<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
__________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-22585
VIALOG CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3305282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 NEW ENGLAND BUSINESS CENTER, SUITE 160
-----------------------------------------
ANDOVER, MASSACHUSETTS 01810
(Address of principal executive offices, including Zip Code)
(978) 975-3700
---------------
(Registrant's telephone number, including area code)
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 twelve months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes [X] No [_]
At August 12, 1998 the registrant had outstanding an aggregate of 3,675,072
shares of its Common Stock, $.01 par value.
1
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VIALOG CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets at December 31, 1997 and June 30, 1998 (Unaudited) 3
Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended
June 30, 1997 and 1998 4
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended
June 30, 1997 and 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
</TABLE>
2
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VIALOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,567 $ 3,608
Accounts receivable, net of allowance
for doubtful accounts of $32 and $159, respectively 5,686 6,613
Prepaid expenses 156 298
Deferred offering costs - 174
Other current assets 101 59
--------- ---------
Total current assets 15,510 10,752
Property and equipment, net 7,544 9,396
Deferred debt issuance costs 7,324 6,377
Goodwill and intangible assets, net 44,391 43,140
Other assets 314 626
--------- ---------
Total assets $ 75,083 $ 70,291
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 397 $ 370
Accounts payable 2,129 2,619
Accrued interest expense 1,310 1,215
Accrued expenses and other liabilities 4,415 4,345
--------- ---------
Total current liabilities 8,251 8,549
Long-term debt, less current portion 71,539 71,911
Other long-term liabilities 175 206
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value; 10,000,000
shares authorized; none issued and outstanding - -
Common stock, $0.01 par value; 30,000,000 shares
authorized; 3,486,380 and 3,665,072 shares, respectively,
issued and outstanding 35 37
Additional paid-in capital 11,689 11,742
Retained deficit (16,606) (22,154)
--------- ---------
Total stockholders' deficit (4,882) (10,375)
--------- ---------
Total liabilities and stockholders' deficit $ 75,083 $ 70,291
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ - $ 11,878 $ - $ 23,168
Cost of revenues, excluding depreciation - 6,012 - 12,134
Selling, general and administrative expense 2,660 4,437 3,530 7,942
Depreciation expense 2 651 3 1,235
Amorization of goodwill and intangibles - 623 - 1,251
----------- ----------- ----------- -----------
Operating income (loss) (2,662) 155 (3,533) 606
Inerest expense, net (63) (3,109) (66) (6,154)
----------- ----------- ----------- -----------
Net loss $ (2,725) $ (2,954) $ (3,599) $ (5,548)
=========== =========== =========== ===========
Net loss per share - basic and diluted $ (0.97) $ (0.81) $ (1.30) $ (1.55)
=========== =========== =========== ===========
Weighted average shares outstanding 2,799,300 3,628,072 2,773,300 3,585,370
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $(3,599) $(5,548)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 3 1,235
Amortization of goodwill and intangibles - 1,251
Amorization of debt issuance costs and debt discount 53 1,496
Provision for doubtful accounts - 131
Write-off of deferred offering costs 205 -
Changes in operating assets and liabilities:
Accounts receivable - (1,058)
Prepaid expenses and other current assets 13 (100)
Other assets - (199)
Accounts payable 1,100 490
Accrued expenses 1,459 (151)
Other long-term liabilities - 31
-------- --------
Cash flows used in operating activities (766) (2,422)
-------- --------
Cash flows from investing activities:
Additions to property and equipment (24) (3,087)
Deferred acquisition costs (42) (119)
-------- --------
Cash flows used in investing activities (66) (3,206)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt and warrants 500 -
Payments of long-term debt - (198)
Proceeds from issuance of common stock 2 41
Deferred offering costs - (174)
-------- --------
Cash flows provided by (used in) financing activities 502 (331)
-------- --------
Net decrease in cash and cash equivalents (330) (5,959)
Cash and cash equivalents at beginning of period 337 9,567
-------- --------
Cash and cash equivalents at end of period $ 7 $ 3,608
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - $ 4,934
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission, and reflect all adjustments (all of which are of a normal recurring
nature) which, in the opinion of management, are necessary for a fair statement
of the results of the interim periods presented. The unaudited results of
operations for the three and six month periods ended June 30, 1998 are not
necessarily an indication of the results of operations for the full year. These
financial statements do not include all disclosures associated with annual
financial statements and, accordingly, should be read in conjunction with the
financial statements and footnotes for the year ended December 31, 1997 included
in the Company's Form 10-K where certain terms have been defined. The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(2) DESCRIPTION OF BUSINESS
VIALOG Corporation (the "Company") was incorporated in Massachusetts on January
1, 1996. The Company was formed to create a national independent provider of
group communications services, consisting primarily of operator-attended and
operator-on-demand audio teleconferencing, as well as video and data
conferencing services. On November 12, 1997, the Company sold $75.0 million in
senior notes due 2001, Series A in a private placement (the "Private
Placement"). Contemporaneously with the closing of the Private Placement, the
Company acquired, in separate transactions (the "Acquisitions"), six private
conference service bureaus (each an "Operating Center", and collectively, the
"Operating Centers") in exchange for cash and shares of its common stock. Each
of the Operating Centers is a wholly-owned subsidiary of the Company.
