September 30, 2006, we
withheld approximately 215,000 shares of our common stock to satisfy certain of
our employees' tax withholdings due upon the vesting of their restricted stock
grants and remitted approximately $1.6 million to the IRS on their behalf.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) represents the change in equity of a
business during a period, except for investments by owners and distributions to
owners. Cumulative translation adjustments represent the only component of other
comprehensive income (loss) at September 30, 2007 and December 31, 2006. For the
nine months ended September 30, 2007 and 2006, total other comprehensive income
was approximately $31.6 million and $24.7 million, respectively. Accumulated
other comprehensive loss was $242.4 million and $274.0 million at September 30,
2007 and December 31, 2006, respectively.
New Accounting Pronouncements
We will be required to adopt SFAS No. 157 "Fair Value Measurements" (SFAS
No. 157) for the fiscal year beginning January 1, 2008. SFAS No. 157 provides a
single definition of fair value and a hierarchical framework for measuring it,
as well as establishing additional disclosure requirements about the use of fair
value to measure assets and liabilities. We are in the process of evaluating the
impact of SFAS 157 on our results of operations and financial position.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities" (SFAS No. 159). SFAS No. 159 provides the
option to report certain financial assets and liabilities at fair value, with
the intent to mitigate volatility in financial reporting that can occur when
related assets and liabilities
6
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
are recorded on different bases and is effective for fiscal years beginning
after November 15, 2007. We are in the process of evaluating the impact of SFAS
No. 159, if elected, on our results of operations and financial position.
Reclassifications
Certain prior year amounts in our condensed consolidated financial
statements have been reclassified to conform to our new segment presentation. In
the fourth quarter of 2006, we began reporting our financial results on a
geographic regional basis and no longer report under our former Conferencing &
Collaboration and Data Communications business segments. In the second quarter
of 2007, we completed a detailed review of approximately $2.6 million in credit
balances recorded in "Accounts receivable" and determined that the
classification of these balances in the allowance account was a more appropriate
presentation. The December 31, 2006 allowance balance was adjusted to reflect
this reclassification.
Goodwill and Intangible Assets
Summarized below are the carrying value and accumulated amortization of
intangible assets that continue to be amortized under SFAS No. 142, "Accounting
For Goodwill and Other Intangible Assets" (SFAS No. 142) (in thousands):
September 30, 2007 December 31, 2006
--------------------------------------- ---------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Value Amortization Value Value Amortization Value
-------- ------------ -------- -------- ------------ --------
Intangible assets $169,197 $(131,208) $37,989 $157,788 $(119,431) $38,357
Intangible assets are amortized on a straight-line basis with an estimated
useful life between one and five years. Amortization expense for the intangible
assets above is expected to be approximately $4.1 million for the remainder of
2007, $13.5 million in 2008, $9.7 million in 2009, $5.3 million in 2010, $3.3
million in 2011 and $0.9 million in 2012.
Goodwill and intangible assets by reportable segment at September 30, 2007
and December 31, 2006 are as follows (in thousands):
North Asia
America Europe Pacific Total
--------- --------- --------- ---------
Goodwill carrying value at December 31, 2006 $ 268,458 $ 22,556 $ 4,171 $ 295,185
Additions and adjustments 19,186 2,221 502 21,909
--------- --------- --------- ---------
Goodwill carrying value at September 30, 2007 $ 287,644 $ 24,777 $ 4,673 $ 317,094
========= ========= ========= =========
Intangibles carrying value at December 31, 2006 $ 33,327 $ 3,582 $ 1,448 $ 38,357
Additions and adjustments 10,401 302 155 10,858
Amortization (9,850) (1,052) (324) (11,226)
--------- --------- --------- ---------
Intangibles carrying value at September 30, 2007 $ 33,878 $ 2,832 $ 1,279 $ 37,989
========= ========= ========= =========
7
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. RESTRUCTURING COSTS
Consolidated restructuring costs at December 31, 2006 and September 30,
2007 are as follows (in thousands):
Accrued 2007 Accrued
Costs at Charge To Adjustment Costs at
December 31, Continuing Costs of Accrued September 30,
Consolidated 2006 Operations Incurred Costs 2007
------------ ------------ ---------- -------- ---------- -------------
Accrued restructuring costs:
Severance and exit costs $ 4,027 $ 4,098 $(6,097) $ (452) $ 1,576
Contractual obligations 3,112 100 (649) -- 2,563
------- ------- ------- ------- -------
Accrued restructuring costs $ 7,139 $ 4,198 $(6,746) $ (452) $ 4,139
======= ======= ======= ======= =======
Realignment of Workforce - 2007
During the three months ended June 30, 2007, we executed a restructuring
plan to consolidate our non-Conferencing Solutions service delivery
organizations. As part of this consolidation, we eliminated approximately 86
positions. We incurred approximately $4.1 million in severance costs associated
with the elimination of these positions. Additionally, we incurred $0.1 million
of lease termination costs associated with our Paris, France office. On a
segment basis, these restructuring costs were $1.1 million in North America,
$2.7 million in Europe and $0.4 million in Asia Pacific. Estimated annual
savings from this consolidation is approximately $6.0 million. During the three
and nine months ended September 30, 2007, we paid approximately $2.0 million and
$2.8 million, respectively, related to these severance and exit costs. We
anticipate the majority of this $4.1 million restructuring cost to be paid
during 2007. Our reserve for these restructuring costs at September 30, 2007 was
approximately $1.3 million, which reflects the impact of foreign exchange rate
movement of the reserve balance.
Realignment of Workforce - 2006
In 2006, we executed a restructuring plan to streamline the management of
our business on a geographic regional basis from our former Conferencing &
Collaboration and Data Communications business segments. As part of this
streamlining, we eliminated approximately 100 positions within customer service,
finance, operations and sales and marketing. In the fourth quarter of 2006, we
entered into a separation agreement in connection with the resignation of our
former chief investment officer. We incurred an aggregate of approximately $8.0
million in severance costs associated with the elimination of these positions,
which included the issuance of restricted stock having a fair market value of
$0.6 million. Additionally, we incurred $0.6 million of lease termination costs
associated with five locations within North America. On a segment basis, these
restructuring costs were $4.6 million in North America, $3.2 million in Europe
and $0.7 million in Asia Pacific. In the three and nine months ended September
30, 2007, we paid approximately $0.2 million and $3.4 million, respectively,
related to these severance and exit costs. During the nine months ended
September 30, 2007, we adjusted our restructuring reserve by approximately $0.5
million as a result of actual severance payments to certain individuals being
less than originally estimated. Management expects to pay the majority of these
remaining severance obligations during 2007. Our reserve for these restructuring
costs at September 30, 2007 was approximately $0.2 million. Our reserve for
restructuring costs incurred in years prior to 2006 was approximately $2.6
million at September 30, 2007.
4. ACQUISITIONS AND DISPOSITIONS
We seek to acquire complementary companies that increase our market share
and provide us with additional customers, technologies, applications and sales
personnel. All revenues and related costs from these transactions have been
included in our condensed consolidated financial statements as of the effective
date of each acquisition.
8
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
North America
In July 2007, we acquired assets and the stock of Budget Conferencing, a
Canadian-based provider of audio and Web conferencing services. We paid $19.8
million in cash at closing and $0.6 million in 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, $0.2 million has
been allocated to acquired fixed assets, $1.4 million has been allocated to
other acquisition liabilities, $6.6 million has been allocated to identifiable
customer lists, $1.3 million has been allocated to trademarks and $1.4 million
has been allocated to a non-compete agreement, with the identifiable customer
lists, trademarks and non-compete agreements amortized over five-year useful
lives. In addition, $2.9 million has been allocated to long-term deferred tax
liabilities to record the step-up in basis for the customer lists and developed
technology purchased. Because we have not finalized the working capital
component of the purchase price, the residual $15.2 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 September 2006, we acquired assets and the stock of Enunciate
Corporation, a Canadian-based provider of audio and Web conferencing services.
We paid CA$29.0 million in cash at closing and CA$0.7 million in transaction
fees and closing costs. We funded the purchase through Canadian dollar
borrowings on our line of credit and Canadian dollar cash balances available. We
followed SFAS No. 141, "Business Combinations" (SFAS No. 141), and approximately
CA$0.3 million has been allocated to acquired fixed assets, CA$0.3 million has
been allocated to acquired working capital, CA$6.8 million has been allocated to
identifiable customer lists and CA$0.2 million has been allocated to a
non-compete agreement, with the identifiable customer lists and non-compete
agreement amortized over five-year useful lives. The residual CA$22.1 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 January 2006, we acquired all of the outstanding stock of Accucast,
Inc., a U.S.-based provider of e-mail communication services. We paid $12.3
million in cash at closing and $0.5 million in transaction and closing costs.
Subsequent to closing, we paid an additional $3.0 million cash purchase price
upon the achievement of certain milestone targets as specified in the purchase
agreement. We funded the purchase through our line of credit. We followed SFAS
No. 141, and approximately $0.2 million has been allocated to acquired fixed
assets, $0.1 million has been allocated to other acquisition liabilities, $2.0
million has been allocated to developed technology and $1.0 million has been
allocated to identifiable customer lists, with the identifiable customer lists
and developed technology amortized over five-year useful lives. In addition,
$1.2 million has been allocated to long-term deferred tax liabilities to record
the step-up in basis for the customer lists and developed technology purchased.
The residual $13.9 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.
Asia Pacific
In November 2006, we acquired certain assets and assumed certain
liabilities of EC Teleconferencing Pty Ltd. (ECT), an Australian-based provider
of audio and Web conferencing services. We paid AU$5.7 million in cash at
closing and AU$0.4 million in transaction fees and closing costs. We funded the
purchase through a Yen-denominated line of credit with Sumitomo Mitsui Banking
and Australian dollar cash available. We followed SFAS No. 141, and
approximately AU$0.1 million of the aggregate purchase price has been allocated
to acquired fixed assets, AU$0.5 million has been allocated to acquired working
capital, AU$1.4 million has been allocated to identifiable customer lists and
AU$0.1 million has been allocated to a non-compete agreement, with the
identifiable customer lists and non-compete agreement amortized over five-year
useful lives. The residual AU$4.0 million of the aggregate purchase price has
been preliminarily allocated to goodwill, which is subject to a periodic
impairment assessment in accordance with SFAS No. 142.
