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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
35 NEW ENGLAND BUSINESS CENTER, SUITE 160
ANDOVER, MA 01810
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(978) 975-3700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
As of March 15, 1998 the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the Company was $11,558,615. The
aggregate market value has been computed based on a price per share of $5.75.
On such date the Company had 3,531,410 shares of common stock outstanding.
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PART I
The Form 10-K for the year ended December 31, 1997 has been amended to (i)
reflect a revised presentation style for the Consolidated Statement of
Operations, (ii) include supplemental consolidating condensed financial
information for the Company and its subsidiaries as guarantors of the
Company's 12 3/4% Senior Notes due November 15, 2001, and (iii) include
separate financial information for Access and CSI, the Company's subsidiaries
that are considered to represent a significant percentage of the operating
results of the Company. In addition, certain disclosures have been added to
conform to the disclosures included in the Company's Form S-1 Registration
Statement (File No. 333-53395) filed with the Securities and Exchange
Commission. There was no change to net revenues, net loss or net loss per
share for the year ended December 31, 1997 as a result of the amendment.
This Annual Report on Form 10-K contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Forward-
looking statements should be read with the cautionary statements and important
factors included in this Form 10-K. (See Item 7.--Management's Discussion and
Analysis of Financial Condition and Results of Operations, Safe Harbor for
Forward-Looking Statements.) Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than
statements of historical facts. Such forward-looking statements may be
identified, without limitation, by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts," "projects," and
similar expressions. The Company's expectations, beliefs and projections are
expressed in good faith and are believed by the Company to have a reasonable
basis, including without limitation, management's examination of historical
operating trends, data contained in the Company's records and other data
available from third parties, but there can be no assurance that management's
expectations, beliefs or projections will result or be achieved or
accomplished.
ITEM 1. BUSINESS.
INTRODUCTION
VIALOG Corporation, a Massachusetts corporation, was founded on January 1,
1996 with the intention of becoming a leading provider of value-added
electronic group communications services. These services include audio, video
and data teleconferencing. On November 12, 1997, VIALOG Corporation acquired,
in separate transactions (the "Acquisitions"), six private conference service
bureaus (each, an "Acquired Company"; collectively, the "Acquired Companies")
in exchange for cash and shares of its common stock. Unless otherwise
indicated, (i) all references to "VIALOG Corporation" mean VIALOG Corporation
as a stand alone entity and (ii) all references to "VIALOG" or the "Company"
refer to VIALOG Corporation and include its consolidated subsidiaries. Unless
otherwise indicated, all share, per share and financial information set forth
in this Report has been adjusted to give effect to the Acquisitions. A brief
description of each of the Acquired Companies is set forth below.
Telephone Business Meetings, Inc. D/B/A Access Conference Call Service
("ACCESS"): Access is headquartered and maintains its operations center in
Reston, Virginia. Founded in 1987, Access had net revenues of approximately
$9.1 million in 1996 and of approximately $12.6 million in 1997. Access
specializes in providing electronic group communications services to numerous
organizations, including financial institutions, government agencies, trade
associations and professional service firms. Access is also a leader among the
Acquired Companies in the development of video teleconferencing services. As
of February 1, 1998, Access had approximately 126 employees and approximately
1,512 ports of teleconferencing capability.
Conference Source International, Inc. ("CSI"): CSI is headquartered and
maintains its operations center in Atlanta, Georgia. Founded in 1992, CSI had
net revenues of approximately $5.9 million in 1996 and of approximately $6.4
million in 1997. CSI specializes in providing electronic group communications
services to certain facilities-based carriers and non-facilities-based
telecommunications providers. As of February 1, 1998, CSI had approximately 53
employees and approximately 1,440 ports of teleconferencing capability.
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Call Points, Inc. ("Call Points"): Call Points is headquartered and
maintains its operations center in Montgomery, Alabama. Founded in 1988, Call
Points had net revenues of approximately $7.5 million in 1996 and of
approximately $8.5 million in 1997. Call Points specializes in providing
electronic group communications services to the retail industry. As of
February 1, 1998, Call Points had approximately 94 employees and approximately
2,389 ports of teleconferencing capability.
Kendall Square Teleconferencing, Inc. D/B/A The Conference Center
("TCC"): TCC is headquartered and maintains its operations center in
Cambridge, Massachusetts. Founded in 1987, TCC had net revenues of
approximately $3.4 million in 1996 and of approximately $4.1 million in 1997.
TCC services a general business clientele. As of February 1, 1998, TCC had
approximately 42 employees and approximately 528 ports of teleconferencing
capability.
American Conferencing Company, Inc. D/B/A Americo ("AMERICO"): Americo is
headquartered and maintains its operations center in Oradell, New Jersey.
Founded in 1987, Americo had net revenues of approximately $1.7 million in
1996 and of approximately $2.2 million in 1997. Americo services a general
business clientele. As of February 1, 1998, Americo had approximately 42
employees and approximately 456 ports of teleconferencing capability.
Communication Development Corporation ("CDC"): CDC is headquartered and
maintains its operations center in Danbury, Connecticut. Founded in 1990, CDC
had net revenues of approximately $1.5 million in 1996 and of approximately
$2.1 million in 1997. CDC specializes in providing a range of electronic group
communications services and customized communications solutions to its
clients, the majority of whom are in the pharmaceutical industry. As of
February 1, 1998, CDC had approximately 27 employees and approximately 292
ports of teleconferencing capability.
DESCRIPTION OF BUSINESS
Company Overview
VIALOG is a leading independent provider of electronic group communications
services, consisting primarily of operator-assisted audio teleconferencing, as
well as video, data and unattended audio teleconference services. The Company
has one of the largest and most geographically diverse networks of sales and
operations centers in the industry focused solely on the electronic group
communications market, and has approximately 6,617 ports of teleconferencing
capability (one "port" is required for each conference participant) and state-
of-the-art digital conferencing technology. The Company believes it
differentiates itself from its competitors by providing superior customer
service and support as well as an extensive range of enhanced and customized
communications solutions. Combining these capabilities with targeted marketing
and relationship selling has allowed the Company to capitalize on the growth
in the developing teleconferencing services industry and to build a large,
stable client base of approximately 5,000 customers. The Company's customer
base is diverse, ranging from Fortune 500 companies to medium and small
businesses and institutions. Customers also include certain major long
distance telecommunications providers which have outsourced their
teleconferencing services to VIALOG.
The Company facilitates effective teleconferences through a combination of
technology, enhanced services and superior customer service. Operator-assisted
audio teleconferencing is the cornerstone of the Company's business and the
principal service which builds customer loyalty. The Company also offers
enhanced services such as digital replay of teleconferences, broadcast fax and
fulfillment services such as follow-up mailings or calls. Additionally, the
Company offers customized communications solutions, which include event
planning, auction formats, coaching and event rehearsal services. On a
combined historical basis, the Company derived approximately 95% of its 1997
net revenues from audio and video teleconference services and 5% of its 1997
net revenues from related customized and enhanced services, respectively.
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The Acquired Companies had a combined compound annual growth rate in net
revenues of 24.2% during the three-year period ended December 31, 1997 and pro
forma combined net revenues of $28.3 million and $35.9 million in 1996 and
1997, respectively. VIALOG believes that the consolidation of the Acquired
Companies offers a number of significant synergies that will contribute to
VIALOG's continued growth in net revenues and cash flow. These synergies
include operating efficiencies such as reduced costs for long distance
charges, equipment and employee benefits. The Company also expects to benefit
from significantly enhanced marketing power by creating the critical mass
necessary to develop a brand name effectively, implement a national selling
strategy and offer a wide range of teleconference services. The Company
intends to establish its brand, VIALOG, as synonymous with superior electronic
group communications services. The Company also intends to capitalize on
strong industry fundamentals by leveraging its service capabilities, targeted
selling approach and unique industry position to continue to increase
penetration of its existing customer base and to win new customers, including
those long distance service providers that decide to outsource their
teleconferencing services. In addition to internal growth, the Company
believes there is substantial opportunity to consolidate the industry further
through future acquisitions.