Prior to November 12, 1997, the Company did not conduct any operations, and all
activities conducted by it related to the Acquisitions and the completion of
financing transactions to fund the Acquisitions.
(3) LONG-TERM DEBT
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
(in thousands)
12 3/4% Senior Notes Payable, due 2001, net
of unamortized discount of $4,203 and $3,659 $70,797 $71,341
Capitalized lease obligations 1,044 856
Other long-term debt 95 84
--------- ---------
Total long-term debt 71,936 72,281
Less current portion 397 370
--------- ---------
Total long-term debt, less current portion $71,539 $71,911
--------- ---------
SENIOR NOTES PAYABLE
The senior notes issued in the Private Placement bear interest at 12 3/4% per
annum, payable semi-annually on May 15 and November 15 of each year, commencing
May 15, 1998. The senior notes, which are guaranteed by each of the Operating
Centers, mature on November 15, 2001 and are redeemable in whole or in part at
the option of the Company on or after November 15, 1999 at 110% of the principal
amount thereof, and on or after November 15, 2000 at 105% of the principal
amount thereof, in each case together with accrued interest to the date of
redemption. In addition, there are certain other early redemption options
available to the Company at any time on or prior to November 15, 1999 at certain
premiums, as specified in the indenture pursuant to which the senior notes were
issued.
6
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On February 12, 1998, the Company offered to exchange (the "Exchange Offer")
$75.0 million of 12 3/4% senior notes, Series B (the "Exchange Notes") for the
existing $75.0 million of 12 3/4% senior notes, Series A (the "Old Notes"). In
connection with the Exchange Offer, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 for the registration of
the Exchange Notes under the Securities Act of 1933. The form and terms of the
Exchange Notes are identical in all material respects to the form and terms of
the Old Notes except for certain transfer restrictions and registration rights
relating to the Old Notes. The Old Notes and the Exchange Notes (collectively,
the "Senior Notes") were issued pursuant to an indenture dated November 12,
1997. The Company did not receive any proceeds from the Exchange Offer, which
was terminated on March 26, 1998 with all of the Old Notes being surrendered for
Exchange Notes.
(4) LOSS PER SHARE
As the Company was in a net loss position for the three and six months ended
June 30, 1997 and 1998, common stock equivalents of 822,508, 1,971,468, 849,826
and 1,904,365 for the three months ended June 30, 1997 and 1998 and the six
months ended June 30, 1997 and 1998, respectively, were excluded from the
diluted loss per share calculation as they would be antidilutive. As a result,
diluted loss per share for the three and six months ended June 30, 1997 and 1998
is the same as basic loss per share and, therefore, has not been presented
separately.
(5) SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION
The 12 3/4% Senior Notes due November 15, 2001, in the aggregate principal
amount of $75.0 million, are fully and unconditionally guaranteed, on a joint
and several basis, by all of the Company's subsidiaries. Each of the guarantors
is a wholly-owned subsidiary of the Company. Summarized financial information
of the Company and its subsidiaries is presented below as of and for the six
months ended June 30, 1998. Separate financial statements and other disclosures
concerning the guarantor subsidiaries are not presented because management has
determined that they are not material to investors.