5. INDEBTEDNESS
In April 2006, we closed an amendment to our credit facility, with a
syndicate led by Bank of America, N.A., which increased the amount available to
us under our line of credit from $180.0 million to $300.0 million,
9
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
reduced the applicable percentages across the pricing grid and extended the
maturity of the credit facility from February 2009 to April 2011. The amendment
also provided for an uncommitted accordion feature allowing for an additional
increase of $100.0 million to $400.0 million of the revolving credit line,
subject to the terms and conditions as set forth in the amendment. In April
2007, we entered into an amendment to our credit facility which inserted into
the applicable margin pricing grid a new tier based on a total leverage ratio of
2.5 times or greater, increased the permitted covenant level of the consolidated
total leverage ratio and amended certain other provisions to allow us to
purchase, redeem or otherwise acquire up to an additional $150.0 million of our
common stock during 2007, of which approximately $122.6 million has been used to
fund our self-tender offer in the second quarter of 2007. The credit facility is
subject to customary covenants for secured credit facilities of this nature.
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 65.0% of our material foreign subsidiaries. We believe
that as of September 30, 2007, we were in compliance in all material respects
with the covenants under our line of credit. Proceeds drawn under this credit
agreement may be used for refinancing of existing debt, working capital, capital
expenditures, acquisitions and other general corporate purposes. The annual
interest rate applicable to borrowings under the line of credit, at our option,
is 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
September 30, 2007, the applicable margin with respect to base rate loans was
0.0%, and the applicable margin with respect to LIBOR loans was 1.50%. At
September 30, 2007, our interest rate on 30-day LIBOR loans was 6.62875%. As of
September 30, 2007, we had approximately $255.0 million of borrowings
outstanding and approximately $1.7 million in letters of credit outstanding
under our line of credit.
In February 2006, we entered into a three-year $50.0 million interest rate
swap at a fixed rate of 4.99% plus applicable spread, and in August 2006, we
entered into two separate three-year $12.5 million interest rate swaps at 5.135%
and 5.159%, respectively. These swaps were exclusive of our applicable margin as
stated in our credit facility. We did not designate these interest rate swaps as
hedges and accounted for them in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." During the second quarter of
2007, we terminated these interest rate swaps and recorded a gain of
approximately $0.4 million in "Interest expense" in the accompanying condensed
consolidated statements of operations. Changes in fair value prior to the
termination of these swaps were approximately $0.1 million for the six months
ended June 30, 2007 and are recognized in earnings.
In August and September 2007, we entered into two $100.0 million two-year
interest rate swaps at a fixed rate of approximately 4.99% plus applicable
spread. These swaps are exclusive of our applicable margin as stated in our
credit facility. We did not designate these interest rate swaps as hedges and
will account for them in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Changes in fair value, which
were approximately $0.2 million for the three months ended September 30, 2007
are recognized in earnings.
In March and September 2006, we entered into our Yen-denominated line of
credit for (Y)200.0 million and (Y)300.0 million, respectively, with Sumitomo
Mitsui Banking which have interest rates of 1.875% and 1.61%, respectively,
through March 2008. In May 2007, the (Y)200.0 million line of credit was amended
to (Y)300.0 million. As of September 30, 2007, there were no outstanding
borrowings under these facilities.
At September 30, 2007, we had no other indebtedness outstanding except for
the borrowings under our lines of credit and capital lease obligations with
principal balances totaling approximately $4.8 million.
6. EQUITY-BASED COMPENSATION
On January 1, 2006, we adopted, using the modified prospective
application, SFAS 123(R), "Share Based Payment" (SFAS 123(R)). SFAS 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. It did not change the accounting guidance for share-based payment
transactions with parties other than employees provided in SFAS 123, "Accounting
for Stock Based Compensation" (SFAS 123), as originally issued and Emerging
Issues Task Force
10
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(EITF) 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
Upon our adoption of SFAS 123(R), we began recording compensation cost
related to the continued vesting of all stock options that remained unvested as
of January 1, 2006, as well as for all new stock option grants after our
adoption date. The compensation cost to be recorded is based on the fair value
at the grant date. The adoption of SFAS 123(R) did not have an effect on our
recognition of compensation expense relating to the vesting of restricted stock
grants. SFAS 123(R) required the elimination of the unearned compensation
related to earlier awards against the appropriate equity accounts.
Prior to the adoption of SFAS 123(R), cash flows resulting from the tax
benefit related to equity-based compensation was presented in our operating cash
flows, along with other tax cash flows, in accordance with the provisions of
EITF 00-15, "Classification in the Statement of Cash Flows of the Income Tax
Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock
Option," (EITF 00-15). SFAS 123(R) superseded EITF 00-15, amended SFAS 95,
"Statement of Cash Flows," and requires tax benefits relating to excess
equity-based compensation deductions to be prospectively presented in our
statements of cash flows as financing cash inflows.
The effect of adopting SFAS 123(R) on our income from continuing
operations, income from continuing operations before income taxes, net income
and basic and diluted earnings per share for the three and nine months ended
September 30, 2007 and 2006 and net cash provided by operating activities and
net cash (used in) provided by financing activities for the nine months ended
September 30, 2007 and 2006 is as follows (in thousands, except per share data):
11
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------------ -------------------------
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
-------- -------- -------- --------
Income from continuing operations, as reported $ 8,768 $ 6,717 $ 23,549 $ 20,383
Effect of adopting SFAS 123(R) on income from
operations 66 335 435 1,367
-------- -------- -------- --------
Pro forma income from continuing operations $ 8,834 $ 7,052 $ 23,984 $ 21,750
======== ======== ======== ========
Income from continuing operations before income taxes,
as reported $ 13,652 $ 9,488 $ 35,627 $ 33,647
Effect of adopting SFAS 123(R) on income before
income taxes 103 515 677 2,100
-------- -------- -------- --------
Pro forma income from continuing operations before
income taxes $ 13,755 $ 10,003 $ 36,304 $ 35,747
======== ======== ======== ========
Net income, as reported $ 8,768 $ 6,717 $ 23,549 $ 20,383
Effect of adopting SFAS 123(R) on net income 66 335 435 1,367
-------- -------- -------- --------
Pro forma net income $ 8,834 $ 7,052 $ 23,984 $ 21,750
======== ======== ======== ========
Net income per share, as reported:
Basic $ 0.15 $ 0.10 $ 0.37 $ 0.29
Diluted $ 0.15 $ 0.10 $ 0.36 $ 0.29
Effect of adopting SFAS 123(R) on net income per share,
basic and diluted $ 0.00 $ 0.00 $ 0.01 $ 0.02
Pro forma net income per share:
Basic $ 0.15 $ 0.10 $ 0.38 $ 0.31
Diluted $ 0.15 $ 0.10 $ 0.37 $ 0.31
Net cash provided by operating activities ~ ~ $ 65,749 $ 41,093
Effect of adopting SFAS 123(R) on cash provided by
operating activities ~ ~ (2,510) --
-------- --------
Pro forma net cash provided by operating activities ~ ~ $ 63,239 $ 41,093
======== ========
Net cash (used in) provided by financing activities ~ ~ $ (5,903) $ 30,404
Effect of adopting SFAS 123(R) on cash (used in)
provided by financing activities ~ ~ 2,510 --
-------- --------
Pro forma net cash (used in) provided by financing
activities ~ ~ $ (3,393) $ 30,404
======== ========
We may issue restricted stock awards, stock options, stock appreciation
rights, restricted stock units and other stock-based awards to employees,
directors, non-employee consultants and advisors under the following
equity-based compensation plans: our 1995 stock plan, 2000 directors stock plan
and 2004 long-term incentive plan. Options issued under these plans, other than
the directors plan, may be either incentive stock options, which permit income
tax deferral upon exercise of options, or nonqualified options not entitled to
such deferral. These stock plans are administered by the compensation committee
of our board of directors.
A total of 9.65 million shares of our common stock have been reserved in
connection with awards under our 1995 plan. The maximum number of awards and the
maximum fair market value of such awards that may be granted under our 1995 plan
during any one calendar year to any one grantee is 1.0 million shares and $4.0
million, respectively.
12
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Only non-employee directors can participate in our directors plan. Under
our directors plan, a total of 2.0 million shares of our common stock have been
reserved in connection with awards. No more than 10% of awards under our
directors plan shall be granted in the form of restricted stock, subject to
antidilution adjustments, and only nonqualified options may be granted under our
directors plan.
Under our 2004 plan, a total of 4.0 million shares of our common stock
have been reserved in connection with awards. The maximum number of awards and
the maximum fair market value of such awards that may be granted under our 2004
plan during any one calendar year to any one grantee is 1.0 million shares and
$8.0 million, respectively. No more than 50% of awards under our 2004 plan may
be granted in the form of "full value" awards, such as restricted stock, subject
to anti-dilution adjustments.
As of January 1, 2006, we had issued two types of equity-based payment
arrangements: stock options and restricted stock awards.
Stock Options
The following table summarizes the stock options activity under our stock
plans from December 31, 2006 to September 30, 2007:
Weighted
Average Aggregate
Options Exercise Price Intrinsic Value
---------- -------------- ---------------
Options outstanding at December 31, 2006: 2,651,473 $7.25
Granted -- 0.00
Exercised (1,120,888) 6.47 $6,628,913
Expired (216,411) 8.37
---------- -----
Options outstanding at September 30, 2007 1,314,174 $7.73 $6,471,521
========== ===== ==========
Options exercisable at September 30, 2007 1,190,659 $7.41 $6,241,251
========== ===== ==========
For the three and nine months ended September 30, 2007, we recognized
equity-based compensation expense of approximately $0.1 million and $0.7
million, respectively, related to the vesting of stock options. For the three
and nine months ended September 30, 2006, we recognized equity-based
compensation expense of approximately $0.5 million and $2.1 million,
respectively, related to the vesting of stock options. As of September 30, 2007,
we had approximately $0.6 million of unvested stock options, which we will
record in our statements of operations over a weighted average recognition
period of less than two years.
Restricted Stock
The following table summarizes the activity of restricted stock awards
under our stock plans from December 31, 2006 to September 30, 2007:
Weighted Average Aggregate
Shares Price Intrinsic Value
--------- ---------------- ---------------
Outstanding at December 31, 2006 2,498,168 $ 9.00
Granted 753,158 12.00
Vested/released (726,775) 9.58 $8,849,630
Forfeited (98,667) 8.31
--------- ------
Outstanding at September 30, 2007 2,425,884 $ 9.79
========= ======
13
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the three and nine months ended September 30, 2007, we recognized
equity-based compensation expense of approximately $2.5 and $7.2 million,
respectively, related to the vesting of restricted stock. For the three and nine
months ended September 30, 2006, we recognized equity-based compensation expense
of approximately $2.2 million and $5.7 million, respectively, related to the
vesting of restricted stock. As of September 30, 2007, we had approximately
$21.5 million of unvested restricted stock which we will record in our
statements of operations over a weighted average recognition period of less than
five years.
