XNYS:PGI Premiere Global Services Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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DRAFT AS OF 8/1/2012 6:06:45 PM

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012.

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 NE

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 S No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes S No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

 Large accelerated filer o     Accelerated filer S
Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No S

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class Outstanding at August 6, 2012
Common Stock, $0.01 par value 49,033,424 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 June 30, 2012 and December 31, 2011

 

1

     
 

Condensed Consolidated Statements of Operations

for the Three and Six Months Ended June 30, 2012 and 2011

 

2

     
 

Condensed Consolidated Statements of Comprehensive Income

for the Three and Six Months Ended June 30, 2012 and 2011

 

3

     
 

Condensed Consolidated Statement of Shareholders’ Equity

for the Six Months Ended June 30, 2012

 

4

     
 

Condensed Consolidated Statements of Cash Flows

for the Six Months Ended June 30, 2012 and 2011

 

5

     
  Notes to Condensed Consolidated Financial Statements 6
     
        Item 2       

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

 

18

     
        Item 3        Quantitative and Qualitative Disclosures About Market Risk 31
     
        Item 4        Controls and Procedures 31
     
PART II            OTHER INFORMATION  
     
        Item 1 Legal Proceedings 32
     
        Item 1A.    Risk Factors 32
     
        Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 32
     
        Item 6 Exhibits 33
     
SIGNATURE 34
     
EXHIBIT INDEX 35
     
     
     
     
     

 

i
 

PART I. FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

 

 

PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 June 30,
2012
   December 31,
2011
 
   (Unaudited)      
 ASSETS        
CURRENT ASSETS         
       Cash and equivalents $24,001  $32,033 
       Accounts receivable (net of allowances of $781 and $613, respectively)  81,983   72,518 
       Prepaid expenses and other current assets  15,019   13,906 
       Income taxes receivable  1,634   1,739 
       Deferred income taxes, net  340   1,090 
           Total current assets  122,977   121,286 
         
PROPERTY AND EQUIPMENT,  NET  103,360   103,449 
         
OTHER ASSETS        
       Goodwill  295,875   295,690 
       Intangibles, net of amortization  8,744   10,906 
       Deferred income taxes, net  3,600   3,474 
       Other assets  7,556   8,016 
   Total assets $542,112  $542,821 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
         
CURRENT LIABILITIES        
       Accounts payable $46,645  $42,589 
       Income taxes payable  239   962 
       Accrued taxes, other than income taxes  2,213   3,611 
       Accrued expenses  28,719   28,999 
       Current maturities of long-term debt and capital lease obligations  4,211   3,845 
       Accrued restructuring costs  1,470   2,287 
       Deferred income taxes, net  10   386 
           Total current liabilities  83,507   82,679 
         
LONG-TERM LIABILITIES        
       Long-term debt and capital lease obligations  186,677   195,963 
       Accrued restructuring costs  1,223   1,410 
       Accrued expenses  17,297   17,249 
       Deferred income taxes, net  4,317   1,783 
           Total long-term liabilities  209,514   216,405 
         
COMMITMENTS AND CONTINGENCIES (Note 9)        
         
SHAREHOLDERS’ EQUITY        
       Common stock, $.01 par value; 150,000,000 shares authorized, 49,260,185
            and 50,144,703 shares issued and outstanding, respectively
 492   501 
       Additional paid-in capital  468,197   475,013 
       Accumulated other comprehensive income  10,342   10,809 
       Accumulated deficit  (229,940)  (242,586)
           Total shareholders’ equity  249,091   243,737 
               Total liabilities and shareholders’ equity $542,112  $542,821 
         
         
         

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     Six Months Ended 
   June 30,     June 30,
   2012   2011     2012   2011
  (Unaudited)   (Unaudited) 
Net revenues $127,015  $118,990    $253,618  $235,915 
Operating expenses                  
Cost of revenues (exclusive of depreciation                  
and amortization shown separately below)  53,788   49,315     107,238   96,657 
Selling and marketing  32,997   34,247     67,031   70,359 
General and administrative (exclusive of expenses                  
shown separately below)  15,934   14,217     31,215   27,998 
Research and development  3,526   2,627     6,905   5,803 
Excise and sales tax expense  118        118   21 
Depreciation  8,011   7,710     15,956   15,435 
Amortization  1,212   1,739     2,432   3,449 
Restructuring costs  (48)       113    
Asset impairments  20   35     45   54 
Net legal settlements and related expenses  62   72     82   72 
Total operating expenses  115,620   109,962     231,135   219,848 
                   
Operating income  11,395   9,028     22,483   16,067 
                   
Other (expense) income                  
Interest expense  (1,789)  (2,108)    (3,561)  (4,189)
Interest income  5   11     9   26 
Other, net  (179)  (167)    (249)  (378)
Total other expense  (1,963)  (2,264)    (3,801)  (4,541)
                   
Income from continuing operations before income taxes  9,432   6,764     18,682   11,526 
Income tax expense  2,739   1,911     5,763   3,741 
Net income from continuing operations  6,693   4,853     12,919   7,785 
                   
(Loss) income from discontinued operations, net of taxes  (226)  36     (273)  5 
                   
Net income $6,467  $4,889    $12,646  $7,790 
                   
BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING  48,103   50,173     48,279   50,465 
                   
Basic net income (loss) per share (1)                  
Continuing operations $0.14  $0.10    $0.27  $0.15 
Discontinued operations          (0.01)   
Net income per share $0.13  $0.10    $0.26  $0.15 
                   
DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING  48,551   50,508     48,740   50,788 
                   
Diluted net income (loss) per share (1)                  
Continuing operations $0.14  $0.10    $0.27  $0.15 
Discontinued operations          (0.01)   
Net income per share $0.13  $0.10    $0.26  $0.15 
                   

 

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

Accompanying notes are integral to these condensed consolidated financial statements.

 

2
 

PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

  Three Months Ended   Six Months Ended
June 30,   June 30,
  2012   2011   2012   2011
  (Unaudited)   (Unaudited)
Net income $             6,467    $       4,889    $      12,646    $       7,790 
               
Other comprehensive income:              
         Translation adjustments (2,350)   1,520          (467)           4,711 
              Total other comprehensive income (2,350)   1,520            (467)           4,711 
               
Comprehensive income $             4,117    $      6,409    $      12,179    $     12,501 

 

 

3
 

PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands)

 

   Common Stock Issued    Additional Paid-In Capital    Accumulated Deficit    Accumulated Other Comprehensive Income    Total
Shareholders’ Equity
 
             (Unaudited)         
BALANCE, December 31, 2011  $501   $475,013   $(242,586)  $10,809   $243,737 
Net income   —      —      12,646    —      12,646 
Translation adjustments   —      —      —      (467)   (467)
Exercise of stock options   1    852    —      —      853 
Equity-based compensation   —      4,058    —      —      4,058 
Treasury stock purchase and retirement   (12)   (10,257)   —      —      (10,269)
Tax withholding related to vesting of restricted stock, net   2    (1,402)   —      —      (1,400)
Income tax benefit from equity awards   —      (67)   —      —      (67)
                          
BALANCE, June 30, 2012  $492   $468,197   $(229,940)  $10,342   $249,091 
                          

 

Accompanying notes are integral to these condensed consolidated financial statements.

4
 

PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

            Six Months Ended
            June 30,
            2012   2011
CASH FLOWS FROM OPERATING ACTIVITIES   (Unaudited)
     Net income         12,646    $          7,790 
     Loss (income) from discontinued operations, net of taxes   273    (5)
      Net income from continuing operations   12,919    7,785 
  Adjustments to reconcile net income to net cash provided by operating activities      
    Depreciation   15,956    15,435 
    Amortization   2,432    3,449 
    Amortization of debt issuance costs   295    468 
    Net legal settlements and related expenses   82    12 
    Payments for legal settlements and related expenses   (17)   (12)
    Deferred income taxes   3,342    655 
    Restructuring costs   113    — 
    Payments for restructuring costs   (1,152)   (4,540)
    Asset impairments   45    54 
    Equity-based compensation   4,184    3,587 
    Excess tax benefits from share-based payment arrangements   (264)   — 
    Provision for doubtful accounts   576    378 
    Changes in working capital   (9,344)   (7,119)
        Net cash provided by operating activities from continuing operations 29,167    20,152 
        Net cash (used in) provided by operating activities from discontinued operations (630)   27 
        Net cash provided by operating activities   28,537    20,179 
                 
CASH FLOWS FROM INVESTING ACTIVITIES        
    Capital expenditures   (15,018)   (15,306)
    Other investing activities   (346)   (1,094)
    Business dispositions   —    1,951 
        Net cash used in investing activities from continuing operations (15,364)   (14,449)
        Net cash used in investing activities from discontinued operations (60)   — 
        Net cash used in investing activities   (15,424)   (14,449)
                 
CASH FLOWS FROM FINANCING ACTIVITIES        
    Principal payments under borrowing arrangements   (35,140)   (30,790)
    Proceeds from borrowing arrangements   24,729    44,971 
    Payments of debt issuance costs   (23)   — 
    Excess tax benefits of share-based payment arrangements   264    — 
    Purchase of treasury stock, at cost   (11,437)   (11,992)
    Exercise of stock options   853    — 
        Net cash (used in) provided by financing activities from continuing operations (20,754)   2,189 
        Net cash used in financing activities from discontinued operations —    — 
        Net cash (used in) provided by financing activities   (20,754)   2,189 
                 
Effect of exchange rate changes on cash and equivalents   (391)   998 
                 
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS   (8,032)   8,917 
CASH AND EQUIVALENTS, beginning of period   32,033    15,101 
CASH AND EQUIVALENTS, end of period   $         24,001    $        24,018 
                 

 

Accompanying notes are integral to these condensed consolidated financial statements.