<TABLE>
<CAPTION>
VIALOG CALL
CORP. ACCESS CSI POINTS TCC AMERICO CDC ELIMINATIONS CONSOLIDATED
------ ------ --------- ------ --------- ------- --------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION
AS OF JUNE 30, 1998
(UNAUDITED)
Total current assets $ 2,111 $ 2,978 $ 2,029 $2,386 $1,055 $ (588) $ 781 $ - $10,752
Property and equipment, net 291 4,439 1,109 1,761 1,069 636 91 - 9,396
Investment in subsidiaries 57,121 - - - - - - (57,121) -
Goodwill and intangible assets - 15,457 14,769 3,744 3,842 2,891 2,437 - 43,140
Other assets 6,652 159 79 - 14 91 8 - 7,003
------- ------- ------- ------ ------ ------ ------ -------- -------
Total assets $66,175 $23,033 $17,986 $7,891 $5,980 $3,030 $3,317 $(57,121) $70,291
======= ======= ======= ====== ====== ====== ====== ======== =======
Current liabilities $ 3,325 $ 2,065 $ 595 $ 934 $ 700 $ 797 $ 133 $ - $ 8,549
Long-term debt, excluding
current portion 71,341 16 334 - 136 84 - - 71,911
Other liabilities - 172 - - 13 - 21 - 206
Stockholders' equity (deficit) (8,491) 20,780 17,057 6,957 5,131 2,149 3,163 (57,121) (10,375)
------- ------- ------- ------ ------ ------ ------ -------- -------
Total liabilities and stock-
holders' equity (deficit) $66,175 $23,033 $17,986 $7,891 $5,980 $3,030 $3,317 $(57,121) $70,291
======= ======= ======= ====== ====== ====== ====== ======== =======
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
VIALOG CALL
CORP. ACCESS CSI POINTS TCC AMERICO CDC ELIMINATIONS CONSOLIDATED
------ ------ --------- ------ --------- ------- ------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
INFORMATION FOR THE SIX
MONTHS ENDED JUNE 30,
1998 (UNAUDITED)
Net revenues $ - $ 8,797 $ 4,164 $ 4,787 $ 2,809 $ 1,457 $ 1,394 $ (240) $ 23,168
Cost of revenues, excluding
depreciation - 4,055 1,753 3,336 1,490 924 816 (240) 12,134
Selling, general and
administrative expenses 4,907 714 463 323 474 778 283 - 7,942
Depreciation expense 23 615 188 214 114 57 24 - 1,235
Amortization of goodwill and
intangibles - 445 433 127 102 78 66 - 1,251
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) (4,930) 2,968 1,327 787 629 (380) 205 - 606
Interest income (expense), net (6,095) 3 (29) - (19) (19) 5 - (6,154)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $(11,025) $ 2,971 $ 1,298 $ 787 $ 610 $ (399) $ 210 $ - $ (5,548)
======== ======== ======== ======== ======== ======== ======== ======== ========
CASH FLOW INFORMATION FOR
THE SIX MONTHS ENDED
JUNE 30, 1998 (UNAUDITED)
Cash flows provided by (used
in) operating activities $ (4,016) $ 873 $ 647 $ (45) $ 313 $ (61) $ (133) $ - $ (2,422)
Cash flows used in investing
activities (363) (1,748) (336) (358) (300) (82) (19) - (3,206)
Cash flows used in financing
activities (133) (18) (119) - (51) (10) - - (331)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents (4,512) (893) 192 (403) (38) (153) (152) - (5,959)
Cash and cash equivalents at
the beginning of period 8,396 440 (49) 489 46 67 178 - 9,567
-------- -------- -------- -------- -------- -------- -------- -------- --------
Cash and cash equivalents at
the end of period $ 3,884 $ (453) $ 143 $ 86 $ 8 $ (86) $ 26 $ - $ 3,608
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(6) ACQUISITION
In May, 1998, the Company signed a definitive merger agreement to acquire all of
the outstanding capital stock of A Business Conference-Call, Inc. ("ABCC"),
contingent upon completion of certain items defined in the merger agreement. The
acquisition will be accounted for using the purchase method of accounting. The
total purchase price is $14.0 million in cash plus (i) an additional amount,
based on ABCC's closing date balance sheet, equal to the balances of cash plus
accounts receivable (net of a bad debt reserve of 5%) less all liabilities as of
the closing date, and (ii) approximately $100,000 related to tax reimbursements.
Based on ABCC's June 30, 1998 balance sheet, the amount of such additional
consideration would be approximately $252,000. In addition, the Company expects
to incur approximately $200,000 of acquisition costs. The two stockholders of
ABCC will each enter into one-year employment contracts and receive incentive
stock options for the purchase of 37,500 shares of common stock at the effective
date of the merger. The options will vest as to 3,125 shares on the effective
date of the merger and an additional 3,125 shares on each October 1, January 1,
April 1, and July 1 thereafter until fully vested.