7. EARNINGS PER SHARE
Basic and Diluted Net Income Per Share
Basic earnings per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares outstanding
during the period. The weighted average number of common shares outstanding does
not include any potentially dilutive securities or any unvested restricted
shares of common stock. These unvested restricted shares, although classified as
issued and outstanding at September 30, 2007 and December 31, 2006, are
considered contingently returnable until the restrictions lapse and will not be
included in the basic net income (loss) per share calculation until the shares
are vested.
Diluted net income per share gives effect to all potentially dilutive
securities. Our outstanding stock options, unvested restricted shares and
warrants are potentially dilutive securities during the three and nine months
ended September 30, 2007 and 2006. The difference between basic and diluted
weighted average shares outstanding was the dilutive effect of stock options,
unvested restricted shares and warrants computed as follows (in thousands,
except for share data):
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
------------------------------------- -------------------------------------
Weighted Earnings Weighted Earnings
Net Average Per Net Average Per
Income Share Share Income Share Share
------ ---------- -------- ------ ---------- --------
Basic EPS $8,768 59,327,119 $0.15 $6,717 67,918,830 $0.10
Effect of dilutive securities:
Stock options ~ 462,893 ~ ~ 548,882 ~
Unvested restricted shares ~ 573,872 ~ ~ 143,410 ~
Warrants ~ 38,156 ~ ~ -- ~
---------- ----------
Diluted EPS $8,768 60,402,040 $0.15 $6,717 68,611,122 $0.10
====== ========== ===== ====== ========== =====
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
-------------------------------------- -------------------------------------
Weighted Earnings Weighted Earnings
Net Average Per Net Average Per
Income Share Share Income Share Share
------- ---------- -------- ------ ---------- --------
Basic EPS $23,549 63,669,181 $0.37 $20,383 69,374,518 $0.29
Effect of dilutive securities:
Stock options 623,770 609,214
Unvested restricted shares 626,647 163,163
Warrants 29,437 --
---------- ----------
Diluted EPS $23,549 64,949,035 $0.36 $20,383 70,146,895 $0.29
======= ========== ===== ======= ========== =====
14
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The weighted average diluted common shares outstanding for the three and
nine months ended September 30, 2007 excludes the effect of approximately 71,000
and 42,000, respectively, of out-of-the-money options, warrants and restricted
shares because their effect would be anti-dilutive. The weighted average diluted
common shares outstanding for the three and nine months ended September 30, 2006
excludes the effect of approximately 2.4 million and 2.2 million, respectively,
of out-of-the-money options and restricted shares because their effect would be
anti-dilutive.
8. COMMITMENTS AND CONTINGENCIES
Asset retirement obligation
In January 2006, we were notified by our current landlord of their intent
to exercise a clause in our existing corporate headquarters leases to require
certain site remediation costs to the space prior to us vacating in August 2007.
As a result, in accordance with SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143), we recorded approximately $0.8 million for
remediation costs at December 31, 2005. In 2006, we decreased this estimate of
site remediation costs by $0.3 million through negotiations with our landlord
and contractors. We anticipate the majority of this obligation will be paid
during 2007. The remaining balance in this accrual at September 30, 2007 is $0.5
million.
Litigation and claims
We have several litigation matters pending, including matters 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.
On February 2, 2007, the United States Court of Appeals for the Eleventh
Circuit affirmed the district court's order granting of our motion for summary
judgment in a lawsuit alleging violations of securities laws filed in November
1998 against us and certain of our officers and directors. Plaintiffs had
acquired our common stock in connection with our acquisition of Xpedite Systems,
Inc. (n/k/a Xpedite Systems, LLC). Plaintiffs sought undisclosed damages
together with pre-and post-judgment interest, punitive damages, costs and
attorneys' fees. On February 23, 2007, plaintiffs filed a petition for rehearing
en banc and for panel rehearing with the Eleventh Circuit. On May 30, 2007, the
Eleventh Circuit denied both of plaintiffs' petitions. The plaintiffs did not
seek any further appeals, and the time to do so has now expired. We consider
this matter closed.
On August 21, 2006, a lawsuit was filed in the U.S. District Court for the
Eastern District of Texas by Ronald A. Katz Technology Licensing, L.P. against
three conferencing service providers, including us, alleging that the
defendants' "automated telephone conferencing systems that enable [their]
customers to perform multiple-party meetings and various other functions over
the telephone" infringe six of plaintiff's patents. The complaint seeks
undisclosed monetary damages, together with pre- and post-judgment interest,
treble damages for what is alleged to be willful infringement, attorneys' fees
and costs and injunctive relief. On October 16, 2006, we filed our answer,
affirmative defenses and counterclaim to the complaint, including seeking
declaratory judgment of noninfringement, invalidity and unenforceability and
attorneys' fees and costs. On January 25, 2007, plaintiff amended its complaint
to also add our subsidiary, American Teleconferencing Services, Ltd., as a
party. On March 20, 2007, a multidistrict litigation panel granted a motion to
consolidate 25 pending infringement suits, including our suit, brought by Katz
against various defendants to the District Court in California. Discovery is
on-going.
On May 18, 2007, Gibson & Co. Ins. Brokers, Inc. served an amended
complaint upon us and our subsidiary, Xpedite, in a purported class action
entitled, Gibson & Co. Ins. Brokers, Inc., et al. v. The Quizno's Corporation,
et al., pending in U.S. District Court for the Central District of California.
The underlying complaint alleges that Quizno's sent unsolicited facsimile
advertisements on or about November 1, 2005 in violation of the federal
Telephone Consumer Protection Act of 1991, as amended, and seeks damages of
$1,500 per facsimile for alleged willful conduct in sending of the faxes. The
court has also granted Quizno's motion to file a third party
15
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
complaint to add us and Xpedite as defendants. On June 26, 2007, we answered the
plaintiff's amended complaint, including asserting cross-claims against the
Quizno's defendants. On June 29, 2007, the Quizno's defendants filed their
answer and asserted cross-claims against us and Xpedite. On July 31, 2007, the
court entered an order in which it granted certain Quizno's defendants' motion
to dismiss and denied the motion with respect to other Quino's entities. On
September 7, 2007, plaintiff proceeded to file another amended complaint against
the Quizno's defendants, Growth Partners (Quizno's consultant), Xpedite and us.
On September 21, 2007, we filed our answer and affirmative defenses. On October
1, 2007, certain Quizno's defendants filed a motion to dismiss which is under
consideration by the Court. When that motion is decided, cross-claims will be
filed by Xpedite and us. The case is currently in discovery, and no class has
yet been certified, with the court granting plaintiff's motion to extend the
class certification deadline to November 30, 2007. We were served with non-party
subpoenas for certain documents and information prior to being served with the
amended complaint, for which we filed objections and provided certain responsive
documents. We have asserted indemnity rights against our customer Quizno's, a
defendant in this case, and insurance coverage against our insurer. To date, our
indemnity claim against our customer Quizno's has not been resolved through
litigation or otherwise. Our insurer has agreed to participate in the defense of
Xpedite and us in connection with the plaintiff's claims against Xpedite and us,
subject to certain reservations of rights and the terms of the policy, including
policy limits and deductibles. We intend to vigorously defend ourselves against
these claims. However, due to the inherent uncertainties of litigation, we are
unable to predict the outcome of this matter, and an adverse outcome could have
a material effect on our business, financial condition and results of operation.
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.
9. SEGMENT REPORTING
Beginning in the fourth quarter of 2006, we realigned our reporting
segments to be consistent with the way we now manage our operations on a
geographic regional basis, with reportable segments in North America, Europe and
Asia Pacific. We will no longer report results under our former Conferencing &
Collaboration and Data Communications segments, consistent with the completion
of our One Company initiative. We have changed our reportable segments in order
to better reflect the way in which areas of management responsibility are
divided and the way our management monitors and reviews our financial results
and performance. We have reclassified prior year results in this report to
conform to our new segment presentation. Our unallocated corporate costs are
included in our North America segment.
Information concerning the operations in these reportable segments is as
follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2007 2006 2007 2006
------ ------ ------ ------
Revenues:
Revenues from continuing operations:
North America $ 89.8 $ 78.2 $265.8 $238.0
Europe 24.4 22.4 74.7 69.7
Asia Pacific 25.6 21.5 73.0 61.7
------ ------ ------ ------
$139.8 $122.1 $413.5 $369.4
====== ====== ====== ======
Income:
Income from continuing operations:
North America $ 5.5 $ 3.1 $ 13.8 $ 13.4
Europe 1.3 2.0 5.9 3.9
Asia Pacific 2.0 1.6 3.8 3.1
------ ------ ------ ------
$ 8.8 $ 6.7 $ 23.5 $ 20.4
====== ====== ====== ======
16
PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nine Months Ended
------------------------------
September 30, December 31,
2007 2006
------------- ------------
Identifiable Assets:
North America $482.5 $439.7
Europe 81.9 71.4
Asia Pacific 44.0 38.2
------ ------
$608.4 $549.3
====== ======
10. STATEMENT OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2007 2006 2007 2006
------ ------ ------ -------
Cash paid during the year for:
Interest $4,433 $1,941 $9,433 $ 5,231
Income taxes, net $2,762 $3,805 $6,355 $14,565
11. SUBSEQUENT EVENTS
In November 2007, our chief executive officer, Boland T. Jones, repaid
approximately $0.4 million of his outstanding loans to us, which are classified
as "Notes receivable, shareholder" on the face of the condensed consolidated
balance sheets. The principal amount outstanding under all remaining loans owed
to us by Mr. Jones is approximately $1.7 million as of November 6, 2007.
In November 2007, we acquired all of the outstanding equity interests in
NetConnect Systems AS, a Norwegian-based conferencing services provider,
offering services under the Meet24 brand. We paid approximately NOK $150.0
million in cash at closing. We funded the purchase through cash on hand and our
existing credit facility. We are in the process of completing our valuation of
certain intangible assets in accordance with SFAS No. 141.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a global provider of on-demand business process improvement
solutions. Our Premiere Global Communications Operating System (PGiCOS) offers
hundreds of industry specific business applications within the following
solutions: Conferencing, Desktop Fax, Document Delivery, Accounts Receivable
Management, Notifications & Reminders and eMarketing.
Key highlights of our financial accomplishments during the third quarter
of 2007 include:
o Grew consolidated revenues by approximately 14.5% in the third
quarter of 2007 compared to the third quarter of 2006;
o Continued to grow revenue from our Conferencing Solutions, with
approximately 30.3% growth in this solution set compared to the
comparable prior year period; and
o Grew cash flows provided by operating activities by approximately
133.9% compared to the third quarter of 2006.