5
 

PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION

 

Premiere Global Services, Inc., or PGi, has been a global leader in virtual meetings for more than 20 years. Our cloud-based solutions deliver multi-point, real-time virtual collaboration using video, voice and file sharing technologies. PGi solutions are available via desktops, tablets or mobile devices, helping businesses worldwide to be more productive, mobile and green. We have a global presence in 25 countries in our three segments in North America, Europe and Asia Pacific.

 

Our unaudited condensed consolidated financial statements and related footnotes have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP, for interim financial information and Rule 10-01 of Regulation S-X issued by the Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe that these condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the results for interim periods shown. All significant intercompany accounts and transactions have been eliminated in consolidation. Our results of operations for the three and six months ended June 30, 2012 are not indicative of the results that may be expected for the full fiscal year of 2012 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, 2011, which includes information and disclosures not included in this quarterly report.

 

Unless otherwise stated, current and prior period results in our condensed consolidated statements of operations and cash flows and these notes reflect our results from continuing operations and exclude the effect of discontinued operations. See Note 4 to our condensed consolidated financial statements for additional information and related disclosures regarding our discontinued operations. Certain prior year amounts have been reclassified to conform to current year presentation.

 

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Cash and Equivalents and Restricted Cash

 

Cash and equivalents consist of cash on hand. Cash balances that are legally restricted as to usage or withdrawal are separately included in “Prepaid expenses and other current assets” on our condensed consolidated balance sheets. At June 30, 2012 and December 31, 2011, we had $0.7 million and $0.4 million of restricted cash, respectively.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Included in accounts receivable at June 30, 2012 and December 31, 2011 was earned but unbilled revenue of $9.7 million and $6.6 million, respectively, which results from non-calendar month billing cycles and the one-month lag time in billing related to certain of our services. Earned but unbilled revenue is billed within 30 days. Provision for doubtful accounts was $0.2 million for both the three months ended June 30, 2012 and 2011. Provision for doubtful accounts was $0.6 million and $0.4 million for the six months ended June 30, 2012 and 2011, respectively. Write-offs against the allowance for doubtful accounts were $0.1 million for both the three months ended June 30, 2012 and 2011. Write-offs against the allowance for doubtful accounts were $0.4 million and $0.3 million in the six months ended June 30, 2012 and 2011, respectively. Our allowance for doubtful accounts represents reserves for receivables that reduce accounts receivable to amounts expected to be collected. Management uses significant judgment in estimating uncollectible amounts. In estimating uncollectible amounts, management considers factors such as historical and anticipated customer payment performance and industry-specific economic conditions. Using these factors, management assigns reserves for uncollectible amounts by accounts receivable aging categories to specific customer accounts.

6
 

PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation is recorded under the straight-line method over the estimated useful lives of the assets, commencing when the assets are placed in service. The estimated useful lives are five to seven years for furniture and fixtures, two to five years for software and three to ten years for computer servers and Internet and telecommunications equipment. Accumulated depreciation was $124.0 million and $108.8 million as of June 30, 2012 and December 31, 2011, respectively. The cost of installation of equipment is capitalized, as applicable. Amortization of assets recorded under capital leases is included in depreciation. Assets recorded under capital leases and leasehold improvements are depreciated over the shorter of their useful lives or the term of the related lease.

 

Research and Development

 

Research and development expenses primarily related to developing new services, features and enhancements to existing services that do not qualify for capitalization are expensed as incurred.

 

Software Development Costs

 

We capitalize certain costs incurred to develop software features used as part of our service offerings within “Property and Equipment, Net” on our condensed consolidated balance sheets. We capitalized approximately $3.9 million and $4.0 million of these costs for the three months ended June 30, 2012 and 2011, respectively, and $7.6 million and $7.5 million of these costs for the six months ended June 30, 2012 and 2011, respectively. We amortize these capitalized costs on a straight-line basis over the estimated life of the related software, not to exceed five years. Depreciation expense recorded for the developed software was $3.0 million and $2.4 million for the three months ended June 30, 2012 and 2011, respectively, and was $5.8 million and $4.7 million for the six months ended June 30, 2012 and 2011, respectively.

 

Goodwill

 

Goodwill is subject to a periodic impairment assessment by applying a fair value-based test using a two-step method. The first step is to identify potential goodwill impairment by comparing the estimated fair value of the reporting unit to their carrying amounts. The second step measures the amount of the impairment based upon a comparison of “implied fair value” of goodwill with its carrying amount. We adopted December 31 of a given calendar year as our valuation date and evaluated goodwill as of December 31, 2011, with no impairments identified. Based on our most recent calculations, the fair value of each of our reporting units substantially exceeded their respective carrying values. As of June 30, 2012, we are not aware of any events that would lead to an impairment; therefore, we do not believe that any of our reporting units are at risk of failing step one of the goodwill impairment test.

 

Cost Method Investments

 

During June 2011, we invested approximately $1.0 million in a privately held conferencing company. The investment is accounted for under the cost method and is periodically assessed for other-than-temporary impairment using financial results, economic data and other quantitative and qualitative factors deemed applicable. In the event an other-than-temporary impairment occurs, an impairment loss equal to the difference between the cost basis and the fair value will be recognized. The cost of this investment is carried on our condensed consolidated balance sheet at June 30, 2012 as a component of “Other assets.”

 

Revenue Recognition

 

We recognize revenues when persuasive evidence of an arrangement exists, services have been rendered, the price to the buyer is fixed or determinable and collectability is reasonably assured. Revenues consist primarily of usage fees generally based on per minute and per transaction methods. To a lesser extent, we charge subscription-based and license fees and fixed-period minimum revenue commitments. Unbilled revenue consists of revenue that is earned but has not been billed, which results from non-calendar month billing cycles and the one-

7
 

PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

month lag time in billing related to certain of our services. Deferred revenue consists of payments made by customers in advance of the time services are rendered. Incremental direct costs incurred related to deferred revenue are deferred over the life of the contract and are recorded in “Prepaid expenses and other current assets” in our condensed consolidated balance sheets.

 

USF Charges

 

In accordance with Federal Communications Commission rules, we are required to contribute to the federal Universal Service Fund, or USF, for some of our solutions, which we recover from our applicable customers and remit to the Universal Service Administration Company. We present the USF charges that we collect and remit on a net basis, with charges to our customers netted against the amounts we remit.

 

Foreign Currency Translation

 

The assets and liabilities of subsidiaries with a functional currency other than the U.S. Dollar are translated at rates of exchange existing at our condensed consolidated balance sheet dates. Revenues and expenses are translated at average rates of exchange prevailing during the year. The resulting translation adjustments are recorded in the “Accumulated other comprehensive income” component of shareholders’ equity in our condensed consolidated balance sheets. In addition, intercompany loans with foreign subsidiaries are assessed periodically to determine if they will be paid in the foreseeable future.  Loans that are not expected to be paid in the foreseeable future are considered permanently invested.  Therefore, foreign currency exchange gains and losses related to these permanently invested balances are recorded in the “Accumulated other comprehensive income” component in shareholders’ equity in our condensed consolidated balance sheets. Gains and losses resulting from foreign currency transactions, including intercompany transactions that are not related to the balances mentioned above, are included in “Other, net” in our condensed consolidated statements of operations as incurred.

 

Treasury Stock

 

All treasury stock transactions are recorded at cost, and all shares of treasury stock repurchased are retired. During the six months ended June 30, 2012, we repurchased 1,202,874 shares of our common stock for $10.3 million in the open market pursuant to our board-approved stock repurchase program. During the six months ended June 30, 2011, we repurchased 1,469,900 shares of our common stock for $11.1 million in the open market pursuant to our board-approved stock repurchase program.

 

During the six months ended June 30, 2012 and 2011, we redeemed 155,985 and 145,078 shares, respectively, of our common stock to satisfy certain of our employees’ tax withholdings due upon the vesting of their restricted stock grants and remitted $1.2 million and $1.1 million, respectively, to the Internal Revenue Service on our employees’ behalf.

 

Preferred Stock

 

We have 5.0 million shares of authorized $0.01 par value preferred stock, none of which are issued or outstanding. Under the terms of our amended and restated articles of incorporation, our board of directors is empowered to issue preferred stock without shareholder action.

 

Restructuring Costs

 

Restructuring reserves are based on certain estimates and judgments related to severance and exit costs, contractual obligations and related costs and are recorded as “Restructuring costs” in our condensed consolidated statements of operations. See Note 3 to our condensed consolidated financial statements for additional information and related disclosures regarding our restructuring costs.

8
 

PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Excise and Sales Tax

 

Some of our solutions may be subject to telecommunications excise tax and sales taxes in states where we have not collected and remitted such taxes from our customers. During the six months ended June 30, 2012 and 2011, we did not make any significant payments related to the settlement of these state excise and sales tax contingencies.

 

We have reserves for certain state excise and sales tax contingencies based on the likelihood of obligation. These contingencies are included in “Accrued taxes, other than income taxes” in our condensed consolidated balance sheets. At June 30, 2012 and December 31, 2011, we had reserved $2.0 million and $1.7 million, respectively, for certain state excise and sales tax contingencies and interest. We believe we have appropriately accrued for these contingencies. In the event that actual results differ from these reserves, we may need to make adjustments, which could materially impact our financial condition and results of operations. In addition, states may disagree with our method of assessing and remitting such taxes, or additional states may subject us to inquiries regarding such taxes.

 

Income Taxes

 

Income taxes are determined under the asset and liability method as required by ASC 740, “Income Taxes.” Under this method, deferred tax assets and liabilities are recognized based upon the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary items are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. To the extent we establish a valuation allowance or increase this allowance in a period, an expense is recorded within the income tax provision in our condensed consolidated statements of operations. Under current accounting principles, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority.