(7) OFFICER TERMINATION
The Company terminated the employment of David L. Lipsky, former President of
Americo, in June 1998. On July 22, 1998, the Company and Mr. Lipsky signed an
agreement resolving a dispute regarding his employment and position at Americo.
The Company agreed to pay Mr. Lipsky a sum of $309,000, less required
withholdings and deductions, in satisfaction of amounts due under his employment
agreement and to include Mr. Lipsky as a selling shareholder in the proposed
initial public offering of the Company's common stock with respect to the
267,826 shares of common stock owned by Mr. Lipsky. In exchange, Mr. Lipsky
agreed, among other things, to cancel all of his vested and unvested stock
options, release the Company from all claims, refrain from acquiring any voting
securities of the Company for ten years, and acknowledge the termination of his
employment as President of Americo and his term as a director of the Company.
Approximately $413,000 has been expensed in the three months ended June 30, 1998
related to the payment of $309,000 and associated legal fees.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the financial statements and
footnotes contained in the Company's Form 10-Q for the three and six months
ended June 30, 1998 and the Form 10-K for the year ended December 31, 1997 filed
with the Securities and Exchange Commission.
VIALOG CORPORATION
RESULTS OF OPERATIONS
The Company was incorporated on January 1, 1996. Prior to the Acquisitions of
the Operating Centers, the Company did not conduct any operations, and all
activities conducted by it related to the Acquisitions and the completion of
financing transactions to fund the Acquisitions.
Net revenues and cost of revenues, excluding depreciation. As the Company did
not conduct any operations prior to November 12, 1997, there were no revenues
and cost of revenues, excluding depreciation for the three and six months ended
June 30, 1997. Net revenues and cost of revenues, excluding depreciation for
the three and six months ended June 30, 1998 represent the consolidated results
of the Company, including the Operating Centers.
Two of the Company's largest outsourcing customers have recently agreed to
acquire or merge with competitors of the Company. Collectively, these customers
accounted for approximately 13% of the Company's 1997 combined net revenues.
One of these customers, representing approximately 9% of the Company's 1997
combined net revenues, has verbally informed the Company that it will honor its
outsourcing contract with the Company through at least August 1999. The Company
believes that the second customer, representing approximately 4% of the
Company's 1997 combined net revenues, will move its teleconferencing business
during the second half of 1998 to a teleconferencing company it has recently
acquired. Although a significant reduction in or loss of net revenues from
these customers could reduce the Company's expected net revenues and operating
results in the near term, the Company believes that the long-term impact to net
revenues and results of operations will not be significant.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.8 million, or 67%, from $2.7 million to
$4.4 million for the three months ended June 30, 1997 and 1998, respectively,
and increased $4.4 million, or 125%, from $3.5 million to $7.9 million for the
six months ended June 30, 1997 and 1998, respectively. The increase was
primarily due to the fact that selling, general and administrative expenses for
the three and six months ended June 30, 1997 represented only general and
administrative expenses related to the organization of the Company and the
consummation of business combination agreements with the Operating Centers,
while the expenses for the three and six months ended June 30, 1998 represent
consolidated selling, general and administrative expenses of the Company,
including the Operating Centers. Selling, general and administrative expenses
for the six months ended June 30, 1997 and 1998 consisted primarily of the
following: (i) compensation, benefits and travel expenses of $779,000 and $5.0
million, respectively, (ii) certain marketing expenses, including advertising,
promotions, trade shows and consulting of $237,000 and $1.0 million,
respectively, (iii) professional services expenses of $2.4 million and $602,000,
respectively, (iv) occupancy costs of $96,000 and $360,000, respectively, (v)
materials, supplies and equipment related costs of $26,000 and $378,000,
respectively, (vi) taxes and insurance costs of $0 and $254,000, respectively,
and (vii) all other costs of $19,000 and $371,000, respectively. Included in
professional services expenses for the three months ended June 30, 1997
is approximately $2.0 million related to an initial public offering which was
terminated in early 1997. Included in selling, general and administrative
expenses for the three and six months ended June 30, 1998 is approximately
$508,000 for compensation and legal expenses related to severance agreements for
two former employees.
Depreciation and amortization expense. Depreciation and amortization expense
increased $1.3 million from $2,000 to $1.3 million for the three months ended
June 30, 1997 and 1998, respectively, and increased $2.5 million from $3,000 to
$2.5 million for the six months ended June 30, 1997 and 1998, respectively. The
increase was primarily due to the fact that VIALOG Corporation did not conduct
operations during the three and six months ended June 30, 1997, while
depreciation and amortization expense for the three and six months ended June
30, 1998 represents consolidated depreciation and amortization expense of the
Company, including the Operating Centers.