For the remainder of 2007, we plan to continue to focus on our initiatives
to move all of our company's capabilities online and to continue to refine and
improve our market strategy, which we believe will assist us in our objectives
of increased solutions-based revenue growth and improved profitability.
We believe that our online initiative, which will make all of our
solutions and applications accessible through a single point of presence at
PGiConnect.com, opens a new sales channel that will improve our revenue growth
by increasing our geographic and customer reach. We believe that our more
focused cross-selling efforts under our unified sales management team and the
systematic introduction of PGiCOS to all of our enterprise customers to drive
adoption of additional solutions per customer will help accelerate revenue
growth in our core solution sets. In addition, by continuing to drive many of
our customer service and support capabilities into a self-serve Web environment,
we believe we will improve our customer experience and generate additional
efficiencies throughout our business. We believe that over time these
efficiencies will help us reduce our service and support costs as a percent of
revenues and further our goal of improving profitability.
We also intend to explore new packaging and pricing options for our
solutions, including offering subscription-based and license pricing and
application bundles targeted at specific vertical markets, which we plan to
continue to introduce through our Web sales channel. We believe that a gradual
migration over time towards this type of pricing is consistent with the pricing
of other on-demand services and will lead to more predictable revenues.
We also plan to improve our profitability by continuing to automate our
internal processes and by focusing our development efforts on continuing to
enhance open access to our platform and solutions and on more highly automated
applications that have quicker sales cycles and implementation times. We
recently launched a developer community within PGiConnect.com and have partnered
with third party developers and systems integrators to assist us in these
efforts.
We believe our success against these objectives will enable us to continue
to increase our market share and to improve shareholder value throughout the
remainder of 2007.
The results of operations for the three and nine months ended September
30, 2007, are not indicative of the results that may be expected for the full
fiscal year of 2007 or for any other interim period. The financial information
presented herein should be read in conjunction with our annual report on Form
10-K for the year ended December 31, 2006, which includes information and
disclosures not included herein. All significant intercompany accounts and
transactions have been eliminated in consolidation.
18
RESULTS OF OPERATIONS
Beginning in the fourth quarter of 2006, we realigned our reporting
segments to be consistent with the way we now manage our operations on a
geographic regional basis. Our new management structure is a matrix organization
with single functional management worldwide and regional management in our
current reportable segments in North America, Europe and Asia Pacific. As a
result, we no longer report our financial results under our former Conferencing
& Collaborations and Data Communications business segments. We have reclassified
prior year results in this report to conform to our new geographic segment
presentation. Our unallocated corporate costs are included in our North America
segment.
The following table presents certain financial information about our
segments for the periods presented (in millions), with amortization expense and
asset impairments allocated to the appropriate geographic segment:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2007 2006 2007 2006
------ ------ ------ ------
Revenues:
Revenues from continuing operations:
North America $ 89.8 $ 78.2 $265.8 $238.0
Europe 24.4 22.4 74.7 69.7
Asia Pacific 25.6 21.5 73.0 61.7
------ ------ ------ ------
$139.8 $122.1 $413.5 $369.4
====== ====== ====== ======
Income:
Income from continuing operations:
North America $ 5.5 $ 3.1 $ 13.8 $ 13.4
Europe 1.3 2.0 5.9 3.9
Asia Pacific 2.0 1.6 3.8 3.1
------ ------ ------ ------
$ 8.8 $ 6.7 $ 23.5 $ 20.4
====== ====== ====== ======
Revenues
Consolidated revenues from continuing operations increased 14.5% to $139.8
million for the three months ended September 30, 2007 compared with $122.1
million for the same period in 2006 and increased 11.9% to 413.5 million for the
nine months ended September 30, 2007 compared with $369.4 million for the same
period in 2006.
For the three months ended September 30, 2007 and 2006, North America
revenue was 64.2% and 64.1% of consolidated revenues, respectively, and for the
nine months ended September 30, 2007 and 2006, North America revenue was 64.3%
and 64.4% of consolidated revenues, respectively. For the three months ended
September 30, 2007 and 2006, North America experienced a 14.7% increase in
revenue from $78.2 million to $89.8 million, and for the nine months ended
September 30, 2007 and 2006, North America experienced an 11.7% increase in
revenue from $238.0 million to $265.8 million. These increases in revenue were
attributable primarily to organic growth in our Conferencing Solutions and our
acquisitions of Enunciate, Budget and Accucast, offset in part by declines in
our broadcast fax
19
revenue. Our Conferencing Solutions revenue in North America was approximately
$67.7 million and $53.5 million for the three months ended September 30, 2007
and 2006, respectively, and $199.1 million and $161.1 million for the nine
months ended September 30, 2007 and 2006, respectively. Our broadcast fax
revenue in North America was approximately $4.9 million and $6.6 million for the
three months ended September 30, 2007 and 2006, respectively, and $15.7 million
and $22.7 million for the nine months ended September 30, 2007, respectively.
For the three months ended September 30, 2007 and 2006, Europe revenue was
17.5% and 18.3% of consolidated revenues, respectively, and for the nine months
ended September 30, 2007 and 2006, Europe revenue was 18.1% and 18.9% of
consolidated revenues, respectively. For the three months ended September 30,
2007 and 2006, Europe experienced a 9.2% increase in revenue from $22.4 million
to $24.4 million, and for the nine months ended September 30, 2007, Europe
experienced a 7.2% increase in revenue from $69.7 million to $74.7 million.
These increases in revenue were attributable primarily to organic growth in our
Conferencing Solutions and the strengthening of the Euro and British Pound to
the U.S. dollar, offset in part by declines in our broadcast fax revenue.
Fluctuations in foreign exchange rates resulted in revenue growth of
approximately $1.7 and $5.5 million for the three and nine months ended
September 30, 2007, respectively. Our Conferencing Solutions revenue in Europe
was approximately $11.0 million and $7.8 million for the three months ended
September 30, 2007 and 2006, respectively, and $31.6 million and $22.4 million
for the nine months ended September 30, 2007 and 2006, respectively. Our
broadcast fax revenue in Europe was approximately $5.5 million and $6.4 million
for the three months ended September 30, 2007 and 2006, respectively, and $18.4
million and $22.7 million for the nine months ended September 30, 2007 and 2006,
respectively.
For the three months ended September 30, 2007 and 2006, Asia Pacific
revenue was 18.3% and 17.6% of consolidated revenues, respectively, and for the
nine months ended September 30, 2007 and 2006, Asia Pacific revenue was 17.6%
and 16.7% of consolidated revenues, respectively. For the three months ended
September 30, 2007 and 2006, Asia Pacific experienced a 19.4% increase in
revenue from $21.5 million to $25.6 million and for the nine months ended
September 30, 2007, Asia Pacific experienced an 18.2% increase in revenue from
$61.7 million to $73.0 million. These increases in revenue were attributable
primarily to organic growth in our Conferencing Solutions, the strengthening of
the Australian Dollar and Japanese Yen to the U.S. dollar, growth in our
maritime Notifications & Reminders solution (which we resale from a third party
to shipping companies in this region) and our ECT acquisition, offset in part by
declines in our broadcast fax revenue. Our Conferencing Solutions revenue in
Asia Pacific was approximately $11.3 million and $7.8 million for the three
months ended September 30, 2007 and 2006, respectively, and $30.8 million and
$21.0 million for the nine months ended September 30, 2007 and 2006,
respectively. Our broadcast fax revenue in Asia Pacific was approximately $8.2
million and $8.3 million for the three months ended September 30, 2007 and 2006,
respectively, and $24.3 million and $26.0 million for the nine months ended
September 30, 2007 and 2006, respectively.
Cost of revenues
Consolidated cost of revenues increased 15.9% to $57.4 million from $49.6
million and increased to 41.1% from 40.6% of consolidated revenues for the three
months ended September 30, 2007 and 2006, respectively. Consolidated cost of
revenues increased 14.2% to $168.1 million from $147.2 million and increased to
40.7% from 39.8% of consolidated revenues for the nine months ended September
30, 2007 and 2006, respectively.
For the three months ended September 30, 2007 and 2006, North America cost
of revenue was 40.5% and 39.9% of segment revenue, respectively, and for the
nine months ended September 30, 2007 and 2006, North America cost of revenue was
39.7% and 38.3% of segment revenue, respectively. For the three months ended
September 30, 2007 and 2006, North America experienced a 16.6% increase in cost
of revenue from $31.2 million to $36.4 million, and for the nine months ended
September 30, 2007, North America experienced a 15.7% increase in cost of
revenue from $91.2 million to $105.5 million. North America cost of revenue
increased as a percentage of segment revenue primarily as a result of price
compression in our Conferencing Solutions and broadcast fax services in excess
of cost reductions in the underlying telecommunications network, a greater
percentage of resold Web conferencing services that carry an inherently higher
cost of revenue, further investment in our Conferencing Solutions support
operations, offset in part by early stage savings related to our
non-conferencing solutions operating support functions. North America cost of
revenue increased in dollar amount as a result of minute volume growth in our
Conferencing Solutions.
For the three months ended September 30, 2007 and 2006, Europe cost of
revenue was 36.9% and 35.7% of segment revenue, respectively, and for the nine
months ended September 30, 2007 and 2006, Europe cost of revenue was 35.9% and
37.8% of segment revenue, respectively. For the three months ended September 30,
2007 and 2006, Europe experienced a 12.9% increase in cost of revenue from $8.0
million to $9.0 million, and for the nine months ended September 30, 2007,
Europe experienced a 1.8% increase in cost of revenue from $26.3 million to
$26.8 million. For the three months ended September 30, 2007, Europe cost of
revenue increased as a percentage of segment revenue as a result of temporary
duplicative re-engineering costs associated with our non-conferencing solutions
operating support functions. For the nine months ended September 30, 2007,
Europe cost of revenue decreased as a percentage of segment revenue primarily as
a result of growth in higher margin Conferencing Solutions and declines in lower
margin broadcast fax services. In contrast to North America, broadcast fax
services in Europe have an inherently lower gross profit margin as a result of
lower revenue yields and higher underlying telecommunications network costs.
Europe cost of revenue increased in dollar amount in both comparative periods
20
as a result of minute volume growth in our Conferencing Solutions and
duplicative costs associated with our non-conferencing solutions operating
support functions.