 

Income tax expense for the three and six months ended June 30, 2012 was $2.7 million and $5.8 million, respectively, compared to $1.9 million and $3.7 million for the three and six months ended June 30, 2011, respectively. The increase in income tax expense during the three and six months ended June 30, 2012 compared to the same periods in the prior year was primarily related to the increases in pre-tax net income.

 

As of June 30, 2012 and December 31, 2011, we had $4.1 million and $3.4 million, respectively, of unrecognized tax benefits. Upon resolution, unrecognized tax benefits of $2.7 million and $2.5 million as of June 30, 2012 and December 31, 2011, respectively, would affect our annual effective tax rate. The unrecognized tax benefits are included in “Other assets,” and “Accrued expenses” under “Long-Term Liabilities” in our condensed consolidated balance sheets. If the statutes of limitations expire on certain unrecognized tax benefits, as anticipated, the balance could change over the next 12 months.

 

Our valuation allowance at December 31, 2011 primarily relates to certain foreign and state net operating loss and capital loss carryforwards that, in the opinion of management, are more likely than not to expire unutilized. During the six months ended June 30, 2012, our valuation allowance increased by $0.3 million primarily as a result of current year tax losses in certain foreign jurisdictions that, in the opinion of management, are more likely than not to go unutilized.

 

Fair Value Measurements

 

Fair value is defined as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability at the measurement date in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The fair value amounts for cash and equivalents, accounts receivable, net,

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PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


and accounts payable and accrued expenses approximate carrying amounts due to the short maturities of these instruments. The estimated fair value of our long-term debt and capital lease obligations at June 30, 2012 and December 31, 2011 were based on expected future payments discounted using current interest rates offered to us on debt of the same remaining maturity and characteristics, including credit quality, and did not vary materially from carrying value.

 

New and Recently Adopted Accounting Pronouncements

 

In June, 2011, Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, No. 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” which modifies the requirements for presenting net income and other comprehensive income and requires that all non-owner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment requires presentation of each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. In December 2011, the FASB issued Accounting Standards Update No. 2011-12 “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” These amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income in all periods presented. This guidance is effective for public companies for fiscal years and interim periods beginning on or after December 15, 2011. We adopted the guidance as of December 31, 2011, and it did not have a material impact on our consolidated financial position or results of operations.

 

In July 2012, the FASB issued ASU No. 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment,” which allows a company the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test.  Under that option, a company would no longer be required to calculate the fair value of an indefinite-lived intangible asset unless the company determines, based on that qualitative assessment, that it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount.  This guidance is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our financial position or results of operations.

 

 

3. RESTRUCTURING COSTS

 

Below is a reconciliation of the beginning and ending balances of our accrued restructuring costs for the six months ended June 30, 2012. All expenses associated with these activities are reflected in “Restructuring costs” in our condensed consolidated statements of operations. Cash payments for restructuring costs from continuing operations were $1.2 million and $4.5 million during the six months ended June 30, 2012 and 2011, respectively.

 

The components included in the reconciliation of the liability balances include activity for our continuing and discontinued operations (in thousands):

 

   Balance at December 31, 2011    Provisions    Cash Payments    Non-cash    Balance at
June 30,
2012 
Accrued restructuring costs:                         
Severance and exit costs  $1,010   $86   $(563)  $(4)  $529 
Contractual obligations   2,687    27    (589)   39    2,164 
Total restructuring costs  $3,697   $113   $(1,152)  $35   $2,693 

 

Realignment of Workforce – 2011

 

During 2011, we eliminated approximately 30 positions in an effort to consolidate and streamline various functions of our workforce. To date, we have recorded $1.7 million of severance costs, including $0.3 million recorded in discontinued operations, and $0.2 million of lease termination costs associated with this realignment. On a segment basis, these restructuring costs totaled $1.2 million in North America, $0.4 million in Europe and $0.3 million in Asia Pacific. Included in these amounts was an adjustment to severance and exit costs of $0.1 million in North America, which was recorded during the six months ending June 30, 2012. Our reserve for the 2011 realignment was $0.3 million at June 30, 2012, including $0.2 million for severance costs and $0.1 million for lease termination costs. We anticipate the severance costs will be paid over the next year and the lease termination costs will be paid over the next 14 months.

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PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Realignment of Workforce – 2010

 

During 2010, we eliminated approximately 165 positions in an effort to consolidate and streamline various functions of our workforce. To date, we have recorded $9.3 million of severance costs and $0.6 million of lease termination costs associated with this realignment. We have also recorded $1.8 million of asset impairments in connection with these restructuring efforts. In addition, we recorded $0.9 million of exit costs related to marketing efforts abandoned during the year and $0.5 million of exit costs related to the reorganization of our operating structure subsequent to the sale of our PGiSend messaging business as restructuring costs. On a segment basis, these restructuring costs totaled $7.7 million in North America, including accelerated vesting of restricted stock with a fair market value of $0.2 million, $2.4 million in Europe and $1.2 million in Asia Pacific. Our reserve for the 2010 realignment was $0.3 million at June 30, 2012, including $0.1 million for lease termination costs and $0.2 million for severance costs. We anticipate the severance costs and the lease termination costs will be paid within the next 12 months.

 

Realignment of Workforce – 2009

 

During 2009, we executed a restructuring plan to consolidate and streamline various functions of our workforce. As part of these consolidations, we eliminated approximately 500 positions. To date, we have recorded total severance and exit costs of $14.7 million associated with this realignment, including accelerated vesting of restricted stock with a fair market value of $0.2 million in North America. We have also recorded $5.6 million of lease termination costs associated with office locations in North America and Europe. On a segment basis, these restructuring costs totaled $13.7 million in North America, $6.0 million in Europe and $0.6 million in Asia Pacific. Our reserve for the 2009 realignment was $2.1 million at June 30, 2012, comprised primarily of lease termination costs. We anticipate these costs will be paid over the next seven years.

 

 

4. DISCONTINUED OPERATIONS

 

PGiSend

 

On October 21, 2010, we completed the sale of our PGiSend messaging business to EasyLink Services International Corporation, or EasyLink, for an aggregate purchase price of $105.0 million, with a working capital target that was finalized in the first quarter of 2011, resulting in an additional payment from EasyLink of $1.8 million.

 

Maritime Notification and Reminder Solutions

 

During the year ended December 31, 2010, we classified our Maritime Notification and Reminder solutions operations as a disposal group held for sale. This disposal group consisted of all customers using these non-conferencing, ship-to-shore communication services targeted specifically towards shipping vessels that we resell through our Japanese subsidiary. As of December 31, 2011, this disposal was completed, and no assets or liabilities of the disposal group remain.

 

PGiMarket

 

On November 5, 2009, we completed the sale of our PGiMarket business. During the six months ended June 30, 2011, we received $0.7 million in cash for the achievement of certain revenue targets in 2010 under an earn-out provision in the sale agreement.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Components of Discontinued Operations

 

The following amounts associated with our discontinued businesses have been segregated from continuing operations and are reflected as discontinued operations for the three and six months ended June 30, 2012 and 2011 (in thousands):

   Three Months Ended
June 30,
  Six Months Ended
June 30,
   2012    2011    2012    2011  
Net revenue from discontinued operations  $—     $3,595   $—     $7,560 
                     
Operating (loss) income   (292)   64    (322)   54 
Interest expense   (48)   —      (96)   (61)
(Loss) income from disposal   (8)   —      (2)   18 
Income tax benefit (expense)   122    (28)   147    (6)
(Loss) income from discontinued operations, net of taxes  $(226)  $36   $(273)  $5 

 

 

5. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

Summarized below are the carrying values of goodwill and any changes to the carrying value of goodwill from December 31, 2011 to June 30, 2012 (in thousands):

 

   North America    Europe    Asia Pacific    Total  
Goodwill:                    
Gross value at December 31, 2011  $363,953   $18,856   $5,304   $388,113 
Accumulated impairment losses   (92,423)   —      —      (92,423)
Carrying value at December 31, 2011   271,530    18,856    5,304    295,690 
Impact of currency fluctuations   88    69    28    185 
Carrying value at June 30, 2012  $271,618   $18,925   $5,332   $295,875 

 

Goodwill is not subject to amortization, but is subject to periodic reviews for impairment.

 

Other Intangible Assets

 

Summarized below are the carrying value and accumulated amortization, if applicable, by intangible asset class (in thousands):

   June 30, 2012  December 31, 2011
   Gross
Carrying Value
   Accumulated Amortization    Net
Carrying Value
   Gross Carrying Value    Accumulated Amortization    Net Carrying Value  
Other intangible assets:                              
   Customer lists  $65,423   $(59,472)  $5,951   $65,566   $(57,682)  $7,884 
   Non-compete agreements   5,704    (5,382)   322    5,701    (5,063)   638 
   Developed technology   1,000    (1,000)   —      1,000    (1,000)   —   
   Other   3,167    (696)   2,471    2,889    (505)   2,384 
       Total other intangible assets  $75,294   $(66,550)  $8,744   $75,156   $(64,250)  $10,906 

 

We record fees incurred in connection with our patents and trademarks in “Prepaid expenses and other current assets” in our condensed consolidated balance sheets until the patents and trademarks are granted or

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PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


abandoned. We have $1.0 million and $1.1 million of these assets recorded as of June 30, 2012 and December 31, 2011, respectively.