INDUSTRY OVERVIEW
Services
The electronic group communications industry provides a range of services to
facilitate multiparty communications with participants in different locations.
Through electronic group communications services, customers conduct routine
meetings, run training sessions, and share information where the traveling
associated with assembling a group frequently or on short notice makes face-
to-face meetings too costly, impractical or inconvenient. Industry studies
published by Frost & Sullivan estimate that total teleconferencing services
revenues in North America increased from $437 million in 1994 to an estimated
$780 million in 1997, representing a compound annual growth rate of 21%. Frost
& Sullivan estimates that the teleconferencing services sector will grow at a
compound annual rate of approximately 24% between 1998 and 2003. The primary
electronic group communications services available today are audio, video and
data teleconferencing.
Audio teleconferencing. Industry sources estimate that total audio
teleconferencing net revenues attributable to the service segment (the segment
in which the Company competes) constituted approximately $1.7 billion in 1996.
An audio teleconference is established through specialized telephone
equipment known as a Multipoint Control Unit ("MCU") or "bridge." Prior to
1984, audio teleconferencing was generally considered ineffective because only
one person could speak at a time. With the introduction of MCU technology in
1984, the industry began to develop rapidly. Using MCU technology, the number
of participants in an audio teleconference can now vary from three to
thousands. The maximum number of participants is limited by the number of
conference "ports" available to the operator, with each participant using one
port. Calls may be established manually by an operator who places calls to, or
receives calls from, conference participants, each of whom occupies a single
telephone line and port. These lines are then "bridged" together through an
MCU, which permits simultaneous speaking by all participants, filters out the
"echo" of each participant's own speech, and equalizes sound volume and
clarity. Advances in MCU technology have not only eliminated many of the
problems associated with early audio teleconferencing, such as "clipping" (the
loss of initial or ending syllables of words) and loss of quality as lines
were added, but also have increased the number of available enhanced features.
These technological advances, combined with the greater overall awareness and
acceptance of audio teleconferencing as a business tool, have contributed to
the increased usage of teleconferencing over the last five years.
The demand for audio teleconferencing services has increased as a result of
a wide range of trends, including globalization of operations, increased
workforce training requirements, the advent of geographically dispersed work
teams, shared decision-making, and the growing role of strategic partnerships.
Users of audio teleconferencing are able to replace travel to existing
meetings, with attendant savings of actual and opportunity costs, and increase
communication with parties with whom they would otherwise not meet, thereby
yielding
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greater organizational productivity. The facilities, network and labor costs
associated with audio teleconferencing services, combined with a lack of
expertise and a desire to focus on their core businesses, have caused most
organizations to outsource audio teleconferencing.
Video teleconferencing. Video conferencing is similar to audio
teleconferencing except that one or more callers may be viewed on a video
monitor by the other participants. The Company believes that the broad
adoption of video teleconferencing as a meeting tool has historically been
constrained by several factors, including limited access to video sites,
expensive and proprietary equipment, limited and costly bandwidth,
incompatibility of systems, and poor video quality. Video teleconferencing was
also generally limited to small or broadcast meetings at fixed locations,
except when implemented using expensive two-way satellite technology.
The adoption of International Telecommunications Union ("ITU") standard
H.320 in 1991 and ITU standard H.323 in 1996 has facilitated systems
compatibility. By 1995, technological advances (which brought down the cost of
equipment and required bandwidth) combined with increased processing speed
(which improved quality) to permit the development of desktop video.
Interactive multipoint video teleconferencing also became feasible in 1995
with the introduction of more cost-effective video MCU technology and low-
cost, PC-based video cameras and sound cards. The rapid deployment of
compatible hardware, reductions in cost, increases in available bandwidth, and
improvements in quality are all expected to accelerate the growth of the
market for multipoint video teleconferencing. Industry sources estimate that
video conferencing services revenue will grow at a compound rate of 27%
between 1998 and 2003, from $240 million to $779 million.
Data teleconferencing. Data teleconferencing, which enables multiple users
to collaborate using data and voice over a single, high bandwidth line, is the
most recent advance in teleconferencing. The adoption of ITU standard T.120
data protocols and H.323 for multimedia conferencing and new Internet
"groupware" services and software are expected to facilitate greater adoption
of data teleconferencing.
Prior to the emergence of data teleconferencing, audio teleconference
participants were unable to share computer data during a conference call. New
standards allow data to travel over data networks on an interactive basis so
that multiple remote computers can manipulate the same program. For instance,
Intel's ProShare and Microsoft's NetMeeting allow remotely located personal
computers and/or work stations to share video and data interactively over the
Internet. The Company believes that these Internet data teleconferencing
programs will likely be used in conjunction with audio teleconferencing to
allow simultaneous group discussions during editing and display of documents.
Also, several manufacturers have introduced specialized application servers
that provide high quality mixed media teleconferencing. Industry sources
estimate that revenues from data conferencing services will grow at a compound
annual rate of 82% between 1998 and 2003, from $3 million to $59 million.
SERVICE PROVIDERS
There are three categories of service providers in the North American
electronic group communications industry: (i) the IXCs, such as AT&T, MCI,
Sprint, WorldCom, Inc., Frontier and Cable & Wireless, (ii) the PCSBs, a group
of over 25 companies, excluding the Acquired Companies, and (iii) the
independent LECs, such as GTE and SNET. In addition, the RBOCs will be allowed
to provide long distance services, which the Company believes may lead to
their entry into the teleconferencing market, if they individually meet
certain requirements under the Telecommunications Act of 1996. See "Business--
Regulation."
The IXCs are currently the largest providers of teleconferencing services,
constituting approximately 78% of the audio teleconferencing services market
in 1996. The Company believes that the IXCs generate most of their business
through their position as the customer's long distance carrier. The IXCs
generally do not market teleconferencing services separately, but rather offer
such services as part of a "bundled" telecommunications offering. The IXCs
have generally not emphasized enhanced services or customized communications
solutions to meet individual customer needs. Rather, they have generally de-
emphasized operator-involved services (such as directory assistance and
collect calls), and are increasingly implementing automated systems and
technology as a substitute for traditional operator-intensive services.
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The second category of providers of electronic group communications services
are the PCSBs. There are approximately 25 PCSBs, excluding the Acquired
Companies. PCSBs began entering the teleconferencing market in the mid-1980s
when businesses were beginning to find applications for teleconferencing due
to significant technological improvements in teleconferencing equipment. The
number of PCSBs increased in the late 1980s, taking advantage of a niche
opportunity to provide customized, high quality service and specialized
applications. As a result of their scale and limited access to capital, PCSBs
tended to develop as regional or industry-specific businesses. Due to
technological changes facing the teleconferencing industry, such as the
introduction of video and data service, the ability to secure necessary
capital has become more critical. Additionally, many PCSBs do not currently
have the marketing expertise or teleconferencing capacity to reach the
critical mass which will allow them to develop a national brand name and
compete for and service large, national accounts.
The third category of providers of electronic group communications services
are the independent LECs. Similar to the IXCs, the LECs have generally not
focused on teleconferencing, enhanced services or customized communications
solutions.