For the three months ended September 30, 2007 and 2006, Asia Pacific cost
of revenue was 46.9% and 48.3% of segment revenue, respectively, and for the
nine months ended September 30, 2007 and 2006, Asia Pacific cost of revenue was
49.1% and 48.1% of segment revenue, respectively. For the three months ended
September 30, 2007 and 2006, Asia Pacific experienced a 15.8% increase in cost
of revenue from $10.4 million to $12.0 million, and for the nine months ended
September 30, 2007, Asia Pacific experienced a 20.6% increase in cost of revenue
from $29.7 million to $35.8 million. For the three months ended September 30,
2007, Asia Pacific cost of revenues decreased as a percentage of segment revenue
as a result of initial network cost savings related to upgrades in our fax
delivery platform. For the nine months ended September 30, 2007, Asia Pacific
cost of revenue increased as a percentage of segment revenue primarily as a
result of growth in our lower margin maritime Notifications & Reminders solution
and price compression in our broadcast fax services, offset in part by growth in
our higher margin Conferencing Solutions and initial network cost savings
related to upgrades in our fax delivery platform. The cost of revenue associated
with our maritime Notifications & Reminders solution is inherently higher than
other solutions offered in the region because of its resale costs. Asia Pacific
cost of revenue increased in dollar amount as a result of growth in our maritime
Notifications & Reminders solution and costs associated with the introduction of
operator-assisted conferencing services.
Selling and marketing
Consolidated selling and marketing expenses increased 8.8% to $34.1
million from $31.4 million and decreased to 24.4% from 25.6% of consolidated
revenues for the three months ended September 30, 2007 and 2006, respectively.
Consolidated selling and marketing expenses increased 7.2% to $105.0 million
from $97.9 million and decreased to 25.4% from 26.5% of consolidated revenues
for the nine months ended September 30, 2007 and 2006, respectively.
For the three months ended September 30, 2007 and 2006, North America
selling and marketing expense was 23.7% and 26.6% of segment revenue,
respectively, and for the nine months ended September 30, 2007 and 2006, North
America selling and marketing expense was 25.1% and 27.3% of segment revenue,
respectively. For the three months ended September 30, 2007 and 2006, North
America experienced a 2.2% increase in selling and marketing expense from $20.8
million to $21.3 million, and for the nine months ended September 30, 2007,
North America experienced a 2.6% increase in selling and marketing expense from
$65.0 million to $66.7 million. For the three and nine months ended September
30, 2007, the increase in North America selling and marketing expense is
primarily the result of our acquisition of Budget, Enunciate and Accucast,
increased costs to optimize Web sales and increased sales headcount. This
increase was offset in part by marketing and advertising expenses during the
prior year associated with our One Company initiative.
For the three months ended September 30, 2007 and 2006, Europe selling and
marketing expense was 31.2% and 26.4% of segment revenue, respectively, and for
the nine months ended September 30, 2007 and 2006, Europe selling and marketing
expense was 30.4% and 27.2% of segment revenue, respectively. For the three
months ended September 30, 2007 and 2006, Europe experienced a 28.8% increase in
selling and marketing expense from $5.9 million to $7.6 million, and for the
nine months ended September 30, 2007, Europe experienced a 19.7% increase in
selling and marketing expense from $19.0 million to $22.7 million. Approximately
half of the Europe selling and marketing expense increase is associated with the
strengthening of the Euro and British Pound against the U.S. dollar. The
remaining half of this increase is associated with increased sales headcount
associated with our new solutions sales strategy implemented during the fourth
quarter of 2006 and additional investment in our Conferencing Solutions.
For the three months ended September 30, 2007 and 2006, Asia Pacific
selling and marketing expense was 20.4% and 21.7% of segment revenue,
respectively, and for the nine months ended September 30, 2007 and 2006, Asia
Pacific selling and marketing expense was 21.3% and 22.6% of segment revenue,
respectively. For the three months ended September 30, 2007 and 2006, Asia
Pacific experienced a 12.5% increase in selling and marketing expense from $4.7
million to $5.2 million, and for the nine months ended September 30, 2007, Asia
Pacific experienced an 11.6% increase in selling and marketing expense from
$13.9 million to $15.6 million. The increase
21
in Asia Pacific selling and marketing expense is primarily associated with our
ECT acquisition and increased sales headcount associated with additional
investment in our Conferencing Solutions.
Research and development
Consolidated research and development expenses increased 16.3% to $3.6
million from $3.1 million and increased to 2.6% from 2.5% of consolidated
revenues for the three months ended September 30, 2007 and 2006, respectively.
Consolidated research and development expenses increased 18.8% to $10.4 million
from $8.8 million and increased to 2.5% from 2.4% of consolidated revenues for
the nine months ended September 30, 2007 and 2006, respectively. Research and
development costs associated with product development are capitalized as
internally developed software, whereas management overhead, facilities costs and
maintenance activities are expensed as research and development. We capitalized
software development costs of approximately $4.3 million and $2.5 million for
the three months ended September 30, 2007 and 2006, respectively, and
approximately $10.0 million and $9.9 million for the nine months ended September
30, 2007 and 2006, respectively. The majority of research and development
expenses were incurred in North America. The increase in research and
development expenses is primarily associated with additional resources invested
in the maintenance and support of our Conferencing Solutions and our e-Marketing
Solutions (primarily associated with our Accucast acquisition). The increase in
capitalized software development costs is associated primarily with increased
product development within all of our core solution sets.
General and administrative
Consolidated general and administrative expenses increased 3.1% to $15.9
million from $15.4 million and decreased to 11.4% from 12.6% of consolidated
revenues for the three months ended September 30, 2007 and 2006, respectively.
Consolidated general and administrative expenses increased 13.1% to $49.8
million from $44.0 million and increased to 12.0% from 11.9% of consolidated
revenues for the nine months ended September 30, 2007 and 2006, respectively.
For the three months ended September 30, 2007 and 2006, North America
general and administrative expense was 11.9% and 14.4% of segment revenue,
respectively, and for the nine months ended September 30, 2007 and 2006, North
America general and administrative expense was 13.3% and 13.4% of segment
revenue, respectively. For the three months ended September 30, 2007 and 2006,
North America experienced a 4.9% decrease in general and administrative expense
from $11.2 million to $10.7 million, and for the nine months ended September 30,
2007, North America experienced a 10.9% increase in general and administrative
expense from $31.8 million to $35.3 million. The decrease in North America
general and administrative expense for the three months ended September 30, 2007
was primarily associated with lower bad debt expense of $1.4 million and lower
stock option expenses, offset in part by increased spending in facilities and
legal fees associated with certain matters disclosed in "--Commitments and
Contingencies." The increase in general and administrative costs for the nine
months ended September 30, 2007 was primarily associated with $2.9 million in
proxy-related costs.
For the three months ended September 30, 2007 and 2006, Europe general and
administrative expense was 12.0% and 11.4% of segment revenue, respectively, and
for the nine months ended September 30, 2007 and 2006, Europe general and
administrative expense was 11.5% and 10.7% of segment revenue, respectively. For
the three months ended September 30, 2007 and 2006, Europe experienced a 14.7%
increase in general and administrative expense from $2.6 million to $2.9
million, and for the nine months ended September 30, 2007, Europe experienced a
15.8% increase in general and administrative expense from $7.4 million to $8.6
million. Approximately half of the Europe general and administrative expense
increase is associated with the strengthening of the Euro and British Pound
against the U.S. dollar. The remaining half of this increase is associated with
duplicative costs associated with efforts to consolidate our former Conferencing
& Collaboration and Data Communications operating segments' finance
organizations under one regional organization.
For the three months ended September 30, 2007 and 2006, Asia Pacific
general and administrative expense was 9.0% and 7.7% of segment revenue,
respectively, and for the nine months ended September 30, 2007 and 2006, Asia
Pacific general and administrative expense was 8.1% and 7.8% of segment revenue,
respectively. For the three months ended September 30, 2007 and 2006, Asia
Pacific experienced a 40.3% increase in general and administrative expense from
$1.6 million to $2.3 million, and for the nine months ended September 30, 2007,
Asia
22
Pacific experienced a 23.6% increase in general and administrative expense from
$4.8 million to $5.9 million. This increase in Asia Pacific general and
administrative expense is primarily associated with duplicative costs related to
our efforts to consolidate our former Conferencing & Collaboration and Data
Communications operating segments' finance organizations under one regional
organization, bad debt associated with one customer and duplicative rent and
relocation costs associated with the consolidation of our Tokyo, Japan
facilities.
Depreciation
Consolidated depreciation expenses from continuing operations increased
16.6% to $7.2 million from $6.2 million and increased to 5.2% from 5.1% of
consolidated revenues for the three months ended September 30, 2007 and 2006,
respectively. Consolidated depreciation expenses from continuing operations
increased 19.9% to $21.6 million from $18.0 million and increased to 5.2% from
4.9% of consolidated revenues for the nine months ended September 30, 2007 and
2006, respectively.
North America depreciation expense totaled $5.8 million and $4.6 million,
or 6.4% and 5.8% of segment revenue, for the three months ended September 30,
2007 and 2006, respectively, and $17.1 million and $13.1 million, or 6.4% and
5.5% of segment revenue, for the nine months ended September 30, 2007 and 2006,
respectively. Europe depreciation expense totaled $0.9 million and $1.0 million,
or 3.6% and 4.4% of segment revenue, for the three months ended September 30,
2007 and 2006, respectively, and $2.5 million and $2.9 million, or 3.3% and 4.2%
of segment revenue, for the nine months ended September 30, 2007 and 2006,
respectively. Asia Pacific depreciation expense totaled $0.6 million and $0.7
million, or 2.3% and 3.1% of segment revenue, for the three months ended
September 30, 2007 and 2006, respectively, and $2.0 million and $1.9 million, or
2.7% and 3.1% of segment revenue, for the nine months ended September 30, 2007
and 2006, respectively. The increase in depreciation expense in North America is
primarily attributed to increased capital spending during 2006 and 2007
associated with added capacity to our Conferencing Solutions and increased
product development in our non-conferencing solutions.
Amortization
Consolidated amortization from continuing operations increased 24.4% to
$4.1 million from $3.3 million and increased to 2.9% from 2.7% of consolidated
revenues for the three months ended September 30, 2007 and 2006, respectively.
Consolidated amortization expenses from continuing operations increased 17.9% to
$11.2 million from $9.5 million and increased to 2.7% from 2.6% of consolidated
revenues for the nine months ended September 30, 2007 and 2006, respectively.