 

Other intangible assets are amortized over an estimated useful life between one and 20 years. Estimated annual amortization expense related to our other intangible assets for 2012 through 2016 is as follows (in thousands):

 

Year   Estimated  Annual
Amortization  Expense
     
2012   $ 3,813
2013   $ 1,496
2014   $ 1,115
2015   $ 1,111
2016   $ 851

 

 

6. INDEBTEDNESS

 

Long-term debt and capital lease obligations at June 30, 2012 and December 31, 2011 are as follows (in thousands):

 

   June 30,
2012
   December 31,
2011
 
Borrowings on credit facility  $183,926   $192,885 
Capital lease obligations   6,962    6,923 
Subtotal   190,888    199,808 
Less current portion   (4,211)   (3,845)
Total long-term debt and capital lease obligations  $186,677   $195,963 

 

Our credit facility consists of a $250.0 million revolver, a $50.0 million Term A loan and an uncommitted $75.0 million accordion feature. Our subsidiary, American Teleconferencing Services Ltd., or ATS, is the borrower under our credit facility, with PGi and certain of our material domestic subsidiaries guaranteeing the obligations of ATS under the credit facility, which is secured by substantially all of our assets and the assets of our material domestic subsidiaries. In addition, we have pledged as collateral all of the issued and outstanding stock of our material domestic subsidiaries and 65% of our material foreign subsidiaries. Proceeds drawn under our credit facility can be used for working capital, capital expenditures, acquisitions and other general corporate purposes. The annual interest rate applicable to borrowings under our credit facility, at our option, is (1) the base rate (the greater of either the federal funds rate plus one-half of one percent, the prime rate or one-month LIBOR plus one and one-half percent) plus an applicable percentage that varies based on our consolidated leverage ratio at quarter end, or (2) LIBOR for one, two, three, nine or twelve months adjusted for a percentage that represents the Federal Reserve Board’s reserve percentage plus an applicable percentage that varies based on our consolidated leverage ratio at quarter end. The applicable percentage for base rate loans and LIBOR loans were 1.50% and 2.50%, respectively, at June 30, 2012 under our credit facility. Our interest rate on LIBOR loans, which comprised materially all of our outstanding borrowings as of June 30, 2012, was 2.75%. In addition, we pay a commitment fee on the unused portion of our credit facility that is based on our consolidated leverage ratio at quarter end. As of June 30, 2012, the rate applied to the unused portion of our credit facility was 0.40%. Our credit facility contains customary terms and restrictive covenants, including financial covenants. At June 30, 2012, we were in compliance with the covenants under our credit facility.

 

 

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PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

7. EQUITY-BASED COMPENSATION

 

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 our amended and restated 2004 long-term incentive plan and our amended and restated 2000 directors stock plan, each plan as amended. Options issued under our 2004 plan may be either incentive stock options, which permit income tax deferral upon exercise of options, or non-qualified options not entitled to such deferral. We may only issue non-qualified options under our directors stock plan. The compensation committee of our board of directors administers these stock plans.

 

Equity-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized over the applicable vesting periods. The following table presents total equity-based compensation expense for restricted stock awards included in the line items below in our condensed consolidated statements of operations (in thousands):

 

   Three Months Ended
June 30,
        Six Months Ended
June 30,
   2012    2011   2012    2011  
Cost of revenues  $148   $68  $267   $68 
Selling and marketing   424    282   784    546 
Research and development   135    116   276    325 
General and administrative   1,395    1,329   2,857    2,648 
Equity-based compensation expense   2,102    1,795   4,184    3,587 
Income tax benefits   (736)   (628)  (1,464)   (1,255)
Total equity-based compensation expense, net of tax  $1,366   $1,167  $2,720   $2,332 

 

Restricted Stock Awards

 

The fair value of restricted stock awards is the market value of the stock on the date of grant. The effect of vesting conditions that apply only during the requisite service period is reflected by recognizing compensation cost only for the restricted stock awards for which the requisite service is rendered. As a result, we are required to estimate an expected forfeiture rate, as well as the probability that performance conditions that affect the vesting of certain stock-based awards will be achieved and only recognize expense for those shares expected to vest. We estimate that forfeiture rate based on historical experience of our stock-based awards that are granted, exercised and voluntarily cancelled. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. Our estimated forfeiture rate for restricted stock awards is 3.0%.

 

The following table summarizes the activity of restricted stock awards under our stock plans from December 31, 2011 to June 30, 2012:

  Shares   Weighted-
Average Grant
Date Fair Value
Unvested at December 31, 2011 1,742,920    $ 8.14      
Granted 379,223    8.95      
Vested (534,578)   8.80      
Forfeited —    —       
Unvested at June 30, 2012 1,587,565    $ 8.12      

 

The weighted-average grant date fair value of restricted stock awards granted during the six months ended June 30, 2012 and 2011 was $8.95 and $7.57, respectively. The aggregate fair value of restricted stock vested was $1.8 million and $4.7 million for the three and six months ended June 30, 2012, respectively and $1.4 million and $3.6 million for the three and six months ended June 30, 2011, respectively. During the six months ended June 30, 2012 and the year ended December 31, 2011, we issued 373,711 and 521,840 shares, respectively, of our common

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PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


stock relating to the vesting of restricted stock awards. As of June 30, 2012, we had $10.1 million of unvested restricted stock, which we will recognize over a weighted-average recognition period of 2.19 years.

 

Stock Options

 

The fair value of stock options is estimated at the date of grant with the Black-Scholes option pricing model using various assumptions such as expected life, volatility, risk-free interest rate, dividend yield and forfeiture rates. The expected life of stock-based awards granted represents the period of time that they are expected to be outstanding and is estimated using historical data. Using the Black-Scholes option valuation model, we estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. We have not historically paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. We use historical data to estimate pre-vesting option forfeitures. Stock-based compensation is recorded for only those awards that are expected to vest. No stock options have been issued since the year ended December 31, 2005.

 

The following table summarizes the stock options activity under our stock plans from December 31, 2011 to June 30, 2012:

 

    Options     Weighted-Average Exercise Price   Weighted-
Average Remaining Contractual
Life
(in years)
  Aggregate Intrinsic Value
Options outstanding at December 31, 2011     227,835     $ 9.98            
Granted     —         —              
Exercised     (100,000 )     8.53            
Expired     (31,500 )     11.53            
Options outstanding and exercisable at
    June 30, 2012
    96,335     $ 10.98     1.0   $ 525

 

As of each of June 30, 2012 and 2011, we had no remaining unvested stock options to be recorded as an expense for future periods. During the six months ended June 30, 2012 and the year ended December 31, 2011, we issued 100,000 and 75,000 shares of our common stock, respectively, as a result of options exercised.

 

 

8. EARNINGS PER SHARE

 

Basic and Diluted Earnings Per Share

 

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. The weighted-average number of common shares outstanding does not include any potentially dilutive securities or any unvested restricted shares of common stock. These unvested restricted shares, although classified as issued and outstanding at June 30, 2012 and June 30, 2011, are considered contingently returnable until the restrictions lapse and will not be included in the basic earnings per share calculation until the shares are vested. Unvested shares of our restricted stock do not contain nonforfeitable rights to dividends or dividend equivalents.

 

Diluted earnings per share includes the effect of all potentially dilutive securities on earnings per share. Our unvested restricted shares and stock options are potentially dilutive securities. The difference between basic and diluted weighted-average shares outstanding was the dilutive effect of unvested restricted shares and stock options for the three and six months ended June 30, 2012 and 2011.

 

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PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


The following table represents a reconciliation of the shares used in the calculation of basic and diluted net income per share from continuing operations computations contained in our condensed consolidated financial statements (in thousands, except per share data):

 

 

Three Months

Ended June 30,

 

Six Months

Ended June 30,

  2012     2011     2012     2011
Net income from continuing operations $   6,693     $ 4,853     $ 12,919     $ 7,785
Weighted-average shares outstanding - basic and diluted:                            
Weighted-average shares outstanding - basic   48,103       50,173       48,279       50,465
    Add effect of dilutive securities:                            
        Unvested restricted shares   448       335       451       323
        Stock options   —         —         10       —  
Weighted-average shares outstanding - diluted   48,551       50,508       48,740       50,788
Basic net income per share from continuing operations $ 0.14     $ 0.10     $ 0.27     $ 0.15
Diluted net income per share from continuing operations $ 0.14     $ 0.10     $ 0.27     $ 0.15

 

The weighted-average diluted common shares outstanding for the three and six months ended June 30, 2012 excludes the effect of an aggregate of 117,077 and 149,913 restricted shares, out-of-the-money options and warrants, respectively, because their effect would be anti-dilutive. The weighted-average diluted common shares outstanding for the three and six months ended June 30, 2011 excludes the effect of an aggregate of 536,479 and 795,981 restricted shares, out-of-the-money options and warrants, respectively, because their effect would be anti-dilutive.

 

 

9. COMMITMENTS AND CONTINGENCIES

 

State Corporate Tax Matter

 

On August 6, 2010, one of our former subsidiaries, Xpedite Systems, LLC, or Xpedite, which was included in the sale of our PGiSend messaging business to EasyLink completed on October 21, 2010, received a final determination from the New Jersey Division of Taxation upholding a corporate business tax audit assessment for the tax years ended December 31, 1998 through December 31, 2000 and December 31, 2002. The assessment totaled approximately $6.2 million as of August 15, 2010, including approximately $2.4 million in taxes and $3.8 million in accrued interest and penalties. The assessment relates to the sourcing of Xpedite’s receipts for purposes of determining the amount of its income that is properly attributable to, and therefore taxable by, New Jersey. We are vigorously contesting the determination and filed a timely appeal with the Tax Court of New Jersey on November 2, 2010. We believe we are adequately reserved for this matter. However, if the New Jersey Division of Taxation’s final determination is sustained, the amount assessed could result in an adjustment to our condensed consolidated financial statements and could impact our financial condition and results of operations. We agreed to indemnify EasyLink for this matter in connection with our PGiSend sale.

 

Other Litigation and Claims

 

We are involved in other litigation matters and are subject to claims arising in the ordinary course of business that we do not believe will have a material adverse effect upon our business, financial condition or results of operations, although we can offer no assurance as to the ultimate outcome of any such matters.