A potential new category of providers is the RBOCs. As a result of the
Consent Decree entered into by AT&T and the United States Department of
Justice in 1982, the RBOCs could not offer long distance services, which
drastically limited their teleconferencing potential. Under the
Telecommunications Act of 1996, the RBOCs will be allowed to provide in-region
long distance services upon the satisfaction of certain conditions. The
Company believes that the ability of an RBOC to gain immediate and significant
teleconferencing market share upon entrance into the long distance market will
be enhanced by its status as the incumbent provider of local services to its
customers. While each RBOC will determine whether to create a separate
teleconferencing business unit or to outsource this service, the Company
believes that some of the new entrants will elect to outsource
teleconferencing services and focus on entering the long distance market. To
date, the Company has received requests for proposals to provide
teleconferencing services from four of the five RBOCs.
COMPETITIVE STRENGTHS
The Company believes that several characteristics differentiate it from many
of its competitors, including:
Diverse and stable customer base. The Company has a diverse base of
customers that numbered approximately 5,000 in 1997, with no customer
representing greater than 10% of combined net revenues and the Company's top
ten customers representing less than 23% of combined net revenues. The Company
believes that it has created strong customer loyalty for its services through
its emphasis on superior customer service and the importance of such service
to its clients. This loyalty is demonstrated by VIALOG's record of attracting
and retaining significant clients, with low customer turnover.
Unique industry position. VIALOG believes that it is positioned as one of
the largest and most geographically diverse companies in the industry that
focuses solely on electronic group communications. The Company's largest
competitors are long distance service providers for whom teleconferencing
represents only a small fraction of their total revenues. VIALOG can focus its
capabilities and resources solely on teleconferencing, including its
information systems, capital equipment, hiring practices, training and
marketing. The Company believes that this focus offers significant flexibility
and competitive advantages in responding to the needs of customers. VIALOG is
also well situated to obtain future outsourcing contracts from long distance
service providers which the Company believes are reluctant to outsource to a
long distance service competitor, and would prefer to outsource to a larger,
independent group communications company with experience in managing the
outsourcing process.
Superior customer service capabilities. The Company believes that it has a
core competency in its customer service capabilities, which stress operator
training, personalized service and anticipation of customer needs. VIALOG has
developed and refined the technological capabilities, procedures and
management information systems necessary to provide superior customer service,
a factor that is critical to both customer
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retention and new business. An example of these capabilities is the Company's
proprietary billing system for outsourced services. VIALOG has spent several
years developing and revising this software and believes that no competitor
can currently match the flexibility of this system in meeting customer needs.
Broad range of services. The Company believes that it offers the most
comprehensive selection of audio, video and data teleconferencing services in
its industry, providing it with significant marketing advantages. VIALOG
offers the features and pricing options to meet a wide variety of customer
needs. The Company intends to remain at the forefront of the electronic group
communications industry by continuing to augment its existing service
offerings through the development and introduction of additional enhanced
services and customized communications solutions.
Experienced management team. VIALOG has one of the most experienced
management teams in the teleconferencing industry. The top 10 managers of the
Company have on average 14 years of experience within the
teleconferencing/telecommunications industry. This experience is critical to
the Company's ability to implement its business strategy, respond to industry
trends and to identify and consummate acquisition opportunities successfully.
GROWTH STRATEGY
The Company's objective is to build upon its position as a leading
independent provider of electronic group communications services. Management
plans to achieve this goal by implementing the following initiatives:
Create a brand identity. The Company intends to establish its brand, VIALOG,
as synonymous with expertise in, and a focus on, electronic group
communications. The Company intends to distinguish its brand from those of the
IXCs and other competitors through the Company's responsive customer service,
focused service offerings and selling strategy.
Establish a national retail sales organization. The Company is in the
process of deploying a nationwide retail sales organization consisting of an
outside sales group and an inside sales group. The retail sales organization
is expected to be comprised of a vice president of retail sales, six regional
sales directors, twenty-eight senior account executives, fourteen sales
support specialists, one inside sales manager and eight inside sales people.
The twenty-eight senior account executives are expected to be geographically
deployed under the six regional sales directors throughout the United States.
They will be responsible for protecting and growing the revenue within their
assigned customer base. Each sales support specialist will work with two
senior account executives to ensure customer satisfaction and help facilitate
"roll-outs" of service within existing and new customer organizations. The
inside sales group has responsibility for all customers that do not meet the
criteria established for customers being serviced by the outside sales
organization. Inside sales will be responsible for the retention and growth of
these customers.
The Company expects that the retail sales organization will receive a steady
stream of qualified leads generated by an array of marketing campaigns and
programs. A minimum of two direct marketing campaigns per year will account
for a significant percentage of new business lead generation. In addition to
leads generated by the marketing campaigns, the Company expects that the
retail sales organization will receive on-going leads from the following: a
national Yellow Pages program, trade shows, vertical trade publications, an
interactive web site and our customer referral program. The Company believes
that its marketing database will continually provide intelligence that will be
critical to maximizing the return on investment of every marketing effort and
sales resource. The Company believes that this disciplined approach to
marketing and sales will ensure greater penetration of existing customers and
significantly increase the Company's market share.
Capitalize on opportunities to provide outsourced services. In addition to
the retail sales organization, the Company has deployed a wholesale sales
organization which will capitalize on what the Company believes to be the
significant opportunity for revenue growth through the provisioning of
outsourced services to IXCs, LECs as well as RBOCs. The Company believes the
broad trend among long distance providers generally to outsource
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services such as telemarketing and billing is likely to extend to
teleconferencing as these companies continue to move away from labor intensive
activities. The Company has hired a vice president of wholesale sales and
three senior telecom sales professionals who have extensive experience in the
industry. This team of telecom sales professionals will focus their efforts
exclusively on growing the Company's outsourced service base. The Company
believes that, should the RBOCs become long distance providers, competition
will require that the RBOCs enter the market quickly with a complete package
of high quality telecommunications services, including teleconferencing.
Consequently, the Company believes that some RBOCs will choose to outsource
their electronic group communications requirements. The Company believes that
it is well-positioned to be competitive in obtaining outsourced
teleconferencing business, since it (i) is not a competitor with IXCs or LECs
in the long distance markets or with the RBOCs, (ii) has the capacity and
resources to handle significant teleconferencing volume, and (iii) already has
experience in providing services on an outsourced basis.
Expand through acquisitions. One element of the Company's strategy is to
continue consolidating the electronic group communications services industry
in order to increase market share, broaden geographic coverage and add new
service offerings. The Company will seek to acquire companies that provide
high quality service, have a significant customer base and utilize high
quality technology. The Company believes its acquisition experience and its
knowledge of the industry will be instrumental in identifying and successfully
negotiating additional acquisitions. The Company believes that it will be an
attractive acquirer for many closely-held PCSBs because of (i) the Company's
increased access to financial resources as a larger company, (ii) the
Company's decentralized operating structure, and (iii) the ability of the
owner of the business being acquired to participate in the Company's on-going
business, while at the same time realizing liquidity.
Capitalize on consolidation benefits. The Company expects to capitalize on
the benefits of its increased size, the combined experience of the Acquired
Companies and its diverse customer base. The Company believes that its size
will result in stronger bargaining power in areas such as long distance
telecommunications, equipment, employee benefits and marketing. The Company
also intends to improve allocation of personnel and equipment and to
streamline internal practices through coordination among the Acquired
Companies. The Company believes its combined experience and diverse customer
base will allow it to develop and rapidly deploy innovative new services.
Management also intends to cross-market services developed by any one of the
Acquired Companies to all of the Company's customers, to maximize capacity
utilization and to integrate pricing strategy.
THE COMPANY'S ELECTRONIC GROUP COMMUNICATIONS SERVICES
Audio Teleconferencing. The Company offers a broad range of audio
teleconferencing services and related services, primarily to businesses in the
financial, professional service and pharmaceutical industries as well as to
government agencies and trade associations. The Company generates revenues
from this service by charging on a per-line, per-minute basis similar to
standard telephone pricing practices.
