Ptek Holdings is a global provider of business communication services to large and medium-sized corporate customers. The company has two business units, Premier Conferencing and Xpedite. Premier Conferencing offers a variety of conferencing and Web-based data collaboration services, and Xpedite offers enhanced electronic messaging through various distribution channels including e-mail, fax, wireless, and voice. The company has a global presence and an established customer base of over 32,000 corporate accounts, including a majority of the Fortune 500 firms, spanning virtually every industry group.
A large number of businesses rely on data, audio, and web conferencing or electronic transactional messaging to manage a wide variety of important communications. The growth of these communication technologies and the increasing complexity of service requirements have created a large market for companies that wish to outsource these group communication processes. In addition, the current geopolitical climate coupled with corporate cost-cutting trends have encouraged companies to replace business travel with more convenient, reliable, and economical communications such as teleconferencing and videoconferencing. Ptek went public in 1996 at $25.00 per share. The company had $52 million in revenue and was marginally profitable during its first year of operation. The company began a rapid expansion program in 1997 that included deploying a large number of assets into fixed infrastructure in order to accommodate the growing volume of conferencing activities. In addition, the company made a number of acquisitions of smaller enterprises and quickly grew sales from $52 million in 1996 to a peak of $458 million in 1999. However, the company was not able to execute this growth strategy at a profit. On a per-share basis, the company lost $.78 in 1997, $1.67 in 1998, $.72 in 1999, and $1.22 in 2000 as sales declined to $423 million in 2001. As a result of write-downs and charge-offs as well as continuing losses on its operating business, the company reported a loss of $4.84 per share. Although the company was largely unprofitable on a generally accepted accounting principle (GAAP) earnings basis, between 1998 and 2001 the company generated large internal cash flow through depreciation and amortization of capital equipment. So, although the company had had significant GAAP earnings losses, it managed to generally break even and even create positive cash flow during the period through 2001.
During 2001 and 2002, the company presented what seemed to be an interesting investment opportunity. Sales had stabilized at around $425 million and the company was trading at a relatively low multiple of book value as well as a low multiple of cash flow. In fact, during 2000, 2001, and 2002, the company traded in a range as low as 1.0 times cash flow and as high as 6.4 times cash flow. On a cash flow basis, this was an extremely cheap company. Furthermore, in 2002 the company had created a stable EBITDA margin of 17.5 percent and a net profit margin of 4.2 percent, which created a return on equity of 17.7 percent. All these financial metrics suggested that if the company could continue growing, it would present a fairly attractive investment opportunity and would ultimately show the ability to convert revenue to earnings and allow for expanding margins and growing profitability.
On August 7, 2003, Ptek Holdings announced the pricing of an offering of $75 million of 5 percent five-year convertible subordinated notes due in 2008. The press release stated that the notes were sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 as amended. In addition, certain persons in offshore transactions relying on Regulation S also purchased the offering. In essence, that press release announced to the world that the company had done a PIPE offering of convertible subordinated notes. The press release indicated that the notes were convertible under certain circumstances into the company’s standard stock at a conversion rate of 149.4 shares per $1,000 of principal amount. That equaled a conversion price of approximately $6.69 per share. At the time, the common stock of the company was trading at about $5.50 a share, so the $6.69 conversion price represented a conversion premium of 18 percent. This indicated that institutional investors believed that the potential return on the common stock would be no less than 18 percent, based on the trading premium for which they negotiated upon the pricing of the securities. On August 21, the company filed a registration rights agreement between Ptek Holdings and CIBC World Markets, an affiliate of UBS Securities, as the initial purchasers of the 5 percent convertible subordinated notes.
For purposes of micro cap analysis, UBS Securities would be considered a technical investor, and it’s likely that these convertible subordinated notes went into one of its hedge fund vehicles. It would also be safe to assume that at the time, the time horizon on these notes, although having a useful life through August 2008, would for practical purposes be shorter than the five years indi- cated by the registration rights agreement.
In part, the company used the proceeds to fund several acquisitions of complementary business lines and fund several joint ventures with other service providers that would provide increased revenue for the company. The year 2003 was solidly profitable for the company, with the real profitability starting with the June 2003 quarter. However, sales began to increase with the September and December quarters, along with real net income, with the company showing $.42 of adjusted gap earnings for the year ended December 2003.
Since the August 2003 offering of convertible subordinated debentures, Ptek Holding stock has increased in value from approximately $5.50 per share to approximately $11.00 per share, showing about 100 percent appreciation over the time period.
On June 14, 2004, Ptek Holdings announced that all outstanding 5 percent convertible subordinated notes due in 2008 would be converted into approximately 12.7 million shares of common stock, all of which had been included in the company’s diluted shares outstanding. As a condition of the conversion, Ptek would pay converting note holders accrued interest of approximately $1.4 million and also pay them a make-whole provision, essentially a prepayment penalty of approximately $16.3 million, which represents the net present value of future interest payments on the bonds.
During the first quarter of 2004, Ptek continued to perform strongly, with revenues increasing from $89 million in March 2003 to $105 million in March 2004. The company earned $.13 per common share on a fully diluted basis, an increase of 25 percent over the $.09 per share the company earned for the quarter ended March 2003. Since 2003, five well-known research organizations have elected to begin coverage on Ptek Holdings, including CIBC World Markets, which were the initial issuers of the convertible subordinated debt, and Morgan Keegan, a well-known regional brokerage firm. This is just a brief example of the private investment and public equities transactional activity that takes place in the capital markets. These types of transactions are worth scrutinizing in order to determine whether there is an opportunity available as a private micro cap investor. The addition of capital allows companies like Ptek Holdings to continue executing their business plans, along with increasing equity capitalization through ongoing conversion of convertible securities, all of which points to positive future valuation potential for the company.