 

 

10. SEGMENT REPORTING

 

We manage our operations on a geographic regional basis, with reportable segments in North America, Europe and Asia Pacific. The accounting policies as described in the summary of significant accounting policies are

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PREMIERE GLOBAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


applied consistently across our segments. Our North America segment is primarily comprised of operations in the United States and Canada. We present “Operating income” for each of our reportable segments as a measure of segment profit. Our chief operating decision makers use operating income internally as a means of analyzing segment performance and believe that it more clearly represents our segment profit without the impact of income taxes and other non-operating items. Information concerning our operations in our reportable segments is as follows (in thousands):

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2012     2011     2012     2011  
Net revenues:                                
North America   $ 84,584     $ 78,602     $ 170,269     $ 158,365  
Europe     26,739       25,332       52,518       48,749  
Asia Pacific     15,692       15,056       30,831       28,801  
Consolidated   $ 127,015     $ 118,990     $ 253,618     $ 235,915  
                                 
Operating income (loss):                                
North America   $ 2,965     $ (31 )   $ 5,800     $ (1,005 )
Europe     7,567       7,056       14,702       13,591  
Asia Pacific     863       2,003       1,981       3,481  
Consolidated   $ 11,395     $ 9,028     $ 22,483     $ 16,067  

 

 

11. CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION

 

Supplemental disclosures of cash flow information are as follows (in thousands):

 

            Six Months Ended
            June 30,
            2012   2011
    Cash paid for interest   $      2,820   $      3,218
    Income tax payments   $      3,907   $      2,896
    Income tax refunds   $      1,171   $          249
    Capital lease additions   $      1,485   $          996
    Capitalized interest   $          107   $            78

 

At June 30, 2012 and 2011, we had accrued capital expenditures in “Total current liabilities” in our condensed consolidated balance sheets of $2.8 million and $4.8 million, respectively.

 

 

12. SUBSEQUENT EVENTS

 

In July 2012 through August 6, 2012, we repurchased an aggregate of 240,078 shares of our common stock in the open market pursuant to our board-approved stock repurchase program for approximately $2.2 million, at an average price of $9.19 per share.

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

PGi has been a global leader in virtual meetings for more than 20 years. Our cloud-based solutions deliver multi-point, real-time virtual collaboration using video, voice and file sharing technologies. PGi solutions are available via desktops, tablets or mobile devices, helping businesses worldwide to be more productive, mobile and green. We have a global presence in 25 countries in our three segments in North America, Europe and Asia Pacific.

 

With the launch of our iMeet® and GlobalMeet® solutions, the sale of our PGiSend business and the disposal of our Maritime Notification and Reminder solutions, we have positioned PGi as a focused virtual meetings company. Our continuing operations reflect only our meeting solutions. As a result and except as provided herein, the following discussion and analysis reflects our results from continuing operations.

 

During 2012, we have continued our strategy to transition PGi to a software as a service company, focusing our sales and marketing efforts on growing the market awareness and adoption of our next-generation virtual meeting solutions, iMeet and GlobalMeet. Key highlights of our financial and strategic accomplishments for the second quarter ended June 30, 2012 include:

 

·Generated 6.7% growth in our net revenues for the three months ended June 30, 2012 compared to the same period in 2011, despite a 1.7% negative impact from fluctuations in foreign currency exchange rates;
·Released additional upgrades and enhancements to iMeet and GlobalMeet including advanced new mobile applications for both products; and
·Repurchased nearly one million shares or approximately 2.0% of our outstanding common stock in the open market under our board-approved stock repurchase plan, at an average price of $8.44 per share.

Our primary corporate objectives for the remainder of 2012 are focused on continuing to:

 

·Expand our global distribution in order to further our market reach and accelerate customer awareness and adoption of iMeet and GlobalMeet;
·Develop and release additional upgrades and enhancements to iMeet and GlobalMeet to increase their functionality, improve their competitive positioning and grow their market opportunities; and
·Transition our audio-only customers to our more integrated, online meeting solutions that provide a richer, more productive user experience.

In the first six months of 2012, 35.6% of our net revenues were generated in countries outside the United States. Because we generate a significant portion of our net revenues from our international operations, movements in foreign currency exchange rates affect our reported results. We estimate that changes in foreign currency exchange rates during the first six months of 2012 negatively affected our net revenues by approximately $2.0 million as compared to the same period in 2011.

 

We have historically generated net revenue growth in our meeting solutions. Revenue growth is driven primarily by the increase of total minutes sold, partially offset by the decrease of the average rates per minute. We believe that this trend is consistent with the industry, and we expect it to continue in the foreseeable future. Our business trends and revenue growth continue to be affected by the challenging economic climate, higher global unemployment and lower global business activity. Despite these economic headwinds and continued price compression, our net revenues increased to $253.6 million in the first six months of 2012 as compared to $235.9 million in the same period in 2011, primarily as a result of volume growth.

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We have historically used our cash flows from operating activities for debt repayments, capital expenditures, stock repurchases, acquisitions and strategic investments. As of June 30, 2012, borrowings under our $375.0 million credit facility, including the uncommitted $75.0 million accordion feature, were $183.9 million, with an additional $5.4 million in letters of credit. See “—Capital resources” for a description of our credit facility.

 

In addition, we intend to continue to invest in our virtual meetings solutions, specifically in technology innovation and platform development, as well as new market strategies to better meet the needs of our existing customers and to better attract, engage and acquire new customers.

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of net revenues and expenses during the reporting period. Actual results could differ from the estimates. See “—Critical Accounting Policies.” The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. The results of operations for the six months ended June 30, 2012 are not indicative of the results that may be expected for the full fiscal year of 2012 or for any other interim period. The financial information and discussion presented herein should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2011, which includes information and disclosures not included in this quarterly report. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

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RESULTS OF OPERATIONS

 

Net Revenues

 

The following tables present certain financial information about our segments for the periods presented (in thousands, except percentages):

 

  Three Months Ended
June 30,
  Change
  2012   2011   $   %
Net revenues:                  
North America $ 84,584    $ 78,602    5,982   7.6 
Europe   26,739      25,332    1,407   5.6 
Asia Pacific   15,692      15,056    636   4.2 
Consolidated $ 127,015    $ 118,990    8,025   6.7 
                   
                   
Operating income:                  
North America $ 2,965    $ (31)   2,996     
Europe   7,567      7,056    511     
Asia Pacific   863      2,003    (1,140)    
Consolidated $ 11,395    $ 9,028    2,367     
                   
Percent of net revenues:                  
North America   66.6%     66.1%        
Europe   21.1%     21.3%        
Asia Pacific   12.3%     12.6%        
Consolidated   100.0%     100.0%        
                   
  Six Months Ended
June 30,
  Change
    2012     2011   $   %
Net revenues:                  
North America $ 170,269    $ 158,365    11,904    7.5 
Europe   52,518      48,749    3,769    7.7 
Asia Pacific   30,831      28,801    2,030    7.0 
Consolidated $ 253,618    $ 235,915    17,703    7.5 
                   
Operating income:                  
North America   5,800      (1,005)   6,805     
Europe   14,702      13,591    1,111     
Asia Pacific   1,981      3,481    (1,500)    
Consolidated $ 22,483    $ 16,067    6,416     
                   
Percent of net revenues:                  
North America   67.1%     67.1%        
Europe   20.7%     20.7%        
Asia Pacific   12.2%     12.2%        
Consolidated   100.0%     100.0%        

 

 

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Consolidated Net Revenues

 

The following tables detail the changes in consolidated net revenues from the three and six months ended June 30, 2011 to the three and six months ended June 30, 2012 (in thousands):

 

   Three Months Ended  
    Consolidated    North
America
    Europe    Asia
Pacific
 
                     
June 30, 2011  $118,990   $78,602   $25,332   $15,056 
     Change in volume   30,895    19,429    7,211    4,255 
     Change in average selling prices   (20,904)   (13,292)   (4,219)   (3,393)
     Impact of fluctuations in foreign                    
       currency exchange rates   (1,966)   (155)   (1,585)   (226)
June 30, 2012  $127,015   $84,584   $26,739   $15,692 

 

   Six Months Ended  
    Consolidated    North
America
    Europe    Asia
Pacific
 
                     
June 30, 2011  $235,915   $158,365   $48,749   $28,801 
     Change in volume   58,476    37,000    14,398    7,078 
     Change in average selling prices   (38,574)   (24,886)   (8,431)   (5,257)
     Impact of fluctuations in foreign                    
       currency exchange rates   (2,199)   (210)   (2,198)   209 
June 30, 2012  $253,618   $170,269   $52,518   $30,831 

 

Net revenues increased in each of our operating segments during the three and six months ended June 30, 2012 from the comparable prior year periods due to increased volume, partially offset by decreased average selling prices. These trends in volume and selling prices are primarily due to volume growth from newly acquired and existing large enterprise customers and continued price reductions to existing customers.