The Company's audio teleconference call services may be divided into three
major classifications: operator attended calls, unattended calls and enhanced
services. Within each major category there are several means of accessing the
conference call, as well as a number of operator assisted features and
services available upon the request of the customer.
Operator Attended Conference Calls. On operator attended conference calls,
the operator coordinates the call with the customer and provides support on
the call as required. Customers are given a choice of three different methods
to access an operator attended conference call. In the dial-out method, the
operator dials each participant and places each participant in the conference.
In the 800 Meet-Me method, the conference participants dial into the
conference using the same toll-free number. In the Meet-Me method, the
conference call is handled the same as 800 Meet-Me, but the participants dial
in via their own long distance service provider. Customers can also decide to
mix the access methods for participants. In an operator-attended conference
call, the operator greets each caller, conducts a roll call, and places each
caller on the conference call. The operator can offer a variety of features
and enhanced services. For example, the operator can gather information such
as agenda items
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or weekly sales figures from participants prior to joining a call, arrange for
translation services, conduct question and answer (Q&A) sessions, conduct
polling sessions, and relay all results back to the customer. If a conference
participant disconnects while a call is in session, the operator can
immediately call that participant to determine if the disconnect was
unintentional and, if necessary, re-establish the link. This feature is
generally not offered on unattended calls.
Unattended Conference Calls. Unattended conference calls refer to calls that
are not monitored by a Company operator. Each of the participants joins the
conference by dialing into a Company MCU and entering an assigned passcode.
This passcode directs participants to the correct conference and allows them
to participate in the conference without operator assistance. During certain
unattended calls, customers are still able to obtain operator assistance by
pressing "0". Customers may use either 800 Meet-Me or Meet-Me access modes to
join unattended conference calls.
Enhanced Services. The Company offers a wide range of enhanced services
(some of which were noted above), which allow customers to add value to their
conference calls. Enhanced services provided to customers are generally
charged on a fee basis. The following are examples of enhanced services.
. Q&A is often utilized on conference calls with a large number of
participants where an orderly forum for accepting questions is required.
This feature is appropriate, for example, during a review of a
corporation's quarterly financial results with a number of financial
analysts.
. Polling is a type of electronic counting using Touch-tone services and
is often provided for focus group sessions or educational applications.
. Digital recording and replay allows people who were unable to
participate in the call to dial in and listen to a recording of the
call. Many customers have the digital recording duplicated on tape or
audio CD for distribution to interested parties. In some cases, a CD ROM
is pressed by another vendor, augmented with interactive graphics, and
used by the customer as a marketing or training tool.
. Broadcast fax and fax on demand services provide distribution of
information to facsimile machines during or after a conference using the
Company's existing MCU facilities. Broadcast fax services are typically
used for the widespread distribution of press releases, earnings
reports, and other time-sensitive material.
. RSVP allows the Company to reserve places for participants on conference
calls and to gather information on such participants for its customers.
. Reminders can be sent to participants prior to a conference call via
direct call, fax or e-mail to ensure increased call attendance.
. Call transcripts of conference calls can be prepared and either printed
or downloaded onto a disk.
Customized Communications Solutions. The Company provides specialized event
management, production services and conference support services. Companies
wishing to conduct new product announcements, investor relations calls
regarding quarterly results, analyst briefings, press conferences, customer
satisfaction polls or large sales events use the Company's customized
communications services extensively. Large events, which combine many
electronic group communications services such as data teleconferencing, audio
teleconferencing and digital replay, may require weeks of planning. Training
services are billed either on a project or a per diem basis. The following are
examples of customized communications solutions.
. The Company works with clients to design events which maximize
participant interaction, provides information retrieval and assists in
distributing pre-conference handouts.
. Coaching and event rehearsal services personnel assist customer
spokespersons to prepare for a teleconference, provide public speaking
lessons, and arrange for professional speakers to ensure the proper
presentation of information and image.
. During a conference call, private line service allows an advisor to
coach a spokesperson privately about points to include or proper
responses to questions, without conference call participants hearing
those comments.
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. The Company provides customer training services such as introducing a
new customer to the effective use of a specific electronic group
communications service or to the detailed development of a teletraining
application.
Video Teleconferencing. In 1996, the Company began to offer video
teleconferencing services, which enable remote sites equipped with ITU
standards-compliant video equipment to conduct interactive multipoint sharing
of video images and audio among three or more participants. This service, like
audio teleconferencing, is charged on a per-line, per-minute basis, with
enhanced services charged on a fee basis. Video teleconferencing requires the
use of a video MCU and telecommunications facilities of greater bandwidth than
that required for a standard audio teleconference. The Company has one MCU
dedicated to video teleconferencing, with approximately 72 ports of capacity.
Video teleconferencing services accounted for approximately $13,000 and
$282,000 of the Acquired Companies' combined net revenues in 1996 and 1997,
respectively.
The Company's video teleconferencing services enable participants at
multiple locations to see and hear each other in a video conference.
Generally, the current speaker is displayed on the video monitors of the other
participants in the conference while the speaker's screen displays the
previous speaker's image. The Company also offers another video conferencing
technique known as "continuous presence," in which up to four participant
locations appear simultaneously on the four quadrants of a monitor for the
duration of the conference.
The Company believes that the use of multipoint video teleconferencing
services will grow in relationship to the installed base of compatible video
equipment. Industry sources estimate that over 230,000 video teleconferencing
units had been sold by the end of 1996. The following are examples of video
teleconferencing applications:
. Telemedicine, in which doctors in different hospitals videoconference to
discuss research, treatments, and surgery.
. Distance learning, in which classes are held over video, enabling
students to benefit from multiple teachers and to interact with students
at other locations.
. Computer aided design (CAD), in which civil engineers and architects
present designs to clients and project teams over live video for review.
Data Teleconferencing. In 1997, the Company began to offer data
teleconferencing services to its customers. Data teleconferences are
established between multiple computers through a server or data MCU and allow
the participants to review, discuss and modify spreadsheets or written text,
or design documents simultaneously on personal computers at different
locations. Data teleconferences are established through parallel data, audio
or video links or on a single high bandwidth line which carries both data and
audio or video. When the Company simultaneously provides audio and data using
a data MCU for the data teleconferencing application, the charges for the data
and audio connections are on a per-line, per-minute basis. When the Company is
simply augmenting a data teleconference with the audio component, the per-
line, per-minute charges are for the audio portion only.
New Internet "groupware" services and software based on industry standards,
such as T.120 and H.323, are expected to facilitate greater awareness and
adoption of data teleconferencing as an electronic group communications tool.
For instance, both Intel's ProShare and Microsoft's NetMeeting software
services allow remotely-located personal computers and/or work stations to
interactively share video and data regardless of the location of each machine.
Also, several manufacturers have introduced specialized application software
that will provide high quality data teleconferencing.
SALES AND MARKETING
The Company's sales and marketing strategy will center on the establishment
of its brand, VIALOG, as synonymous with expertise in, and a focus on,
electronic group communications. The Company plans to launch a new corporate
marketing program focused on customers who have the potential for high usage.
This marketing
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program will utilize targeted database marketing techniques based on the
combined customer data of the Acquired Companies, emerging trends, and other
market segment information.
The Company is in the process of deploying a nationwide retail sales
organization consisting of an outside sales group and an inside sales group.