North America amortization totaled $3.6 million and $2.9 million, or 4.0%
and 3.7% of segment revenue, for the three months ended September 30, 2007 and
2006, respectively, and $9.9 million and $8.1 million, or 3.7% and 3.4% of
segment revenue, for the nine months ended September 30, 2007 and 2006,
respectively. Europe amortization totaled $0.4 million and $0.3 million, or 1.5%
and 1.4% of segment revenue, for the three months ended September 30, 2007 and
2006, respectively, and $1.1 million and $1.3 million, or 1.4% and 1.8% of
segment revenue, for the nine months ended September 30, 2007 and 2006,
respectively. Asia Pacific amortization totaled $0.1 million and $43,000, or
0.4% and 0.2% of segment revenue, for the three months ended September 30, 2007
and 2006, respectively, and $0.3 million and $0.1 million, or 0.4% and 0.2% of
segment revenue, for the nine months ended September 30, 2007 and 2006,
respectively. The increase in amortization expense in North America is primarily
associated with our acquisitions of Budget, Enunciate and Accucast. The increase
in amortization expense in Asia Pacific is primarily associated with our ECT
acquisition.
Restructuring costs
Realignment of Workforce - 2007
During the three months ended June 30, 2007, we executed a restructuring
plan to consolidate our non-Conferencing Solutions service delivery
organizations. As part of this consolidation, we eliminated approximately 86
positions. We incurred approximately $4.1 million in severance costs associated
with the elimination of these positions. Additionally, we incurred $0.1 million
of lease termination costs associated with our Paris, France office. On a
segment basis, these restructuring costs were $1.1 million in North America,
$2.7 million in Europe and $0.4
23
million in Asia Pacific. Estimated annual savings from this consolidation is
approximately $6.0 million. During the three and nine months ended September 30,
2007, we paid approximately $2.0 million and $2.9 million, respectively, related
to these severance and exit costs. We anticipate the majority of this $4.1
million restructuring cost to be paid during 2007. Our reserve for these
restructuring costs at September 30, 2007 was approximately $1.4 million, which
reflects the impact of foreign exchange rate movement on the reserve balance.
Realignment of Workforce - 2006
In 2006, we executed a restructuring plan to streamline the management of
our business on a geographic regional basis from our former Conferencing &
Collaboration and Data Communications business segments. As part of this
streamlining, we eliminated approximately 100 positions within customer service,
finance, operations and sales and marketing. In the fourth quarter of 2006, we
entered into a separation agreement in connection with the resignation of our
former chief investment officer. We incurred an aggregate of approximately $8.0
million in severance costs associated with the elimination of these positions,
which included the issuance of restricted stock having a fair market value of
$0.6 million. Additionally, we incurred $0.6 million of lease termination costs
associated with five locations within North America. On a segment basis, these
restructuring costs were $4.6 million in North America, $3.2 million in Europe
and $0.7 million in Asia Pacific. In the three and nine months ended September
30, 2007, we paid approximately $0.2 million and $3.4 million, respectively,
related to these severance and exit costs. During the nine months ended
September 30, 2007, we adjusted our restructuring reserve by approximately $0.5
million as a result of actual severance payments to certain individuals being
less than originally estimated. Management expects to pay the majority of these
remaining severance obligations during 2007. Our reserve for these restructuring
costs at September 30, 2007 was approximately $0.2 million. Our reserve for
restructuring costs incurred in years prior to 2006 was approximately $2.6
million at September 30, 2007.
Interest expense, net
Net interest expense increased to $4.1 million from $2.5 million for the
three months ended September 30, 2007 and 2006, respectively, and increased to
$8.7 million from $6.1 million for the nine months ended September 30, 2007,
respectively. Interest expense increased primarily as a result of an increased
average outstanding balance on our line of credit as a result of borrowings to
fund our self-tender offer, with average debt outstanding during the three
months ended September 30, 2007 of $254.2 million compared to $128.6 million
during the three months ended September 30, 2006, and as a result of increases
in our margin above LIBOR as a result of an increased leverage ratio. Average
debt outstanding during the nine months ended September 30, 2007 and 2006 was
$189.4 million and $118.5 million, respectively. During the three months ended
June 20, 2007, we terminated all of our prior interest rate swap contracts which
were entered into in 2006 and recorded a gain of approximately $0.4 million.
During the three months ended September 30, 2007, we entered into two $100.0
million two-year interest rate swaps at a fixed rate of approximately 4.99% plus
applicable spread.
Other, net
Other, net was $0.3 million and ($0.2) million for the three months ended
September 30, 2007 and 2006, respectively, and $1.0 million and ($0.2) for the
nine months ended September 30, 2007 and 2006, respectively. Other, net was
comprised primarily of foreign exchange gains and losses associated with the
settlement of transactions in currencies other than the currency in which they
were originally executed.
Effective income tax rate
For the nine months ended September 30, 2007, our effective income tax
rate varied from the statutory rate primarily as a result of non-deductible
executive compensation expenses and the impact of the release of the net
operating loss usage limitation related to a prior year's acquisition. 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.
We believe we have appropriately reserved for income taxes. If we are
required to pay an amount less than or exceeding our reserves for uncertain tax
matters, the financial impact will be reflected in the period in which the
24
matter is resolved. In the event that actual results differ from these
estimates, we may need to adjust our "Income taxes payable" which could
materially impact our financial condition and results of operations.
Acquisitions
We seek to acquire complementary companies that increase our market share
and provide us with additional customers, technologies, 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.
North America
In July 2007, we acquired assets and the stock of Budget. We paid $19.8
million in cash at closing and $0.6 million in 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, $0.2 million has
been allocated to acquired fixed assets, $1.4 million has been allocated to
other acquisition liabilities, $6.6 million has been allocated to identifiable
customer lists, $1.3 million has been allocated to trademarks and $1.4 million
has been allocated to a non-compete agreement, with the identifiable customer
lists, trademarks and non-compete agreements amortized over five-year useful
lives. In addition, $2.9 million has been allocated to long-term deferred tax
liabilities to record the step-up in basis for the customer lists and developed
technology purchased. Because we have not finalized the working capital
component of the purchase price, the residual $15.2 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 September 2006, we acquired assets and the stock of Enunciate. We paid
CA$29.0 million in cash at closing and CA$0.7 million in transaction fees and
closing costs. We funded the purchase through Canadian dollar borrowings on our
line of credit and Canadian dollar cash balances available. We followed SFAS No.
141, "Business Combinations" (SFAS No. 141), and approximately CA$0.3 million
has been allocated to acquired fixed assets, CA$0.3 million has been allocated
to acquired working capital, CA$6.8 million has been allocated to identifiable
customer lists and CA$0.2 million has been allocated to a non-compete agreement,
with the identifiable customer lists and non-compete agreement amortized over
five-year useful lives. The residual CA$22.1 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 January 2006, we acquired all of the outstanding stock of Accucast. We
paid $12.3 million in cash at closing and $0.5 million in transaction and
closing costs. Subsequent to closing, we paid an additional $3.0 million cash
purchase price upon the achievement of certain milestone targets as specified in
the purchase agreement. We funded the purchase through our line of credit. We
followed SFAS No. 141, and approximately $0.2 million has been allocated to
acquired fixed assets, $0.1 million has been allocated to other acquisition
liabilities, $2.0 million has been allocated to developed technology and $1.0
million has been allocated to identifiable customer lists, with the identifiable
customer lists and developed technology amortized over five-year useful lives.
In addition, $1.2 million has been allocated to long-term deferred tax
liabilities to record the step-up in basis for the customer lists and developed
technology purchased. Because we have not finalized the working capital
component of the purchase price, the residual $13.9 million of the aggregate
purchase price has been preliminarily allocated to goodwill, which is subject to
a periodic impairment assessment in accordance with SFAS No. 142.
Asia Pacific
In November 2006, we acquired certain assets and assumed certain
liabilities of ECT. We paid AU$5.7 million in cash at closing and AU$0.4 million
in transaction fees and closing costs. We funded the purchase through a
Yen-denominated line of credit with Sumitomo Mitsui Banking and Australian
dollar cash available. We followed SFAS No. 141, and approximately AU$0.1
million of the aggregate purchase price has been allocated to acquired fixed
assets, AU$0.5 million has been allocated to acquired working capital, AU$1.4
million has been allocated to identifiable customer lists and AU$0.1 million has
been allocated to a non-compete agreement, with the identifiable customer lists
and non-compete agreement amortized over five-year useful lives. The residual
AU$4.0 million of the aggregate purchase price has been preliminarily allocated
to goodwill, which is subject to a periodic impairment assessment in accordance
with SFAS No. 142.
25
Liquidity and capital resources
As of September 30, 2007, we had $27.7 million in cash and equivalents
compared to $19.0 million at December 31, 2006. Cash balances residing outside
of the U.S. at September 30, 2007 were $26.0 million compared to $18.4 million
at December 31, 2006. We repatriate cash for repayment of royalties and
management fees charged to international locations from the U.S. Therefore,
foreign exchange gains and losses resulting from these transactions are recorded
in "Other, net" in the accompanying condensed consolidated statements of
operations. Inter-company loans with foreign subsidiaries generally are
considered to be permanently invested for the foreseeable future. Therefore,
foreign exchange gains and losses resulting from these transactions are recorded
in the cumulative translation adjustment account on face of the condensed
consolidated balance sheets. 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. At
September 30, 2007, we had approximately $43.3 million of availability under our
existing $300.0 million line of credit, without regard to the uncommitted
accordion feature. For a discussion of our line of credit, see "--Liquidity and
capital resources --Capital resources."
Cash provided by operating activities
Net cash provided by operating activities totaled approximately $65.7
million for the nine months ended September 30, 2007 compared to cash provided
by operating activities of approximately $41.1 million for the same period in
2006. The increase in net cash provided by operating activities is associated
with favorable working capital results primarily associated with the timing of
income tax payments and increased net income offset in part by increased
restructuring payments.
Cash used in investing activities
Cash used in investing activities totaled $51.5 million for the nine
months ended September 30, 2007 compared to $70.1 million for the same period in
2006. The principal uses of cash used in investing activities for the nine
months ended September 30, 2007 included $30.5 million of capital expenditures,
$18.6 million for costs associated with our acquisition of Budget and an
aggregate of $2.3 million related to the payment of achieved milestones,
severance and non-compete obligations from prior year acquisitions. The
principal uses of cash from investing activities for the nine months ended
September 30, 2006 were primarily associated with $26.8 million of capital
expenditures and $43.3 million for costs associated with the acquisitions of
Enunciate and Accucast and costs associated with prior year acquisitions.