Interest expense, net. Interest expense, net increased $3.0 million from
$63,000 to $3.1 million for the three months ended June 30, 1997 and 1998,
respectively, and increased $6.1 million from $66,000 to $6.2 million for the
six months ended June
9
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30, 1997 and 1998, respectively. The six month increase was primarily due to (i)
approximately $4.8 million of interest expense on the $75.0 million of Senior
Notes and (ii) approximately $1.5 million of non-cash interest expense related
to the amortization of deferred debt issuance costs and original issue discount
on the Senior Notes, partially offset by (iii) increased interest income of
approximately $182,000 due to increased cash balances.
LIQUIDITY AND CAPITAL RESOURCES
As the Company did not conduct any operations prior to November 12, 1997, the
Company generated negative cash flows for the six months ended June 30, 1997.
For the six months ended June 30, 1998, the Company generated negative cash
flows from operations of $2.4 million. Cash used in investing activities of
$3.2 million for the six months ended June 30, 1998 included $3.1 million
related to the acquisition of property and equipment and $119,000 of deferred
acquisition costs. Cash used in financing activities of $331,000 for the six
months ended June 30, 1998 represents payments of indebtedness of the Operating
Centers and deferred offering costs, offset by proceeds from the exercise of
stock options.
On November 12, 1997, the Company completed a Private Placement of $75.0 million
of Senior Notes, Series A. The Senior Notes bear interest at 12 3/4% per
annum, payable semi-annually on May 15 and November 15 of each year, commencing
May 15, 1998. The Senior Notes are guaranteed by the Operating Centers and
mature on November 15, 2001. The Senior Notes are redeemable in whole or in
part at the option of the Company on or after November 15, 1999 at 110% of the
principal amount thereof, and on or after November 15, 2000 at 105% of the
principal amount thereof until maturity, in each case together with accrued
interest to the date of redemption. In addition, there are certain other early
redemption options available to the Company at any time on or prior to November
15, 1999 at certain premiums, as specified in the Indenture. In the event of a
change in control, as defined in the Indenture, the Company may be required to
repurchase all of the outstanding Senior Notes at 101% of the principal amount
plus accrued interest and additional interest, if any. The Indenture contains
restrictive covenants with respect to the Company that among other things,
create limitations (subject to certain exceptions) on (i) the incurrence of
additional indebtedness, (ii) the ability of the Company to purchase, redeem or
otherwise acquire or retire any Common Stock or warrants, rights or options to
acquire Common Stock, to retire any subordinated indebtedness prior to final
maturity or to make investments in any person, (iii) certain transactions with
affiliates, (iv) the ability to materially change the present method of
conducting business, (v) the granting of liens on property or assets, (vi)
mergers, consolidations and the disposition of assets, (vii) declaring and
paying any dividends or making any distribution on shares of Common Stock, and
(viii) the issuance or sale of any capital stock of the Company's subsidiaries.
The Indenture does not require the Company to maintain compliance with any
financial ratios or tests, except with respect to certain restrictive covenants
noted above. The Company is in compliance with all covenants contained in the
Indenture.
The Company anticipates that its cash flows from operations and existing cash
balances will meet or exceed its 1998 working capital needs and debt service
requirements. The Company may need to finance certain capital expenditures for
property and equipment. The Company expects to meet its liquidity requirements
beyond 1998, including repayment of the Senior Notes, through a combination of
working capital, cash flow from operations, borrowings, and future issuances of
debt and/or equity securities. However, no assurances can be given that such
funds will be available when required or on terms favorable to the Company.
In May, 1998, the Company signed a definitive merger agreement to acquire all of
the outstanding capital stock of A Business Conference-Call, Inc. ("ABCC"),
simultaneous with and contingent upon the closing of a proposed initial public
offering of common stock by the Company. The acquisition will be accounted for
using the purchase method of accounting. The total purchase price is $14.0
million in cash plus (i) an additional amount, based on ABCC's closing date
balance sheet, equal to the balances of cash plus accounts receivable (net of a
bad debt reserve of 5%) less all liabilities as of the closing date, and (ii)
approximately $100,000 related to tax reimbursements. Based on ABCC's June 30,
1998 balance sheet, the amount of such additional consideration would be
approximately $252,000. In addition, the Company expects to incur approximately
$200,000 of acquisition costs. No assurances can be given that either the
proposed initial public offering or the acquisition of ABCC will occur as
anticipated.