The retail sales organization is expected to be comprised of a vice president
of retail sales, six regional sales directors, twenty-eight senior account
executives, fourteen sales support specialists, one inside sales manager and
eight inside sales people. The twenty-eight senior account executives are
expected to be geographically deployed under the six regional sales directors
throughout the United States. They will be responsible for protecting and
growing the revenue within their assigned customer base. Each sales support
specialist will work with two senior account executives to ensure customer
satisfaction and help facilitate "roll-outs" of service within existing and
new customer organizations. The inside sales group has responsibility for all
customers that do not meet the criteria established for customers being
serviced by the outside sales organization. Inside sales will be responsible
for the retention and growth of these customers.
The Company expects that the retail sales organization will receive a steady
stream of qualified leads generated by an array of marketing campaigns and
programs. A minimum of two major marketing campaigns per year will account for
a significant percentage of new business lead generation. In addition to leads
generated by the marketing campaigns, the Company expects that the retail
sales organization will receive on-going leads from the following: a national
Yellow Pages program, trade shows, vertical trade publications, an interactive
web site and our customer referral program. The Company believes that its
marketing database will continually provide intelligence that will be critical
to maximizing the return on investment of every marketing effort and sales
resource. The Company believes that this disciplined approach to marketing and
sales will ensure greater penetration of existing customers and significantly
increase the Company's market share.
In addition to the retail sales organization, the Company has deployed a
wholesale sales organization which will capitalize on what the Company
believes to be the significant opportunity for revenue growth through the
provisioning of outsourced services to IXCs, LECs, and RBOCs. The Company
currently provides outsourced audio teleconferencing services for one IXC, one
RBOC, two LECs, and several non-facilities based long distance providers. An
important element of the Company's marketing strategy will be to initiate
additional outsourcing alliances, both domestically and overseas, and to
expand net revenues from its existing alliances. These alliances could include
the existing and future IXCs in the U.S. and overseas, the LECs, the RBOCs and
other non-facilities based providers of equipment and services. In order to
capitalize on this market the Company has hired a vice president of wholesale
sales and three senior telecom sales executives who have extensive experience
in the industry. This team of telecom sales professionals will focus their
efforts exclusively on growing the Company's outsourced service base. The
Company believes the broad trend among telecommunications will extend to
teleconferencing, as indicated by (i) existing outsourcing of other services,
such as billing and telemarketing, (ii) hiring and downsizing trends in the
IXCs, LECs and RBOCs as they move away from labor-intensive activities, and
(iii) increasing opportunities under the Telecommunications Act of 1996 to
provide telecommunication services in new markets for the IXCs and RBOCs.
CUSTOMER SERVICE
The Company believes that it has successfully obtained and retained
customers due, in large measure, to quality customer service provided by a
highly skilled staff. Reservationists and operators become the Company's
primary contacts with its customers after the initial sales effort, thereby
providing opportunities to support the sales effort with personalized service.
The Company uses a team approach, whereby a customer can work with the same
small group of customer service personnel. In some cases, customers have
become accustomed to working with a particular reservationist or operator and
insist upon continued assistance from these specific individuals.
Reservationists assist the Company's customers in scheduling their
conferences. Reservationists access the conferencing system to determine time
and ports available and to confirm the teleconferences. Operators monitor
calls and provide the services requested in the reservation. Operators are
also trained to provide assistance to the
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moderator (usually the person initiating the conference) to ensure a
successful meeting. Supervisors are available to assist in the setup and
execution of a conference. The Company's staff is trained to facilitate
effective meetings through a combination of classroom, mentoring, teaming, and
on-the-job supervision.
CUSTOMERS
The Company has approximately 5,000 customers ranging in size from major
multinational corporations and Fortune 500 companies to small businesses,
professional organizations, public institutions and consumers. A breakdown of
the Company's top 20 customers by industry is as follows: health and
pharmaceutical (two), financial services (five), retail (five),
telecommunications (four), industrial (three) and high technology (one). No
account represented more than 10% of the Company's combined net revenues in
1997. The top 10 customers of the Company represented approximately 28% and
23% of the Company's combined net revenues in 1996 and 1997, respectively.
BILLING AND MANAGEMENT INFORMATION SYSTEMS
Most operational aspects of the electronic group communications business are
presently performed at each of the Acquired Companies, including purchasing,
accounting, billing, reservations, personnel, and service delivery functions.
Management of the Company intends to retain a decentralized organizational
structure, permitting most customer-related decisions to remain at the
Acquired Company level. The Company intends to centralize some administrative
support activities within the next 12-18 months in order to standardize its
services, improve customer service and reduce Company expenses.
The Acquired Companies presently perform the entire billing and collection
process for their respective customer receivables. The data needed to develop
an invoice is captured by and stored on each MCU and entered into the billing
system automatically or by the staff. This data includes the account number,
which identifies the entity paying for the call and the moderator number,
which identifies the person who organized the call. The MCU software creates a
call detail record which is augmented by the operator to capture any
additional, enhanced services. Billing is on a one minute increment basis for
the duration of each connected line. A billing database is maintained by each
of the Acquired Companies and used to customize billing formats to respond to
individual customer preferences. The frequency with which invoices are
delivered to the customer for payment varies by Acquired Company and by
customer.
Each of the Acquired Companies validates its invoices against its telephone
bills to verify billing accuracy. Each Acquired Company also generates account
reports which detail payments and adjustments, credit status, aging of
accounts receivable, invoice analysis, commission summaries, and usage and
rate profiles. These detailed reports allow management to make business and
marketing decisions concerning extension of credit or additional sales
contacts as customer usage increases or decreases.
The Company believes that the flexibility and capabilities of its billing
systems represent a competitive advantage in allowing the Company to meet the
needs of its customers, particularly in the Company's outsourcing services
business. The Company has spent several years developing and refining the
proprietary software used in the billing services provided to long distance
service carriers that outsource their teleconferencing function to the
Company.
The Company intends to transition the Acquired Companies' systems to a
uniform system on an individual basis over the next 12-18 months. Each of the
Acquired Companies will continue to process its results with the existing
system until the new centralized system has been implemented and management
has verified that the centralized system is performing at designed
proficiency.
COMPETITION
The teleconferencing service industry is highly competitive and subject to
rapid change. The Company currently competes, or expects to compete in the
near future, with the following categories of companies:
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(i) IXCs, such as AT&T, MCI, Sprint, Frontier and Cable & Wireless, and non-
facilities based long distance providers, such as Excel, (ii) independent
LECs, such as GTE and SNET, and (iii) other PCSBs. According to estimates from
industry sources, the IXCs serviced approximately 78% of the audio
teleconferencing market in 1996. The IXCs generally do not market
teleconferencing services separately, but rather offer such services as part
of a "bundled" telecommunications offering. The IXCs have not emphasized
enhanced services or customized communications solutions to meet customer
needs. However, there can be no assurance that these competitors will not
alter their current strategies and begin to focus on services-specific
selling, customized solutions and operator-attended services, the occurrence
of any of which could increase competition. Under the Telecommunications Act
of 1996, the RBOCs will also be allowed to provide long distance services
within the regions in which they also provide local exchange services ("in-
region long distance services") upon the satisfaction of certain conditions,
including the specific approval of the FCC, the introduction of or a defined
potential for facilities-based local competition, the offering of local
services for resale, and compliance with access and interconnection
requirements for facilities-based competitors. Upon entrance into the long
distance market, the ability of an RBOC to gain immediate and significant
teleconferencing market share will be enhanced by its status as the incumbent
primary provider of local services to its customers.
If the Company is able to expand its video and data teleconferencing service
offerings, it will encounter additional competition. Management expects that
there will be competition from existing providers of audio teleconferencing
services, as well as new competitors dedicated to video and/or data
teleconferencing. The Company believes that the principal competitive factors
influencing the market for its services are brand identity, quality of
customer service, breadth of service offerings, price and vendor reputation.