 

Cost of Revenues

 

   Three Months Ended
June 30,
   Change  
   2012    2011    $    %  
   (in thousands)      
Cost of revenues:            
     North America  $38,270   $34,911    3,359    9.6 
     Europe   8,056    8,223    (167)   (2.0)
     Asia Pacific   7,462    6,181    1,281    20.7 
       Consolidated  $53,788   $49,315    4,473    9.1 

 

   Six Months Ended
June 30,
   Change  
   2012    2011    $    %  
   (in thousands)      
Cost of revenues:            
     North America  $77,277   $69,827    7,450    10.7 
     Europe   16,041    15,118    923    6.1 
     Asia Pacific   13,920    11,712    2,208    18.9 
       Consolidated  $107,238   $96,657    10,581    10.9 

 

 

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  Three Months Ended   Six Months Ended
  June 30,   June 30,
  2012   2011   2012   2011
  % of Revenue   % of Revenue
Cost of revenues:              
North America 45.2   44.4   45.4   44.1
Europe 30.1   32.5   30.5   31.0
Asia Pacific 47.6   41.1   45.1   40.7
Consolidated 42.3   41.4   42.3   41.0
                         

 

Our cost of revenues as a percentage of net revenues has increased during the three and six months ended June 30, 2012 compared to the same periods during 2011 for North America and Asia Pacific.  These increases were primarily due to volume growth in our large enterprise customer base, including increased capacity requirements, and price concessions to existing customers. Large enterprise customer agreements are negotiated on a global basis, resulting in varying profitability at the segment level. In Asia Pacific, the increase in cost of revenues was also driven by an increase in lower margin third-party sales. In Europe, the sales mix for the three months ended June 30, 2012 included fewer lower margin third-party sales than the comparable period in 2011. Fluctuations in foreign currency exchange rates resulted in a decrease in cost of revenues in Europe of $0.5 million and $0.7 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. Foreign currency fluctuations in Asia Pacific resulted in a decrease of $0.2 million during the three months ended June 30, 2012, compared to the same period in 2011.

 

Selling and Marketing Expenses

 

   Three Months Ended
June 30,
   Change  
   2012    2011    $    %  
   (in thousands)      
Selling and marketing expenses:                    
North America  $20,426   $22,878    (2,452)   (10.7)
Europe   7,853    6,868    985    14.3 
Asia Pacific   4,718    4,501    217    4.8 
Consolidated  $32,997   $34,247    (1,250)   (3.6)
                     

 

   Six Months Ended
June 30,
   Change  
   2012    2011    $    %  
   (in thousands)      
Selling and marketing expenses:                    
North America  $42,329   $47,634    (5,305)   (11.1)
Europe   15,192    13,718    1,474    10.7 
Asia Pacific   9,510    9,007    503    5.6 
Consolidated  $67,031   $70,359    (3,328)   (4.7)

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2012   2011     2012     2011  
    % of Revenue     % of Revenue  
Selling and marketing expenses:                                
North America     24.1       29.1       24.9       30.1  
Europe     29.4       27.1       28.9       28.1  
Asia Pacific     30.1       29.9       30.8       31.3  
Consolidated     26.0       28.8       26.4       29.8  
                                 

 

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Selling and marketing expenses decreased during the three and six months ended June 30, 2012 from the same periods in the previous year due primarily to costs recognized in North America related to the launch of our iMeet and GlobalMeet services in 2011. The increases in costs recognized in Europe and Asia Pacific were primarily attributable to higher personnel-related costs for each period presented. The increase in Europe was partially offset by the effect of fluctuations in foreign currency exchange rates, which resulted in a decrease of $0.6 million and $0.8 million for the three and six months ended June 30, 2012, respectively.

 

General and Administrative Expenses

 

   Three Months Ended
June 30,
   Change  
   2012    2011    $    %  
   (in thousands)      
General and administrative expenses:                    
North America  $11,758   $10,363    1,395    13.5 
Europe   2,083    2,049    34    1.7 
Asia Pacific   2,093    1,805    288    16.0 
Consolidated  $15,934   $14,217    1,717    12.1 

 

   Six Months Ended
June 30,
   Change  
   2012    2011    $    %  
   (in thousands)      
General and administrative expenses:                    
North America  $22,673   $20,405    2,268    11.1 
Europe   4,204    4,094    110    2.7 
Asia Pacific   4,338    3,499    839    24.0 
Consolidated  $31,215   $27,998    3,217    11.5 

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2012   2011     2012     2011  
    % of Revenue     % of Revenue  
General and administrative expenses:               
North America   13.9    13.2    13.3   12.9
Europe   7.8    8.1    8.0   8.4
Asia Pacific   13.3    12.0    14.1   12.1
Consolidated   12.5    11.9    12.3   11.9

 

General and administrative expenses in North America increased in the three and six months ended June 30, 2012 compared to the same periods in 2011 primarily as a result of increased personnel-related costs. General and administrative expenses in Asia Pacific increased during the three months ended June 30, 2012 compared to the same period in 2011 primarily as a result of increases in personnel-related costs. The increases in Asia Pacific for the six months ended June 30, 2012 were primarily due to increases in personnel-related costs of $0.2 million, bad debt expense of $0.3 million and professional fees of $0.3 million. Fluctuations in foreign currency exchange rates resulted in a decrease in general and administrative expenses in Europe of $0.2 million and $0.3 million for the three and six months ended June 30, 2012, respectively.

 

Research and Development Expenses

 

Consolidated research and development expense as a percentage of net revenues was 2.8% and 2.7% for the three and six months ended June 30, 2012, respectively, and was 2.2% and 2.5% for the three and six months ended June 30, 2011, respectively. Consolidated research and development expenses increased $0.9 million and $1.1 million for the three and six months ended June 30, 2012, respectively. The increase in research and development expenses was primarily driven by additional resources to develop our virtual meeting solutions. We incurred the majority of research and development costs in North America.

 

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Equity-Based Compensation Expense

 

Equity-based compensation expense for restricted stock awards is included in operating expenses. The expense was recorded in the line items below (in thousands):

 

   Three Months Ended  Six Months Ended
   June 30,    June 30,  
   2012    2011    2012    2011  
Cost of revenues  $148   $68   $267   $68 
Selling and marketing   424    282    784    546 
Research and development   135    116    276    325 
General and administrative   1,395    1,329    2,857    2,648 
Equity-based compensation expense  $2,102   $1,795   $4,184   $3,587 

 

Depreciation Expense

 

   Three Months Ended
June 30,
   Change  
   2012    2011    $    %  
   (in thousands)      
Depreciation expense:                    
North America  $6,676   $6,491    185    2.9 
Europe   779    741    38    5.1 
Asia Pacific   556    478    78    16.3 
Consolidated  $8,011   $7,710    301    3.9 
                     

 

   Six Months Ended
June 30,
   Change  
   2012    2011    $    %  
   (in thousands)      
Depreciation expense:                    
North America  $13,303   $13,071    232    1.8 
Europe   1,573    1,430    143    10.0 
Asia Pacific   1,080    934    146    15.6 
Consolidated  $15,956   $15,435    521    3.4 

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2012   2011     2012   2011  
    % of Revenue     % of Revenue  
Depreciation expense:               
North America   7.9    8.3    7.8   8.3
Europe   2.9    2.9    3.0   2.9
Asia Pacific   3.5    3.2    3.5   3.2
Consolidated   6.3    6.5    6.3   6.5

 

Consolidated depreciation expense increased for the three and six months ended June 30, 2012 as compared to the same periods in 2011 as a result of increases in our productive asset base.

 

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Amortization Expense

 

   Three Months Ended
June 30,
   Change  
   2012    2011    $    %  
   (in thousands)      
Amortization expense:                    
      North America  $833   $1,236    (403)   (32.6)
      Europe   379    424    (45)   (10.6)
      Asia Pacific   —      79    (79)   (100.0)
          Consolidated  $1,212   $1,739    (527)   (30.3)

 

   Six Months Ended
June 30,
  Change
   2012    2011    $    %  
   (in thousands)      
Amortization expense:                    
      North America  $1,666   $2,468    (802)   (32.5)
      Europe   766    826    (60)   (7.3)
      Asia Pacific   —      155    (155)   (100.0
          Consolidated  $2,432   $3,449    (1,017)   (29.5)

 

    Three Months Ended     Six Months Ended
    June 30,     June 30,  
    2012   2011     2012   2011  
    % of Revenue     % of Revenue
Amortization expense:                        
North America     1.0       1.6       1.0     1.6   
Europe     1.4       1.7       1.5     1.7  
Asia Pacific     0.0       0.5       0.0     0.5  
Consolidated     1.0       1.5       1.0     1.5  

 

Consolidated amortization expense decreased for the three and six months ended June 30, 2012 as compared to the same periods in 2011 primarily as a result of customer lists and non-compete intangible assets from acquisitions in North America that have become fully amortized.

 

Restructuring Costs

 

Consolidated restructuring costs were $0.1 million, or less than 0.1% of net revenues, for the six months ended June 30, 2012, with no corresponding consolidated restructuring costs for the same period in 2011.

 

Realignment of Workforce – 2011

 

During 2011, we eliminated approximately 30 positions in an effort to consolidate and streamline various functions of our workforce. To date, we have recorded $1.7 million of severance costs, including $0.3 million recorded in discontinued operations, and $0.2 million of lease termination costs associated with this realignment. On a segment basis, these restructuring costs totaled $1.2 million in North America, $0.4 million in Europe and $0.3 million in Asia Pacific. Included in these amounts was an adjustment to severance and exit costs of $0.1 million in North America, which was recorded during the six months ending June 30, 2012. Our reserve for the 2011 realignment was $0.3 million at June 30, 2012, including $0.2 million for severance costs and $0.1 million for lease termination costs. We anticipate the severance costs will be paid over the next year and the lease termination costs will be paid over the next 14 months.

 

Realignment of Workforce – 2010

 

During 2010, we eliminated approximately 165 positions in an effort to consolidate and streamline various functions of our workforce. To date, we have recorded $9.3 million of severance costs and $0.6 million of lease

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termination costs associated with this realignment. We have also recorded $1.8 million of asset impairments in connection with these restructuring efforts. In addition, we recorded $0.9 million of exit costs related to marketing efforts abandoned during the year and $0.5 million of exit costs related to the reorganization of our operating structure subsequent to the sale of our PGiSend messaging business as restructuring costs. On a segment basis, these restructuring costs totaled $7.7 million in North America, including accelerated vesting of restricted stock with a fair market value of $0.2 million, $2.4 million in Europe and $1.2 million in Asia Pacific. Our reserve for the 2010 realignment was $0.3 million at June 30, 2012, including $0.1 million for lease termination costs and $0.2 million for severance costs. We anticipate the severance costs and the lease termination costs will be paid within the next 12 months.