The Company intends to continue pursuing attractive acquisition opportunities.
The timing, size or success of any acquisition and the associated potential
capital commitments are unpredictable. The Company plans to fund future
acquisitions primarily through a combination of working capital, cash flow from
operations and borrowings, as well as issuances of debt and/or equity
securities. However, no assurances can be given that such funds will be
available when required or on terms favorable to the Company.
The Acquisition agreements, pursuant to which the Operating Centers were
acquired (except for Americo), limit through 1999 the Company's ability to
change the location of an Operating Center's facilities (except for Call
Points), physically merge the Operating Center's operations with another
operation, change the position of those employees who received employment
agreements
10
<PAGE>
pursuant to the applicable Acquisition agreement, reduce the workforce or
terminate employees (except as related to employee performance, the contemplated
reorganization of the combined sales and marketing staff and the consolidation
of certain accounting functions) without the approval of a majority in interest
of the former stockholders of the affected Operating Center. Based on the term
of these limitations and the fact that the Company has been growing and adding
additional employees, the Company does not believe that these limitations will
have a significant impact on the future results of operations and liquidity.
The Company is highly leveraged and has a stockholders' deficit at June 30,
1998. This indebtedness requires the Company to dedicate a significant portion
of its cash flow from operations to service its indebtedness and makes the
Company more vulnerable to unfavorable changes in general economic conditions.
The Company is aware of the issues associated with the programming code in
existing computer systems as the millenium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or fail.
The Company is using both internal and external resources to identify, correct
or reprogram, and test the systems for Year 2000 compliance. The Company has
performed a preliminary review of its existing computer programs to address the
Year 2000 issue. Based on the preliminary review, the Company believes that the
Year 2000 issue will not have a significant impact on the operations or the
financial results of the Company. The internally developed computer programs
used in the operations of the Company that are expected to be used beyond the
year 1999 are Year 2000 compliant. Additionally, as part of the integration of
the Operating Centers, the Company will be implementing common systems in both
the operations and financial management areas of the Company within the next two
years. The systems implemented or upgraded will all be Year 2000 compliant, one
of the criteria of the systems integration plan. The Company will continue to
assess the impact of the Year 2000 issue as a part of the systems integration
plan. The Company is in the process of contacting all of its software and
hardware suppliers with regard to their respective Year 2000 compliant programs.
CONSOLIDATED AND COMBINED OPERATING CENTERS AND VIALOG CORPORATION--RESULTS OF
OPERATIONS
The combined Operating Centers' Statement of Operations data for the six months
ended June 30, 1997 does not purport to present the financial results or the
financial condition of the combined Operating Centers in accordance with
generally accepted accounting principles. Such data represents merely a
summation of the net revenues and cost of revenues, excluding depreciation of
the individual Operating Centers on an historical basis, and excludes the
effects of pro forma adjustments. This data will not be comparable to and may
not be indicative of the Company's post-combination results of operations
because the Operating Centers were not under common control or management.
The following table compares certain unaudited combined data of the Operating
Centers on an historical basis for the six months ended June 30, 1997 and
certain unaudited consolidated data of VIALOG Corporation for the six months
ended June 30, 1998, excluding the effects of pro forma adjustments:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------
1997 1998
---------------- ----------------
<S> <C> <C> <C> <C>
Net revenues $17,376 100.0% $23,168 100.0%
Cost of revenues, excluding depreciation 8,519 49.0% 12,134 52.4%
</TABLE>
Net revenues. All Operating Centers reflected an increase in net revenues for
the six months ended June 30, 1998 compared to the six months ended June 30,
1997. Net revenues increased $5.8 million, or 33.3%, from combined net revenues
of $17.4 million in 1997 to consolidated net revenues of $23.2 million in 1998.