There can be no assurance that the Company will be able to compete
successfully with respect to any of these factors. Competition may result in
significant price reductions, decreased gross margins, loss of market share
and reduced acceptance of the Company's services.
The Company derived approximately 14% of its 1997 combined net revenues from
IXCs and LECs which outsource teleconferencing services provided to their
respective customers. These telecommunications companies have the financial
capability and expertise to deliver these teleconferencing services
internally. There can be no assurance that the Company's current IXC and LEC
customers will not insource the teleconferencing services now being provided
by the Company and pursue such market actively and in direct competition with
the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, part of the
Company's growth is projected to occur as RBOCs enter the long distance market
and, as the Company believes, outsource their teleconferencing services. There
can be no assurance that any telecommunications company able to offer
teleconferencing services legally, now or in the future, will choose to do so
or that those choosing to do so will outsource their teleconferencing services
or choose the Company as their provider in case they do outsource
teleconferencing.
The Company also believes that many of its current and prospective customers
have sufficient resources to purchase the equipment and hire the personnel
necessary to establish and maintain teleconferencing capabilities sufficient
to meet their respective teleconferencing needs. If the manufacturers of PBXs
develop improved, cost-effective PBX capabilities for handling
teleconferencing calls with the quality of existing MCUs used in the
teleconferencing business, the Company's customers could choose to purchase
such equipment and hire the personnel necessary to service their
teleconferencing needs through internal telephone systems. The loss of such
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, if Internet
technology can be modified to accommodate multipoint voice transmission
comparable to existing MCUs used in the teleconferencing business, there could
be a material adverse effect on the Company's business, financial condition
and results of operations.
Many of the Company's current and potential competitors have substantially
greater financial, sales, marketing, managerial, operational and other
resources, as well as greater name recognition, than the Company and may be
able to respond more effectively than the Company to new or emerging
technologies and changes in customer requirements. In addition, such
competitors may be capable of initiating or withstanding significant price
decreases or devoting substantially greater resources than the Company to the
development, promotion and
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sale of new services. Because MCUs are not prohibitively expensive to purchase
or maintain, companies previously not involved in teleconferencing could
choose to enter the marketplace and compete with the Company. There can be no
assurance that new competitors will not enter the Company's markets or that
consolidations or alliances among current competitors will not create
significant new competition. In order to remain competitive, the Company will
be required to provide superior customer service and to respond effectively to
the introduction of new and improved services offered by its competitors. Any
failure of the Company to accomplish these tasks or otherwise to respond to
competitive threats may have a material adverse effect on the Company's
business, financial condition and results of operations.
SUPPLIERS
The Company's services require two material components which it purchases
from outside suppliers:
Telecommunications Services. A significant portion of the Company's direct
costs are attributable to the purchase of local and long distance telephone
services. The Acquired Companies have purchased telecommunications services
from a number of vendors, including AT&T, Sprint, MCI, Cable & Wireless and
WorldCom. The Company believes that multiple suppliers will continue to
compete for the Company's telecommunications contracts. Since the minutes of
use generated by the Company will be substantially higher than the largest of
the Acquired Companies, the Company believes that it will be able to negotiate
telecommunications contracts with lower prices and improved service
guarantees. The Company anticipates that new telecommunications contracts will
be phased in over time as the existing contracts at the Acquired Companies
expire. However, there can be no assurance that competition in the long
distance services market will continue to increase, that any increased
competition will reduce the cost of long distance services or that the
Company's purchasing strategy will result in cost savings. If the costs of
long distance services increase over time, the Company's current purchasing
strategy, which calls for shorter-term contracts, may place it at a
competitive disadvantage with respect to competitors that have entered into
longer-term contracts for long distance services. There can be no assurance
that the Company's analysis of the future costs of long distance services will
be accurate, and the failure to predict future cost trends accurately could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Bridging Hardware and Software Support Systems. The Company uses MCU
equipment produced by four different manufacturers. At present, such equipment
is not functionally identical, but it is compatible with substantially all
network standards. Approximately 43% of all audio MCU systems used by the
Acquired Companies are manufactured by one vendor, MultiLink, Inc.
("MultiLink"), which was acquired by PictureTel Corporation in 1997. However,
a number of other vendors offer similar MCU equipment. The Company intends to
use its position as a substantial purchaser of MCU equipment to attempt to
negotiate a volume purchase contract with each selected manufacturer.
EMPLOYEES
On February 1, 1998, the Company had approximately 395 employees, of whom 11
were employed full time at its corporate headquarters, 156 were employed full
time in various management, supervisory, sales, support and administrative
positions, and 228 were employed full time or part time as operators or
reservationists. None of the Company's employees are represented by unions.
The Company has experienced no work stoppages and believes its relationships
with its employees are good.
REGULATION
In general, the telecommunications industry is subject to extensive
regulation by federal, state and local governments. Although there is little
or no direct regulation in the United States of the core electronic group
communications services offered by the Company, various government agencies,
such as the FCC, have jurisdiction over some of the Company's current and
potential suppliers of telecommunications services, and government regulation
of those services has a direct impact on the cost of the Company's electronic
group communications services.
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A central element of the Company's business strategy is to capitalize on
outsourcing opportunities. With the passage of the Telecommunications Act of
1996, the Company believes that the RBOCs will seek to enter the market for
long distance services and that competition in the markets for both local and
long distance telephone services will increase. In order to compete
successfully in those markets, the Company believes that the IXCs, LECs and
RBOCs will be required to devote more attention and resources to the provision
of such services and will therefore seek to outsource non-core services, such
as audio teleconferencing. Because the Company's outsourcing strategy depends
on the entrance of the RBOCs into the long distance market, any factor that
delays or prevents the entrance of the RBOCs into that market could impact the
Company's strategy. For example, the Telecommunications Act of 1996 imposes
strict pre-conditions to the provision of in-region long distance services by
the RBOCs, including the specific approval of the FCC, the introduction of
facilities-based local competition, the offering of local services for resale,
compliance with access and interconnection requirements for facilities-based
competitors, and the establishment of a separate operating subsidiary with
separate financing, management, employees, and books and records. There can be
no assurance that the RBOCs will be able to meet all of the requirements of
the Telecommunications Act of 1996 on a timely basis, if at all. Even if one
or more RBOCs meets these requirements, there can be no assurance that the
entrance of such RBOCs into the long distance market will cause any IXCs, LECs
or RBOCs to seek to outsource their audio teleconferencing services or that
significant IXCs, LECs or RBOCs will not continue to provide audio
teleconferencing services in direct competition with the Company. Finally,
there can be no assurance that any IXCs, LECs or RBOCs seeking to outsource
audio teleconferencing services will obtain such services from the Company.
The failure of IXCs, LECs and RBOCs to outsource audio teleconferencing
services to the Company could have a material adverse effect on the Company's
growth strategy and business, financial condition and results of operations.
The Telecommunications Act of 1996 is being contested both administratively
and in the courts, and opinions vary widely as to the effects and timing of
various aspects of the law. There can be no assurances at this time that the
Telecommunications Act of 1996 will create any opportunities for the Company,
that local access services will be provided by the IXCs, or that the RBOCs
will be able to offer long distance services, including teleconferencing. The
Telecommunications Act of 1996 has caused changes in the telecommunications
industry, and the Company is unable to predict the extent to which such
changes may ultimately affect its business. There can be no assurance that the
FCC or other government agencies will not seek in the future to regulate the
prices, conditions or other aspects of the electronic group communications
services offered by the Company, that the FCC will not impose registration,
certification or other requirements on the provision of those services, or
that the Company would be able to comply with any such requirements.