 

Realignment of Workforce – 2009

 

During 2009, we executed a restructuring plan to consolidate and streamline various functions of our workforce. As part of these consolidations, we eliminated approximately 500 positions. To date, we have recorded total severance and exit costs of $14.7 million associated with this realignment, including accelerated vesting of restricted stock with a fair market value of $0.2 million in North America. We have also recorded $5.6 million of lease termination costs associated with office locations in North America and Europe. On a segment basis, these restructuring costs totaled $13.7 million in North America, $6.0 million in Europe and $0.6 million in Asia Pacific. Our reserve for the 2009 realignment was $2.1 million at June 30, 2012, comprised primarily of lease termination costs. We anticipate these costs will be paid over the next seven years.

 

Interest Expense

 

Interest expense was $1.8 million and $2.1 million in the three months ended June 30, 2012 and 2011, respectively, and was $3.6 million and $4.2 million in the six months ended June 30, 2012 and 2011, respectively. Interest expense decreased during the three and six months ended June 30, 2012 compared to the same periods in the prior year primarily as a result of a decrease in the amortization of debt issuance costs and a decrease in interest expense associated with lower interest rates on our amended credit facility. We had $183.9 million and $190.5 million of outstanding borrowings on our credit facility subject to interest rate risk at June 30, 2012 and 2011, respectively. Our effective interest rate on LIBOR loans, which comprised materially all of our outstanding borrowings, was 2.75% and 3.20% at June 30, 2012 and 2011, respectively. The weighted-average outstanding balance on our credit facility was $188.7 million and $195.5 million for the three months ended June 30, 2012 and 2011, respectively, and $188.1 million and $192.5 million in six months ended June 30, 2012 and 2011, respectively. The decrease in our weighted-average debt outstanding is attributable to our continued efforts to reduce our debt.

 

Income Tax Expense

 

Income tax expense for the three and six months ended June 30, 2012 was $2.7 million and $5.8 million, respectively, compared to $1.9 million and $3.7 million for the three and six months ended June 30, 2011, respectively. The increase in income tax expense during the three and six months ended June 30, 2012 compared to the same periods in the prior year was primarily related to the increases in pre-tax net income.

 

As of June 30, 2012 and December 31, 2011, we had $4.1 million and $3.4 million, respectively, of unrecognized tax benefits. Upon resolution, unrecognized tax benefits of $2.7 million and $2.5 million as of June 30, 2012 and December 31, 2011, respectively, would affect our annual effective tax rate. The unrecognized tax benefits are included in “Other assets,” and “Accrued expenses” under “Long-Term Liabilities” in our condensed consolidated balance sheets. If the statutes of limitations expire on certain unrecognized tax benefits, as anticipated, the balance could change over the next 12 months.

 

Our valuation allowance at December 31, 2011 primarily relates to certain foreign and state net operating loss and capital loss carryforwards that, in the opinion of management, are more likely than not to expire unutilized. During the six months ended June 30, 2012, our valuation allowance increased by $0.3 million primarily as a result of current year tax losses in certain foreign jurisdictions that, in the opinion of management, are more likely than not to go unutilized.

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Discontinued Operations

 

PGiSend

 

On October 21, 2010, we completed the sale of our PGiSend messaging business to EasyLink, for an aggregate purchase price of $105.0 million, with a working capital target that was finalized in the first quarter of 2011, resulting in an additional payment from EasyLink of $1.8 million.

 

Maritime Notification and Reminder Solutions

 

During the year ended December 31, 2010, we classified our Maritime Notification and Reminder solutions operations as a disposal group held for sale. This disposal group consisted of all customers using these non-conferencing, ship-to-shore communication services targeted specifically towards shipping vessels that we resell through our Japanese subsidiary. As of December 31, 2011, this disposal was completed, and no assets or liabilities of the disposal group remain.

 

PGiMarket

 

On November 5, 2009, we completed the sale of our PGiMarket business. During the six months ended June 30, 2011, we received $0.7 million in cash for the achievement of certain revenue targets in 2010 under an earn-out provision in the sale agreement.

 

Components of Discontinued Operations

 

The following amounts associated with our discontinued businesses have been segregated from continuing operations and are reflected as discontinued operations for the three and six months ended June 30, 2012 and 2011 (in thousands):

 

   Three Months Ended  Six Months Ended
   June 30,    June 30,  
   2012    2011    2012    2011  
Net revenue from discontinued operations  $—     $3,595   $—     $7,560 
                     
Operating (loss) income   (292)   64    (322)   54 
Interest expense   (48)   —      (96)   (61)
(Loss) income from disposal   (8)   —      (2)   18 
Income tax benefit (expense)   122    (28)   147    (6)
(Loss) income from discontinued operations, net of taxes  $(226)  $36   $(273)  $5 

 

Liquidity and Capital Resources

 

At June 30, 2012, we had utilized $189.3 million of our credit facility, with $183.9 million in borrowings and $5.4 million in letters of credit outstanding. From time to time, we may enter into interest rate swaps to reduce our exposure to market risk from changes in interest rates on interest payments associated with our credit facility. As of June 30, 2012, we have no outstanding interest rate swaps.

 

At the scheduled maturity of our credit facility in December 2016, or in the event of an acceleration of the indebtedness under the credit facility following an event of default, the entire outstanding principal amount of the indebtedness under the facility, together with all other amounts payable thereunder, will become due and payable. We may not have sufficient funds to pay such obligations in full at maturity or upon such acceleration. If we default and are not able to pay any such obligations when due, our lenders have liens on substantially all of our assets and could foreclose on our assets in order to satisfy our obligations.

 

As of June 30, 2012, we had $24.0 million in cash and equivalents compared to $32.0 million as of December 31, 2011. Cash balances residing outside of the United States as of June 30, 2012 were $22.0 million compared to $30.6 million as of December 31, 2011. We receive cash for repayment of royalties and management fees charged to international locations from the United States. We record foreign currency exchange gains and

27
 


losses resulting from these transactions in “Other, net” in our condensed consolidated statements of operations. We generally consider intercompany loans with foreign subsidiaries to be permanently invested for the foreseeable future. Therefore, we record foreign currency exchange fluctuations resulting from these transactions in the cumulative translation adjustment account on our condensed consolidated balance sheets. Based on our potential cash position and potential conditions in the capital markets, we could require repayment of these intercompany loans despite the long-term intention to hold them as permanent investments.

 

Cash provided by operating activities

 

Consolidated operating cash flows were $29.2 million and $20.2 million for the six months ended June 30, 2012 and 2011, respectively. The increase in net cash provided by operating activities was primarily attributable to an increase in net income of $4.9 million and a decrease in restructuring payments of $3.4 million.

 

Cash used in investing activities

 

Consolidated investing activities used cash of $15.4 million and $14.4 million for the six months ended June 30, 2012 and 2011, respectively. The principal use of cash in investing activities for the six months ended June 30, 2012 related to $15.0 million of capital expenditures. The principal uses of cash in investing activities for the six months ended June, 30, 2011 related to $15.3 million of capital expenditures and $1.0 million of cash used for our investment described in Note 2 to our condensed consolidated financial statements, partially offset by $2.0 million of cash provided by working capital and earn-out provisions primarily related to our PGiSend and PGiMarket sales.

 

Cash used in financing activities

 

Consolidated financing activities used cash of $20.8 million and provided cash of $2.2 million for the six months ended June 30, 2012 and 2011, respectively. The primary use of cash from financing activities in the six months ended June 30, 2012 included $10.4 million of net payments on borrowing arrangements and $11.4 million in treasury stock purchases, partially offset by $0.9 million related to the exercise of stock options. The primary source of cash from financing activities in the six months ended June 30, 2011 included $14.2 million of borrowings on our credit facility partially offset by $12.0 million in treasury stock purchases.

 

Off-balance sheet arrangements

 

At June 30, 2012, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

Capital resources

 

Our credit facility consists of a $250.0 million revolver, a $50.0 million Term A loan and an uncommitted $75.0 million accordion feature. Our subsidiary, ATS, is the borrower under our credit facility, with PGi and certain of our material domestic subsidiaries guaranteeing the obligations of ATS under the credit facility, which is secured by substantially all of our assets and the assets of our material domestic subsidiaries. In addition, we have pledged as collateral all of the issued and outstanding stock of our material domestic subsidiaries and 65% of our material foreign subsidiaries. Proceeds drawn under our credit facility can be used for working capital, capital expenditures, acquisitions and other general corporate purposes. The annual interest rate applicable to borrowings under our credit facility, at our option, is (1) the base rate (the greater of either the federal funds rate plus one-half of one percent, the prime rate or one-month LIBOR plus one and one-half percent) plus an applicable percentage that varies based on our consolidated leverage ratio at quarter end, or (2) LIBOR for one, two, three, nine or twelve months adjusted for a percentage that represents the Federal Reserve Board’s reserve percentage plus an applicable percentage that varies based on our consolidated leverage ratio at quarter end. The applicable percentage for base rate loans and LIBOR loans were 1.50% and 2.50%, respectively, at June 30, 2012 under our credit facility. Our interest rate on LIBOR loans, which comprised materially all of our outstanding borrowings as of June 30, 2012, was 2.75%. In addition, we pay a commitment fee on the unused portion of our credit facility that is based on our consolidated leverage ratio at quarter end. As of June 30, 2012, the rate applied to the unused portion of our credit facility was 0.40%. Our credit facility contains customary terms and restrictive covenants, including financial covenants. At June 30, 2012, we were in compliance with the covenants under our credit facility.

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At June 30, 2012, we had $183.9 million of borrowings and $5.4 million in letters of credit outstanding under our credit facility.