Overall, the increase was primarily due to increased call volumes for audio and
video conferencing services. The major components of this increase were (i) an
increase in Access' net revenues of $2.7 million, or 43.7%, from $6.1 million to
$8.8 million for the six months ended June 30, 1997 and 1998, respectively,
which consisted of increased sales of teleconferencing services of approximately
$1.3 million and $1.4 million to existing and new customers, respectively,
including the introduction of video equipment sales in the first
11
<PAGE>
quarter of 1998, (ii) an increase in TCC's net revenues of $866,000, or 44.5%,
which was primarily attributable to increased audio teleconferencing services to
existing customers and new customers, (iii) an increase in CSI's net revenues of
$930,000, or 28.8%, which was primarily due to increased revenues from two
significant customers, which represented 71.7% and 71.5% of CSI's net revenues
for the six months ended June 30, 1997 and 1998, respectively, and (iv) an
increase in Call Points' net revenues of $715,000, or 17.6%, which was primarily
due to increased revenues for audio teleconferencing services to existing retail
and financial services customers.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation for the six months ended June 30, 1998 increased $3.6 million, or
42.4%, from cost of revenues, excluding depreciation for the six months ended
June 30, 1997, and increased as a percentage of revenue from 49.0% to 52.4% for
the six months ended June 30, 1997 and 1998, respectively. The dollar increase
was primarily attributable to (i) an increase in Access' cost of revenues,
excluding depreciation of $1.4 million, or 54.7%, resulting from increased
telecommunications costs and personnel and related costs associated with
increased call volumes, and equipment costs related to the introduction of video
equipment sales in the first quarter of 1998 (which generate a lower gross
margin than teleconferencing services), (ii) an increase in CSI's cost of
revenues, excluding depreciation of $629,000, or 56.1%, resulting from increased
telecommunications costs associated with increased call volumes as well as
increased operating costs due to increased staffing to support current and
projected revenue growth, (iii) an increase in Call Points' cost of revenues,
excluding depreciation of $552,000, or 19.9%, resulting primarily from increased
telecommunications costs associated with increased call volumes, and (iv) an
increase in TCC's cost of revenues, excluding depreciation of $533,000, or
56.5%, resulting from increased telecommunications costs associated with
increased call volumes as well as increased operating costs due to increased
staffing to support current and projected revenue growth. The increase as a
percentage of revenues was primarily attributable to (a) a change at Access in
the utilization of certain personnel from providing sales support activities
during the start-up phase of video conferencing, the related cost of which was
included in selling, general and administrative expenses during the six months
ended June 30, 1997, to being involved directly in the providing of video
conferencing services during the six months ended June 30, 1998, the related
cost of which was included in cost of revenues, excluding depreciation, (b)
additional labor and related expenses associated with the integration of the
Operating Centers and temporary accelerated hiring and training due to
anticipated increases in call volumes, (c) a modest net decrease in the average
price per conferencing minute for similar types of conferencing services, which
resulted in a net decrease to net revenues of approximately $716,000 based on
taking the respective call volumes for the six months ended June 30, 1998 at the
average prices during the six months ended June 30, 1997 for similar services,
and (d) additional long distance charges associated with new Federal
Communications Commission fees.
Certain of the operating Centers have entered into new contracts for long
distance telephone service. Had these contracts been in effect as of January 1,
1998, cost of revenues, excluding depreciation for the six months ended June 30,
1998 would have decreased by approximately $518,000.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for internal
use, and is effective for fiscal years beginning after December 31, 1998, with
earlier application encouraged. The adoption of SOP 98-1 is not expected to have
a material effect on the Company's financial statements.
CAUTIONARY STATEMENTS FOR FORWARD LOOKING INFORMATION
Management's discussion and analysis set forth above contains certain forward
looking statements, including statements regarding its financial position and
results of operations. These forward looking statements are based on current
expectations. Certain factors have been identified by the Company which could
cause the Company's actual results to differ materially from expected and
historical results. These factors are discussed in the Safe Harbor for Forward
Looking Statements section of the Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Form 10-
K for the year ended December 31, 1997, and should be read in conjunction with
this Form 10-Q.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as described below, there are no material pending legal proceedings
to which the Company is a party or to which any of its properties are subject.
In connection with the acquisition of the assets of Call Points, Inc. ("Call
Points"), the Company agreed to assume all disclosed liabilities with the
exception of any liabilities arising out of Equal Employment Opportunity
Commission ("EEOC") claims and litigation filed against Call Points and Ropir
Industries, Inc. ("Ropir"), the sole stockholder and parent corporation of Call
Points, by certain former and current employees. On or about October 30, 1997,
11 employees or former employees of Call Points filed claims in federal district
court (Northern District of Alabama) against Call Points, Ropir and certain
other parties named therein. On August 11, 1998, the complainants in these cases
named the Company as a defendant in such pending litigation and seek to hold the
Company liable for damages resulting from the litigation as a successor in
interest to Call Points, and two of the complainants added additional claims
against the Company alleging discriminatory and retaliatory conduct. In addition
to equitable relief, the complainants are seeking an unspecified amount for back
pay, compensatory and punitive damages and attorneys fees based on allegations
of discrimination, retaliation and racially harassing atmosphere. Although the
Company believes it has defenses to any such claim, there can be no assurance
that any such defense would be successful. The principal stockholder of Call
Points agreed to indemnify the Company from any liability relating to such
claims and placed $250,000 of the proceeds from the sale of the assets of Call
Points in escrow with a third party to secure such indemnification obligations.