The Company is subject to laws and regulations that affect its ability to
provide certain of its enhanced services, such as those relating to the
recording of telephone calls. Changes in the current federal, state or local
legislation or regulation could have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover,
government regulations in countries other than the United States vary widely
and may restrict the Company's ability to offer its services in those
countries. The Company believes that it is currently in material compliance
with applicable communications laws and regulations.
ITEM 2. PROPERTIES.
The Company's corporate headquarters are located in approximately 2,600
square feet of office space in Andover, Massachusetts under a lease expiring
May 31, 1999. The Company operates six network equipment centers in leased
locations in the United States. The Company believes all of such locations are
fully utilized except for its approximately 41,000 square foot facility in
Reston, Virginia, which is approximately 75% utilized and its 12,000 square
foot facility in Oradell, New Jersey, which is approximately 80% utilized. The
Company occupies the equipment centers and other facilities under leases which
provide for a total of approximately 86,900 square feet at rates ranging from
$5.00 to $23.00 per square foot with expiration dates, excluding month-to-
month leases, ranging from May 1999 to May 2008. The Company's total lease
expense related to its facilities was approximately $908,000 and $961,000 for
the years ended December 31, 1996 and 1997, respectively. The Company believes
its properties are adequate for its needs. The Company's facilities are
located either within
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one mile of central telephone switching locations or on a sonet fiberoptic
loop in metropolitan locations. Each facility has dual sources of power or
back-up generating capabilities. While the Company's telephone and power
requirements may preclude it from locating in some areas, the Company believes
alternative locations are available for its facilities at competitive prices.
ITEM 3. 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 Call Points, one of the Acquired
Companies, 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. Complainants in these cases could seek to
name the Company as a defendant in such pending litigation and could seek to
hold the Company liable for damages resulting from the litigation as a
successor in interest to Call Points. 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 has
agreed to indemnify the Company from any liability relating to such claims and
$250,000 of the purchase price for the acquisition of Call Points has been
placed 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 CSI, one of the Acquired Companies, 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
CSI believe that such claim is without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of the date of this Annual Report, there is no established public trading
market for the Company's common stock.
As of March 15, 1998, the Company's common stock was held by 79 holders of
record.
DIVIDENDS
The Company has not declared any dividends on any class of common equity
during the past two fiscal years and has no intention of paying dividends in
the foreseeable future. Additionally, pursuant to the terms of the Indenture
dated November 12, 1997 among VIALOG Corporation, each of the Acquired
Companies and State Street Bank and Trust Company, VIALOG is prohibited from
declaring or paying any dividends or distributions other than dividends or
distributions payable solely in certain qualified capital stock of the
Company.
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SALES OF UNREGISTERED SECURITIES IN 1997
On February 24, 1997, the Company issued to eight "accredited investors" (as
defined in Rule 501 under the Securities Act) promissory notes in the
aggregate principal amount of $500,000 bearing interest at 8.0% per annum and
payable upon the earlier of ten days following the closing of an initial
public offering of the Company's common stock or one year from their date of
issuance (the "February Notes"), together with warrants to purchase an
aggregate of 111,118 shares of the Company's common stock at an exercise price
of $4.50 per share (the "February Warrants"). The February Notes were paid in
November 1997. The February Warrants expire on February 28, 1999 and contain
anti-dilution provisions. As of the date of this Annual Report, the February
Warrants entitle the holders thereof to purchase an aggregate of 42,260
additional shares of common stock as a result of required anti-dilution
adjustments. The February Notes and February Warrants were issued to
accredited investors only pursuant to the registration exemption provided in
Rule 506 of Regulation D under the Securities Act.
In September 1997, the Company issued to fifteen accredited investors
subordinated convertible promissory notes in the aggregate principal amount of
$255,500 bearing interest at 10% per annum and payable upon the earlier to
occur of five days following (i) the closing of a sale of the Company's equity
securities or debt securities for an aggregate purchase price of $50.0 million
or more and (ii) January 1, 1998 (the "September Notes"). The September Notes
were convertible at the holder's option prior to and including the due date,
into the number of shares of the Company's common stock determined by dividing
the outstanding principal of the September Notes by $2.00. The September Notes
were issued solely to accredited investors pursuant to the registration
exemption provided under Rule 506 of Regulation D under the Securities Act.
All holders of the September Notes elected to convert the September Notes
into common stock simultaneously with the Company's unrelated sale in November
1997 of $75.0 million of senior notes and warrants as described below. The
issuance of shares of the Company's common stock issued upon the conversion of
the September Notes was exempt from registration pursuant to Section 4(2) of
the Securities Act.
On November 12, 1997, the Company sold to Jefferies & Company, as initial
purchaser, 75,000 units, with each unit (a "Unit"; collectively, the "Units")
consisting of (i) a senior note due 2001 in the principal amount of $1,000
bearing interest at 12 3/4% per annum (a "Senior Note"; collectively, the
"Senior Notes"), and (ii) one warrant to purchase 10.0886 shares of the
Company's common stock, subject to adjustment in certain circumstances, at an
exercise price of $.01 par value per share (a "November Warrant";
collectively, the "November Warrants"). Jefferies & Company paid $72.0 million
for the Units, or 96% of the principal amount of the Senior Notes. As
additional compensation to Jefferies & Company, the Company issued, for no
additional consideration, 30,000 warrants to purchase 302,658 shares of the
Company's common stock at an initial exercise price of $.01 per share. The
initial sale of the Units to Jefferies & Company was made in reliance on the
registration exemption provided under Section 4(2) of the Securities Act.
Immediately upon the consummation of the sale of the Units, Jefferies &
Company offered and sold the Units at the face value of $1,000 per Unit to
certain "qualified institutional buyers" (as defined in Rule 144A under the
Securities Act) and to a limited number of accredited investors pursuant to
the registration exemption provided under Section 4(2) of the Securities Act.
The November Warrants are exercisable on or after November 12, 1997. The
shares purchasable upon the exercise of the November Warrants and the exercise
price will be subject to adjustment in certain events including: (i) the
payment by the Company of dividends (or other distributions) on the common
stock of the Company payable in shares of such common stock or other shares of
the Company's capital stock, (ii) subdivisions, combinations and
reclassifications of the common stock, and (iii) the distribution to all
holders of the common stock of any the Company's assets, debt securities or
any rights or warrants to purchase securities (excluding cash dividends or
other cash distributions from current or retained earnings).
17
<PAGE>
Subject to certain exceptions set forth in the warrant agreement under which
the November Warrants were issued, if the Company issues (i) shares of common
stock for a consideration per share less than the current market value per
share or (ii) any securities convertible into or exchangeable for common stock
for a consideration per share of common stock initially deliverable upon
conversion or exchange of such securities that is less than the current market
value per share on the date of issuance of such securities, the Company shall
offer to sell to each holder of warrants, at the same price and on the same
terms offered to all other prospective buyers (provided that the holder of
warrants shall not be required to buy any other securities in order to buy
such common stock or convertible securities), a portion of such common stock
or convertible securities that is equal to such holder's portion of the common
stock then outstanding if immediately prior thereto all the warrants had been
exercised. Each such holder may elect to buy all or any portion of the common
stock or convertible securities offered or may decline to purchase any.
In case of certain consolidations or mergers of the Company, or the sale of
all or substantially all of the assets of the Company to another corporation,
each November Warrant will thereafter be exercisable for the right to receive
the kind and amount of shares of stock or other securities or property to
which such holder would have been entitled as a result of such consolidation,
merger or sale had the warrants been exercised immediately prior thereto.
See Item 13--Certain Relationships and Transactions, Organization of the
Company, for a discussion of the issuance of shares of the Company's common
stock and options to purchase shares of the Company's common stock on November
12, 1997 in connection with the acquisitions of the Acquired Companies. All
such shares and options were issued under the registration exemption provided
under Section 4(2) of the Securities Act.