Liquidity

 

At June 30, 2012, we had $24.0 million in cash and equivalents compared to $32.0 million as of December 31, 2011. Cash and cash equivalents held by our foreign subsidiaries at June 30, 2012 were $22.0 million compared to $30.6 million as of December 31, 2011. As we generated positive operating cash flows from each of our geographic business segments for the year ended December 31, 2011, and expect these results to continue on an annualized basis, we currently do not foresee a need to repatriate the cash and cash equivalents held by our foreign subsidiaries to fund domestic operations or repay domestic obligations. However, if these funds are needed for our operations in the United States, we could be required to pay additional U.S. taxes to repatriate these funds. We utilize a variety of tax planning and financing strategies with the objective of having our worldwide cash and cash equivalents available in the locations where they are needed, and, when advantageous, may access foreign cash or cash equivalents in a tax efficient manner.

 

At December 31, 2011 each geographic business segment had sufficient cash flows from operations to service existing debt obligations, to fund capital expenditure requirements and to fund research and development expenses for new services and enhancements to existing services. We believe that we will generate adequate operating cash flows to fund capital expenditures and contractual commitments, to satisfy our indebtedness and fund our liquidity needs for at least the next 12 months. At June 30, 2012, we had $110.7 million of available credit on our credit facility, without regard to the uncommitted $75.0 million accordion feature. We have historically borrowed on our credit facility in order to fund acquisitions and stock repurchases.

 

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 the entry into credit facilities with banking institutions.

 

 

SUBSEQUENT EVENTS

 

In July 2012 through August 6, 2012, we repurchased an aggregate of 240,078 shares of our common stock in the open market pursuant to our board-approved stock repurchase program for approximately $2.2 million, at an average price of $9.19 per share.

 

 

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 review the accounting policies used in reporting our financial results on a regular basis and review critical accounting policies and related disclosures with the audit committee of our board of directors. We have identified the policies below as critical to our business operations and the understanding of our financial condition and results of operations:

 

·Revenue recognition;

 

·Allowance for uncollectible accounts receivable;

 

·Goodwill and other intangible assets;

 

·Income taxes;

 

·Restructuring costs; and

 

·Legal contingencies.
29
 

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, 2011.

 

 

FORWARD LOOKING STATEMENTS

 

When used in this quarterly report on Form 10-Q and elsewhere by us or by management from time to time, the words “believes,” “anticipates,” “expects,” “will,” “may,” “should,” “intends,” “plans,” “estimates,” “predicts,” “potential,” “continue” and similar expressions are intended to identify forward-looking statements concerning our operations, economic performance and financial condition. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, many of which are beyond our control and reflect future business decisions which are subject to change. A variety of factors could cause actual results to differ materially from those anticipated in our forward-looking statements, including, but not limited to, the following factors:

 

Competitive pressures, including pricing pressures;

 

Technological changes and the development of alternatives to our services;

 

Market acceptance of our new cloud-based, virtual meeting services, including our iMeet and GlobalMeet services;

 

Our ability to attract new customers and to retain and further penetrate our existing customers;

 

Risks associated with challenging global economic conditions;

 

Price increases from our telecommunications service providers;

 

Service interruptions and network downtime;

 

Technological obsolescence and our ability to upgrade our equipment or increase our network capacity;

 

Concerns regarding the security of transactions;

 

Future write-downs of goodwill or other intangible assets;

 

Greater than anticipated tax liabilities;

 

Restructuring and cost reduction initiatives and the market reaction thereto;

 

Our level of indebtedness;

 

Risks associated with acquisitions and divestitures;

 

The impact of the sale of our PGiSend business;

 

Our ability to protect our intellectual property rights, including possible adverse results of litigation or infringement claims;

 

Regulatory or legislative changes, including further government regulations applicable to traditional telecommunications service providers and data privacy;

 

Risks associated with international operations and market expansion, including fluctuations in foreign currency exchange rates;

 

30
 

Factors described under the caption Part I, Item 1A. “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2011; and

 

Factors described from time to time in our press releases, reports and other filings made with the SEC.

 

We caution that these factors are not exclusive. Consequently, all of the forward-looking statements made in this quarterly report on Form 10-Q and in other documents filed with the SEC are qualified by these cautionary statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. We undertake 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. From time to time, we may enter into interest rate swaps to reduce our exposure to market risk from changes in interest rates on interest payments associated with our credit facility. As of June 30, 2012, we have no outstanding swaps.

 

At June 30, 2012, we had borrowings of $183.9 million outstanding under our credit facility that were subject to interest rate risk. Each 100 basis point increase in interest rates relative to these borrowings would impact our annual pre-tax earnings and cash flows by approximately $1.8 million based on our June 30, 2012 debt level.

 

We generated 35.6% of our consolidated net revenues and 30.8% of our operating expenses in countries outside of the United States in the six months ended June 30, 2012. Additionally, we have foreign currency denominated debt as part of our credit facility. At June 30, 2012, we had debt outstanding of £2.5 million. As a result, fluctuations in exchange rates impact the amount of our reported consolidated net revenues, operating income and debt. A hypothetical positive or negative change of 10% in foreign currency exchange rates would positively or negatively change our net revenues, operating expenses and outstanding debt for the six months ended June 30, 2012 by approximately $9.0 million, $7.1 million and $0.4 million, respectively. Our principal exposure has been related to local currency sales and operating costs in Australia, Canada, the Euro Zone, Japan, Norway and the United Kingdom. We have not used derivatives to manage foreign currency exchange risk, and we did not have any foreign currency exchange derivatives outstanding at June 30, 2012.

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our management has evaluated, under the supervision and with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of June 30, 2012. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2012, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended, or the Exchange Act), were effective and designed to ensure that (a) information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and instructions, and (b) information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

31
 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

State Corporate Tax Matter

 

On August 6, 2010, one of our former subsidiaries, Xpedite, which was included in the sale of our PGiSend messaging business to EasyLink completed on October 21, 2010, received a final determination from the New Jersey Division of Taxation upholding a corporate business tax audit assessment for the tax years ended December 31, 1998 through December 31, 2000 and December 31, 2002. The assessment totaled approximately $6.2 million as of August 15, 2010, including approximately $2.4 million in taxes and $3.8 million in accrued interest and penalties. The assessment relates to the sourcing of Xpedite’s receipts for purposes of determining the amount of its income that is properly attributable to, and therefore taxable by, New Jersey. We are vigorously contesting the determination and filed a timely appeal with the Tax Court of New Jersey on November 2, 2010. We believe we are adequately reserved for this matter. However, if the New Jersey Division of Taxation’s final determination is sustained, the amount assessed could result in an adjustment to our condensed consolidated financial statements and could impact our financial condition and results of operations. We agreed to indemnify EasyLink for this matter in connection with our PGiSend sale.

 

Other Litigation and Claims

 

We are involved in other litigation matters and are subject to claims arising in the ordinary course of business that we do not believe will have a material adverse effect upon our business, financial condition or results of operations, although we can offer no assurance as to the ultimate outcome of any such matters.

 

ITEM 1A. RISK FACTORS.

 

Part I, Item 1A. “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2011 includes a detailed discussion of risk factors that could materially affect our business, financial condition or results of operations. There have been no material changes from the risk factors disclosed in that report.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period   Total Number
of Shares
Purchased (1)
  Average
Price Paid
per Share
  Total Number of Shares Purchased as Part of
Publicly Announced
Plans or Programs (2)
  Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
                 
April 1 - 30, 2012   25,268   $ 8.99   15,343   3,518,809
May 1 - 31, 2012   612,111   $ 8.53   612,111   2,906,698
June 1 - 30, 2012   384,497   $ 8.27   333,220   2,573,478
Total   1,021,876   $ 8.44   960,674   2,573,478

 

(1)The total number of shares purchased includes shares purchased pursuant to our board-approved stock repurchase plan described below and shares surrendered by employees to the company to satisfy tax withholding obligations in connection with the vesting of restricted stock totaling 9,925 shares and 51,277 shares for the months of April and June 2012, respectively.

 

(2)In July 2011, our board approved a stock repurchase program authorizing the repurchase of up to 5.0 million shares of our common stock. Through June 30, 2012, we had repurchased 2,426,522 shares pursuant to our new stock repurchase program.

 

32
 

ITEM 6. EXHIBITS

 

(a) Exhibits

 

The exhibits filed with this report are listed on the “Exhibit Index” following the signature page of this Form 10-Q, which are incorporated by reference.

33
 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 9, 2012 PREMIERE GLOBAL SERVICES, INC.
   
   
   
  /s/ David E. Trine                                                         
  David E. Trine
  Chief Financial Officer
  (principal financial and accounting officer and
  duly authorized signatory of the registrant)

34
 

EXHIBIT INDEX

 

Exhibit  
Number Description
   
3.1 Amended and Restated Articles of Incorporation of the Registrant dated March 15, 2006 (incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005 and filed on March 16, 2006).
   
3.2 Third Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated and filed on October 21, 2010).
   
4.1 See Exhibits 3.1 and 3.2. for provisions of the Articles of Incorporation and Bylaws defining the rights of the holders of common stock of the Registrant.
   
4.2 Specimen Stock Certificate (incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005 and filed on March 16, 2006).
   
10.1 Restricted Stock Agreement between David E. Trine and the Registrant, dated June 30, 2012 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated June 29, 2012 and filed on July 3, 2012).
   
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
   
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
   
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
   
32.2 Certification of Chief Financial Officer, as required by Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
   
101.INS  XBRL Instance Document*
   
101.SCH  XBRL Taxonomy Extension Schema Document*
   
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document*
   
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document*
   
101.LAB  XBRL Taxonomy Extension Label Document*
   
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document

 

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed furnished and not

filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under these sections.

 

35
 

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