In light of such indemnification, the Company does not believe that such claims,
if successful, would have a material adverse effect on the Company.
A former employee of Conference Source International, Inc. ("CSI") has claimed
in writing that he may be entitled to up to five percent of the stock of CSI,
based on an unsigned paper outlining possible employment terms. Based on the
$18.7 million consideration paid to CSI's stockholders upon the consummation of
the Acquisition of CSI by VIALOG Corporation, the value of a five percent equity
interest in CSI would be approximately $934,000. CSI's position is that the
only agreements with such employee were set forth in two successive executed
employment agreements, each of which had a specific provision that such
agreement was inclusive as to the terms of employment. The Company and the
former stockholders of CSI believe that such claim is without merit.
There have been no significant changes to the Company's outstanding litigation
since the filing of the Company's Form 10-K for the twelve months ended December
31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of stockholders, held on June 19,1998, in lieu of and for
the purposes of the annual meeting, the stockholders of the Company elected
Richard G. Hamermesh as a director of the Company to hold office until the 2001
Annual Meeting of Stockholders or special meeting held in lieu thereof. The
nominee was elected with the following vote:
ELECTION OF DIRECTOR VOTES FOR VOTES WITHHELD OR OPPOSED
-------------------- --------- -------------------------
Richard G. Hamermesh 2,102,546 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 11(a) Calculation of Shares Used in Determining Loss Per Share
(b) Reports on Form 8-K.
A report on Form 8-K was filed on May 28, 1998 to report that the Company
entered into a definitive merger agreement with A Business Conference-Call, Inc.
("ABCC"), pursuant to which the Company will acquire all of the outstanding
capital stock of ABCC for approximately $14 million in cash.
A report on Form 8-K was filed on July 2, 1998 to report the election of Richard
G. Hamermesh as a director of the Company for a three year term.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
VIALOG Corporation
(Registrant)
Date: August 14, 1998
/s/ Glenn D. Bolduc
--------------------------
Glenn D. Bolduc,
President and Chief Executive Officer
/s/ John J. Dion
-------------------------
John J. Dion,
Vice President--Finance
(Principal Financial Officer and Principal
Accounting Officer)
14
<PAGE>
EXHIBIT INDEX
EXHIBIT EXHIBIT
NUMBER
11(a) - Calculation of Shares Used in Determining Loss Per Share
27 - Financial Data Schedule
15
<PAGE>
VIALOG CORPORATION
CALCULATION OF SHARES USED IN DETERMINING LOSS PER SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC LOSS PER SHARE
Weighted average number of common
shares outstanding 2,799,300 3,628,072 2,773,300 3,585,370
========= ========= ========= =========
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DILUTED LOSS PER SHARE
Weighted average number of common
shares outstanding 2,799,300 3,628,072 2,773,300 3,585,370
Common stock equivalents - - - -
--------- --------- --------- ---------
Total 2,799,300 3,628,072 2,773,300 3,585,370
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,608,000
<SECURITIES> 0
<RECEIVABLES> 6,772,000
<ALLOWANCES> 159,000
<INVENTORY> 0
<CURRENT-ASSETS> 10,752,000
<PP&E> 10,903,000
<DEPRECIATION> 1,507,000
<TOTAL-ASSETS> 70,291,000
<CURRENT-LIABILITIES> 8,549,000
<BONDS> 71,911,000
0
0
<COMMON> 37,000
<OTHER-SE> (10,412,000)
<TOTAL-LIABILITY-AND-EQUITY> 70,291,000
<SALES> 23,168,000
<TOTAL-REVENUES> 23,168,000
<CGS> 0
<TOTAL-COSTS> 12,134,000
<OTHER-EXPENSES> 10,428,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,154,000
<INCOME-PRETAX> (5,548,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,548,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,548,000)
<EPS-PRIMARY> (1.55)
<EPS-DILUTED> (1.55)
</TABLE>