Cash used in/provided by financing activities
Cash used in financing activities for the nine months ended September 30,
2007 totaled $5.9 million compared with cash provided by financing activities of
$30.4 million for the same period in 2006. Cash used in financing activities for
the nine months ended September 30, 2007 included $127.2 million of treasury
stock purchases of which $122.5 million was associated with the shares
repurchased in our self-tender offer, $0.9 million was associated with
capitalized costs related to our self-tender offer and $2.2 million associated
with the netting of shares to pay certain employees' income tax withholding due
upon the vesting of restricted stock awards, offset in part by $116.5 million of
net borrowings on our line of credit and $7.2 million of proceeds from stock
option exercises. Cash provided by financing activities for the nine months
ended September 30, 2006 included $57.8 million of net borrowings on our line of
credit to fund treasury stock purchases of $29.6 million and proceeds from stock
option exercises of $2.2 million.
Off-balance sheet arrangements
As of September 30, 2007, we did not have any off-balance-sheet
arrangements, as defined in Item 303(a)(4)(ii) of Securities and Exchange
Commission Regulation S-K.
26
State sales taxes
We have reserves for certain state sales tax contingencies based on the
likelihood of obligation in accordance with Statement of Financial Accounting
Standards (SFAS) No. 5, "Accounting for Contingencies" (SFAS No. 5).
Historically, we have not collected and remitted state sales tax from our
Conferencing Solutions customers. We were audited by the Commonwealth of
Massachusetts Department of Revenue claiming that our audio conferencing
services are subject to sales tax in Massachusetts. In March 2006, we began
assessing sales tax to our customers in Massachusetts as a result of this audit.
In July 2006, we paid an initial payment of approximately $1.2 million to the
Commonwealth of Massachusetts Department of Revenue for taxable years prior to
2005. Amounts associated with 2005 and early 2006 are still under review and
have yet to be settled. In March 2007, we were approached by the State of
Illinois regarding the taxability of conferencing services in the state. In
April 2007, we began assessing sales tax to our customers in Illinois. Returns
were filed and approximately $0.5 million was paid to the Illinois Department of
Revenue for taxable period prior to March 2007. Additional amounts may be due as
these returns are audited. More states may claim that we are subject to an
assessment of sales taxes. As of September 30, 2007 and December 31, 2006, we
had reserved approximately $4.8 and $4.3 million, respectively, for certain
state sales tax contingencies. These amounts are included in "Accrued taxes" in
the accompanying condensed consolidated balance sheets. We believe we are
appropriately accrued for these contingencies. In the event that actual results
differ from these reserves, we may need to make adjustments which could
materially impact our financial condition and results of operations.
Historically, we have collected and remitted sales tax from our non-Conferencing
Solutions customers in applicable states. However, it is possible states may
disagree with our method of assessing and remitting these state sales taxes.
Income taxes
Income tax expense, income taxes payable and deferred tax assets and
liabilities are determined in accordance with SFAS No. 109. Under SFAS No. 109,
the deferred tax liabilities and assets are determined based on temporary
differences between the basis of certain assets and liabilities for income tax
and financial reporting purposes, in addition to net operating loss
carryforwards which will more likely than not be utilized. These differences are
primarily attributable to differences in the recognition of depreciation and
amortization of property, equipment and intangible assets, allowances for
doubtful accounts and certain employee benefit accruals. Deferred tax assets and
liabilities are measured by applying enacted statutory tax rates applicable to
future years in which the deferred tax assets or liabilities are expected to be
settled or realized. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Permanent
differences are primarily attributable to non-deductible employee compensation
under Section 162(m) of the Internal Revenue Code of 1986, as amended.
On July 13, 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -An
Interpretation of FASB Statement No. 109" (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entity's financial
statements in accordance with FASB Statement No. 109, "Accounting for Income
Taxes" and prescribes a recognition threshold and measurement attributes for
financial statement disclosures of tax positions taken or expected to be taken
on an income tax return. Under FIN 48, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that
is more-than-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN 48 provides
guidance on derecognition, classification, interest, penalties and disclosures.
FIN 48 is effective for fiscal years beginning after December 15, 2006.
We adopted the provisions of FIN 48 on January 1, 2007. We recorded
provisions for certain asserted international and state income tax uncertain tax
positions based on the recognition and measurement standards of FIN 48. As a
result of our adoption of FIN 48, approximately $1.3 million was recorded as a
reduction to retained earnings as an increase to reserves for uncertain tax
positions. At the adoption date of January 1, 2007, we had approximately $7.3
million of unrecognized tax benefits. Included in the balance of unrecognized
tax benefits at January 1, 2007 is approximately $5.6 million, all of which
would affect our effective tax rate if recognized. This amount is classified as
"Income taxes payable" in the accompanying condensed consolidated balance sheet.
We file federal income tax returns and income tax returns in various states and
international jurisdictions. In major tax jurisdictions, tax years from
1997-2006 remain subject to income tax examinations by tax authorities.
27
As permitted with the adoption of FIN 48, we have changed our
classification of interest and penalties related to uncertain tax positions and
recognize these costs in interest and penalties expense. As of January 1, 2007,
we had accrued interest and penalties of approximately $0.9 million related to
uncertain tax positions.
In the normal course of business, we are subject to inquiries from U.S.
and non-U.S. tax authorities regarding the amount of taxes due. These inquiries
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
taxes. In the event that actual results differ from these estimates, we may need
to adjust "Income taxes payable" which could materially impact our financial
condition and results of operations.
Capital resources
In April 2006, we closed an amendment to our credit facility, with a
syndicate led by Bank of America, N.A., which increased the amount available to
us under our line of credit from $180.0 million to $300.0 million, reduced the
applicable percentages across the pricing grid and extended the maturity of the
credit facility from February 2009 to April 2011. The amendment also provided
for an uncommitted accordion feature allowing for an additional increase of
$100.0 million to $400.0 million of the revolving credit line, subject to the
terms and conditions as set forth in the amendment. In April 2007, we entered
into an amendment to our credit facility which inserted into the applicable
margin pricing grid a new tier based on a total leverage ratio of 2.5 times or
greater, increased the permitted covenant level of the consolidated total
leverage ratio and amended certain other provisions to allow us to purchase,
redeem or otherwise acquire up to an additional $150.0 million of our common
stock during 2007, of which approximately $122.6 million has been used to fund
our self-tender offer in the second quarter of 2007. The credit facility is
subject to customary covenants for secured credit facilities of this nature.
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 65.0% of our material foreign subsidiaries. We believe
that as of September 30, 2007, we were in compliance in all material respects
with the covenants under our line of credit. Proceeds drawn under this credit
agreement may be used for refinancing of existing debt, working capital, capital
expenditures, acquisitions and other general corporate purposes. The annual
interest rate applicable to borrowings under the line of credit, at our option,
is 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
September 30, 2007, the applicable margin with respect to base rate loans was
0.0%, and the applicable margin with respect to LIBOR loans was 1.50%. At
September 30, 2007, our interest rate on 30-day LIBOR loans was 6.62875%. As of
September 30, 2007, we had approximately $255.0 million of borrowings
outstanding and approximately $1.7 million in letters of credit outstanding
under our line of credit.
In February 2006, we entered into a three-year $50.0 million interest rate
swap at a fixed rate of 4.99% plus applicable spread, and in August 2006, we
entered into two separate three-year $12.5 million interest rate swaps at 5.135%
and 5.159%, respectively. These swaps were exclusive of our applicable margin as
stated in our credit facility. We did not designate these interest rate swaps as
hedges and accounted for them in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." During the second quarter of
2007, we terminated these interest rate swaps and recorded a gain of
approximately $0.4 million in "Interest expense" in the accompanying condensed
consolidated statements of operations. Changes in fair value prior to the
termination of these swaps were approximately $0.1 million for the six months
ended June 30, 2007 and are recognized in earnings.
In August and September 2007, we entered into two $100.0 million two-year
interest rate swaps at a fixed rate of approximately 4.99% plus applicable
spread. These swaps are exclusive of our applicable margin as stated in our
credit facility. We did not designate these interest rate swaps as hedges and
will account for them in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Changes in fair value, which
were approximately $0.2 million for the three months ended September 30, 2007
are recognized in earnings.
28
In March and September 2006, we entered into our Yen-denominated line of
credit for (Y)200.0 million and (Y)300.0 million, respectively, with Sumitomo
Mitsui Banking which have interest rates of 1.875% and 1.61%, respectively,
through March 2008. In May 2007, the (Y)200.0 million line of credit was amended
to (Y)300.0 million. As of September 30, 2007, there were no outstanding
borrowings under these facilities.
At September 30, 2007, we had no other indebtedness outstanding except for
the borrowings under our lines of credit discussed above and capital lease
obligations with principal balances totaling approximately $4.8 million.
Liquidity
As of September 30, 2007, we had $27.7 million of cash and equivalents. We
generated positive operating cash flows from each of our geographic business
segments for the nine months ended September 30, 2007. Each geographic business
segment had sufficient cash flows from operations to service existing debt
obligations and to fund capital expenditure requirements, which have
historically been 4% to 6% of annual consolidated revenues, and to fund research
and development costs for new services and enhancements to existing services,
which have historically been approximately 2% to 3% of annual consolidated
revenues. In 2006, capital expenditure funding requirements were slightly higher
than our historical averages due to new product development and capacity
expansion. In the first nine months of 2007, we spent approximately $30.5
million in capital expenditures to fund capacity expansion, new product
development, our automation initiatives and investment in re-engineering our
service and support organizations. We expect capital expenditures in 2007 will
total approximately 9% of consolidated revenues. We funded our self-tender offer
through borrowings under our credit facility and purchased 9,687,841 shares of
our common stock, representing approximately 14.0% of our outstanding shares, at
$12.65 per share for a total purchase price of approximately $122.6 million,
excluding fees. We have historically borrowed on our line of credit in order to
fund acquisitions. At September 30, 2007, we had $43.3 million of available
credit on our existing $300.0 million line of credit, without regard to the
uncommitted accordion feature. Hypothetical additional borrowing capacity under
our uncommitted accordion feature is $25.0 million. We believe that we will
generate adequate operating cash flows for capital expenditures and contractual
commitments and to satisfy our indebtedness and fund our liquidity needs for at
least the next 12 months.
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.
29
SUBSEQUENT EVENTS
In November 2007, our chief executive officer, Boland T. Jones, repaid
approximately $0.4 million of his outstanding loans to us, which are classified
as "Notes receivable, shareholder" on the face of the condensed consolidated
balance sheets. The principal amount outstanding under all remaining loans owed
to us by Mr. Jones is approximately $1.7 million as of November 6, 2007.
In November 2007, we acquired all of the outstanding equity interests in
NetConnect Systems SA, a Norwegian-based conferencing services provider,
offering services under the Meet24 brand. We paid approximately NOK $150.0
million in cash at closing. We funded the purchase through cash on hand and our
existing credit facility. We are in the process of completing our valuation of
certain intangible assets in accordance with SFAS No. 141.
CRITICAL ACCOUNTING POLICIES
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" is based upon our condensed consolidated financial statements and
the notes thereto, which have been prepared in accordance with GAAP. The
preparation of the condensed consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. We have reviewed the accounting policies used in reporting our
financial results on a regular basis. We have reviewed these critical accounting
policies and related disclosures with the audit committee of our board of
directors. We have identified the policies below as critical to our business
operations and the understanding of our financial condition and results of
operations:
o revenue recognition;
o allowance for uncollectible accounts receivable;
o goodwill and other intangible assets;
o income taxes;
o restructuring costs; and
o legal contingencies.
For a detailed discussion on the application of these accounting policies,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", in our annual report on Form 10-K for the fiscal year
ended December 31, 2006.
FORWARD LOOKING STATEMENTS
When used in this quarterly report on Form 10-Q and elsewhere by us or by
management from time to time, the words "believes," "anticipates," "expects,"
"will," "may," "should," "intends," "plans," "estimates," "predicts,"
"potential," "continue" and similar expressions are intended to identify
forward-looking statements concerning our operations, economic performance and
financial condition. For those statements, we claim the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. These statements are based on a number of
assumptions and estimates that are inherently subject to significant risks and
uncertainties, many of which are beyond our control, and reflect future business
decisions which are subject to change. A variety of factors could cause actual
results to differ materially from those anticipated in our forward-looking
statements, including the following factors:
30
o Our ability to compete based on price and against our existing and
future competitors;
o Our ability to respond to rapid technological change and the
development of alternatives to our services;
o Market acceptance of new services and enhancements to existing
services;
o Costs or difficulties related to the integration of any new or
acquired businesses and technologies;
o Concerns regarding the security of transactions and transmitting
confidential information over the Internet and public networks;
o Our ability to increase our network capacity to meet customer
demands;
o Our services may be interrupted due to failure of the platforms and
network infrastructure utilized in providing our services;
o Continued weakness in our legacy broadcast fax services;
o Our ability to efficiently utilize or re-negotiate minimum purchase
requirements in our telecommunications supply agreements;
o Increased leverage may harm our financial condition and results of
operations;
o Our dependence on our subsidiaries for cash flow may negatively
affect our business and our ability to pay amounts due under our
indebtedness;
o Our financial performance could cause future write-downs of goodwill
or other intangible assets in future periods;
o Assessment of income, state sales and other taxes for which we have
not accrued;
o Our ability to attract and retain qualified key personnel;
o Possible adverse results of pending or future litigation or adverse
results of current or future infringement claims;
o Our ability to successfully identify suitable acquisition
candidates, complete acquisitions, integrate acquired operations
into our existing operations or expand into new markets;
o Our ability to protect our proprietary technology and intellectual
property rights;
o Legislative or regulatory changes may adversely affect our business;
o Possible adverse results if our services become subject to
government regulations applicable to traditional telecommunications
service providers;
o Risks associated with expansion of our international operations and
fluctuations in currency exchange rates;
o Domestic and international terrorist activity, war and political
instability may adversely affect the level of services utilized by
our customers and the ability of those customers to pay for services
utilized;
31
o General economic or business conditions, internationally, nationally
or in the local jurisdiction in which we are doing business, may be
less favorable than expected;
o Factors described under the caption "Item 1A. Risk Factors" in our
annual report on Form 10-K for the year ended December 31, 2006 and
in our current reports on Form 10-Q for the quarters ended March 31,
2007 and June 30, 2007; and
o Factors described from time to time in our press releases, reports
and other filings made with the SEC.
We caution that these factors are not exclusive. Consequently, all of the
forward-looking statements made in this quarterly report on Form 10-Q and in
other documents filed with the SEC are qualified by these cautionary statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Form 10-Q. 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-Q, or the date of the statement, if a different
date.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign
currency exchange rates. We manage our exposure to these market risks through
our regular operating and financing activities and the timing of intercompany
payable settlements.
At September 30, 2007, we had borrowings of approximately $55.0 million
outstanding under our line of credit that are subject to interest rate risk.
Each 100 basis point increase in interest rates relative to these borrowings
would impact annual pre-tax earnings and cash flows by approximately $0.5
million based on our September 30, 2007 debt level.
Approximately 39.4% of our consolidated revenues from continuing
operations and 36.0% of our operating expenses from continuing operations were
transacted in foreign currencies for the nine-month period ended September 30,
2007. 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 the nine-month period ended September 30, 2007 by approximately
$16.3 million and operating expenses for 2007 by approximately $13.3 million.
Our principal exposure has been related to local currency sales and operating
costs in the Euro Zone, Canada, the United Kingdom, Australia and Japan. We have
not used derivatives to manage foreign currency exchange risk, and no foreign
currency exchange derivatives were outstanding at September 30, 2007.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures as of September 30, 2007. Based on that evaluation, our chief
executive officer and chief financial officer have concluded that our disclosure
controls and procedures were effective, as of September 30, 2007, to provide
reasonable assurance that the information required to be disclosed by us in the
reports we file or submit under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting
during the quarter ended September 30, 2007 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have several litigation matters pending, including matters 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.
On February 2, 2007, the United States Court of Appeals for the Eleventh
Circuit affirmed the district court's order granting of our motion for summary
judgment in a lawsuit alleging violations of securities laws filed in November
1998 against us and certain of our officers and directors. Plaintiffs had
acquired our common stock in connection with our acquisition of Xpedite.
Plaintiffs sought undisclosed damages together with pre-and post-judgment
interest, punitive damages, costs and attorneys' fees. On February 23, 2007,
plaintiffs filed a petition for rehearing en banc and for panel rehearing with
the Eleventh Circuit. On May 30, 2007, the Eleventh Circuit denied both of
plaintiffs' petitions. The plaintiffs did not seek any further appeals, and the
time to do so has now expired. We consider this matter concluded.
On August 21, 2006, a lawsuit was filed in the U.S. District Court for the
Eastern District of Texas by Ronald A. Katz Technology Licensing against three
conferencing service providers, including us, alleging that the defendants'
"automated telephone conferencing systems that enable [their] customers to
perform multiple-party meetings and various other functions over the telephone"
infringe six of plaintiff's patents. The complaint seeks undisclosed monetary
damages, together with pre- and post-judgment interest, treble damages for what
is alleged to be willful infringement, attorneys' fees and costs and injunctive
relief. On October 16, 2006, we filed our answer, affirmative defenses and
counterclaim to the complaint, including seeking declaratory judgment of
noninfringement, invalidity and unenforceability and attorneys' fees and costs.
On January 25, 2007, plaintiff amended its complaint to also add our subsidiary,
ATS, as a party. On March 20, 2007, a multidistrict litigation panel granted a
motion to consolidate 25 pending infringement suits, including our suit, brought
by Katz against various defendants to the District Court in California.
Discovery is on-going.
On May 18, 2007, Gibson & Co. Ins. Brokers served an amended complaint
upon us and our subsidiary, Xpedite, in a purported class action entitled,
Gibson & Co. Ins. Brokers, Inc., et al. v. The Quizno's Corporation, et al.,
pending in U.S. District Court for the Central District of California. The
underlying complaint alleges that Quizno's sent unsolicited facsimile
advertisements on or about November 1, 2005 in violation of the federal
Telephone Consumer Protection Act of 1991, as amended, and seeks damages of
$1,500 per facsimile for alleged willful conduct in sending of the faxes. The
court has also granted Quizno's motion to file a third party complaint to add us
and Xpedite as defendants. On June 26, 2007, we answered the plaintiff's amended
complaint, including asserting cross-claims against the Quizno's defendants. On
June 29, 2007, the Quizno's defendants filed their answer and asserted
cross-claims against us and Xpedite. On July 31, 2007, the court entered an
order in which it granted certain Quizno's defendants' motion to dismiss and
denied the motion with respect to other Quino's entities. On September 7, 2007,
plaintiff proceeded to file another amended complaint against the Quizno's
defendants, Growth Partners (Quizno's consultant), Xpedite and us. On September
21, 2007, we filed our answer and affirmative defenses. On October 1, 2007,
certain Quizno's defendants filed a motion to dismiss which is under
consideration by the Court. When that motion is decided, cross-claims will be
filed by Xpedite and us. The case is currently in discovery, and no class has
yet been certified, with the court granting plaintiff's motion to extend the
class certification deadline to November 30, 2007. We were served with non-party
subpoenas for certain documents and information prior to being served with the
amended complaint, for which we filed objections and provided certain responsive
documents. We have asserted indemnity rights against our customer Quizno's, a
defendant in this case, and insurance coverage against our insurer. To date, our
indemnity claim against our customer Quizno's has not been resolved through
litigation or otherwise. Our insurer has agreed to participate in the defense of
Xpedite and us in connection with the plaintiff's claims against us and Xpedite,
subject to certain reservations of rights and the terms of the policy, including
policy limits and deductibles. We intend to vigorously defend ourselves against
these claims. However, due to the inherent uncertainties of litigation, we are
unable to predict the outcome of this matter, and an adverse outcome could have
a material effect on our business, financial condition and results of operation.
33
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 1A. RISK FACTORS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Total Number of Shares Maximum Number of Shares
Average Purchased as Part of that May Yet Be Purchased
Total Number of Price Paid Publicly Announced Plans Under the Plans or
Period Shares Purchased per Share or Programs Programs
-------------------- ---------------- ---------- ------------------------ -------------------------
July 1-31, 2007 0 -- 0 5,509,900
August 1-31, 2007 144,400 $10.75 144,400 5,365,500
September 1-30, 2007 0 -- 0 5,365,500
------- ------- ---------
Total 144,400 144,400 5,365,500
In June 2006, our board of directors authorized, and we announced, a new
stock repurchase program under which we could purchase up to 7.0 million shares
of our common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
10.1 Amendment to the Premiere Global Services, Inc. 401(k) Plan,
dated August 28, 2007.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
34
32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and
18 U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer, as required by Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and
18 U.S.C. Section 1350.
35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 8, 2007 PREMIERE GLOBAL SERVICES, INC.
/s/ Michael E. Havener
-----------------------------------------------
Michael E. Havener
Chief Financial Officer
(principal financial and accounting officer and
duly authorized signatory of the Registrant)
36
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.1 Amendment to the Premiere Global Services, Inc. 401(k) Plan, dated
August 28, 2007.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer, as required by Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350.
37