In addition to the options issued in connection with the acquisition of the
Acquired Companies, the Company issued options in 1997 to purchase an
aggregate of 396,000 shares of the Company's common stock to various employees
or consultants of the Company under the Company's 1996 Stock Plan. The
exercise price for the options range from $2.00 per share to $5.75 per share.
The vesting schedule for the options varies from recipient to recipient based
on the circumstances under which the options were granted and the identity of
the recipient. These options were issued in accordance with Section 4(2) of
the Securities Act or Rule 701 under Section 3(b) of the Securities Act.
USE OF PROCEEDS FROM REGISTERED OFFERINGS
As indicated in the preceding section, on November 12, 1997, the Company
completed the private sale of Units consisting of (i) an aggregate of $75.0
million principal amount of Senior Notes and (ii) warrants to purchase shares
of the Company's common stock. The Company used the proceeds from that private
sale to finance the cash portion of the purchase price for the Company's
acquisition of the Acquired Companies and the related acquisition expenses,
repay outstanding indebtedness, make capital expenditures and provide working
capital for the Company.
Pursuant to a Form S-4 Registration Statement declared effective by the
Securities and Exchange Commission on February 12, 1998, the Company commenced
on that date an exchange offer (the "Exchange Offer") whereby the Company
offered to exchange the Senior Notes for a like principal amount of registered
notes (the "Exchange Notes"). The form and terms of the Exchange Notes are
identical in all material respects to the form and terms of the Senior Notes
except for certain transfer restrictions and registration rights relating to
the Senior Notes.
The Exchange Offer terminated on March 26, 1998. Prior to the termination,
all of the Senior Notes had been exchanged by investors for Exchange Notes.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes. The Senior Notes surrendered in exchange for the Exchange
Notes will be retired and canceled and cannot be reissued.
18
<PAGE>
Accordingly, the issuance of the Exchange Notes will not result in any change
in the capitalization of the Company.
No underwriter was involved in the Exchange Offer.
ITEM 6. SELECTED FINANCIAL DATA.
On November 12, 1997, VIALOG Corporation ("VIALOG") closed a private
placement of $75.0 million in Senior Notes due 2001 (the "Private Placement").
Contemporaneously with the closing of the Private Placement, VIALOG
consummated agreements to acquire (the "Acquisition") six private conference
service bureaus (the "Acquired Companies"), all of which became wholly-owned
subsidiaries of VIALOG Corporation. Prior to November 12, 1997, VIALOG did not
conduct any operations, and all activities related to the Acquisitions and the
completion of financing transactions to fund the Acquisitions.
The following selected financial data of VIALOG for the years ended December
31, 1996 and 1997 have been derived from the audited consolidated financial
statements of VIALOG Corporation included elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997
------------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues.................................... $ -- $ 4,816
Cost of revenues, excluding depreciation........ -- 2,492
Selling, general and administrative expenses.... 1,308 7,178
Depreciation expense............................ -- 273
Amortization of goodwill and intangibles........ -- 306
Write-off of purchased in-process research and
development.................................... -- 8,000
------------- -------------
Operating loss.................................. (1,308) (13,433)
Interest income (expense), net.................. 1 (1,866)
------------- -------------
Loss before income taxes........................ (1,307) (15,299)
Income tax benefit (expense).................... 522 (522)
------------- -------------
Net loss........................................ $ (785) $ (15,821)
============= =============
Net loss per share--basic and diluted........... $ (0.38) $ (5.48)
============= =============
Weighted average shares outstanding............. 2,088,146 2,889,005
============= =============
<CAPTION>
OTHER FINANCIAL DATA:
<S> <C> <C>
EBITDA(1)....................................... $ (1,308) $ (4,854)
Cash flows used in operating activities......... (178) (4,148)
Cash flows used in investing activities......... (7) (53,762)
Cash flows provided by financing activities..... 522 67,140
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 337 $ 9,567
Working capital (deficit)....................... (249) 7,259
Total assets.................................... 1,263 75,083
Total long-term debt, including current
portion(2)..................................... -- 71,936
Stockholders' equity (deficit).................. 287 (4,882)
</TABLE>
- --------
(1) EBITDA represents income from continuing operations before income taxes,
depreciation and amortization. EBITDA is not a measurement presented in
accordance with generally accepted accounting principles and should not be
considered as an alternative to net income as a measure of operating
results or as an alternative to cash flows as a better measure of
liquidity. EBITDA does not represent funds available for management's
discretionary use. The Company believes that EBITDA is accepted by the
telecommunications industry as a generally recognized measure of
performance and is used by analysts to report publicly on the performance
of telecommunications companies.
(2) Net of unamortized original issue discount of $4.2 million at December 31,
1997.
19
<PAGE>
ACCESS AND CSI SELECTED FINANCIAL DATA
VIALOG reports operating results commencing with its inception on January 1,
1996. For the purpose of providing five full years of selected historical
financial data, as required under the Securities Act, the following historical
selected financial data is presented for the two largest Acquired Companies,
the Reston Center (known as Telephone Business Meetings, Inc., or "Access,"
prior to its Acquisition) and the Atlanta Center (known as Conference Source
International, Inc., or "CSI," prior to its Acquisition). The selected data as
of December 31, 1995 and 1996 and for the years ended December 31, 1994, 1995
and 1996 and the period January 1, 1997 to November 12, 1997, the date of
their respective Acquisitions, are derived from, and should be read in
conjunction with, Access' and CSI's respective audited financial statements
and the notes thereto appearing elsewhere in this Report. The selected data as
of December 31, 1994 are derived from Access' and CSI's respective audited
financial statements. The selected data as of December 31, 1993 and for the
year then ended are derived from Access' and CSI's respective unaudited
financial statements for that year. The data presented below is neither
comparable to nor indicative of the Company's post-Acquisition financial
position or results of operations.
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED DECEMBER 31, 1997 TO
------------------------------------ NOVEMBER 12,
1993 1994 1995 1996 1997
------- ------- ------- --------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
ACCESS STATEMENT OF OPERATIONS DATA:
Net revenues................................. $ 3,814 $ 5,114 $ 6,508 $ 9,073 $ 10,945
Cost of revenues, excluding depreciation..... 1,831 2,608 3,021 3,564 4,791
Selling, general and administrative ex-
penses...................................... 1,217 1,691 2,484 3,332 4,124
Depreciation and amortization expense........ 198 269 496 630 823
------- ------- ------- --------- ---------
Operating income............................. 568 546 507 1,547 1,207
Interest expense, net........................ 37 49 152 174 132
------- ------- ------- --------- ---------
Earnings before income taxes................. 531 497 355 1,373 1,075
Income tax expense (benefit)................. 54 52 (48) -- --
------- ------- ------- --------- ---------
Net income................................... $ 477 $ 445 $ 403 $ 1,373 $ 1,075
======= ======= ======= ========= =========
Net income per share - basic and diluted..... $477.00 $445.00 $644.80 $2,746.00 $2,150.00
======= ======= ======= ========= =========
Weighted average shares outstanding.......... 1,000 1,000 625 500 500
======= ======= ======= ========= =========
ACCESS OTHER FINANCIAL DATA:
EBITDA(1).................................... $ 766 $ 815 $ 1,003 $ 2,177 $ 2,030
Cash flows provided by operating activities.. 525 592 821 2,048 2,932
Cash flows used in investing activities...... (497) (557) (1,432) (795) (1,704)
Cash flows provided by (used in) financing
activities.................................. 146 22 771 (839) (1,549)
<CAPTION>
DECEMBER 31,
------------------------------------
1993 1994 1995 1996
------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ACCESS BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 172 $ 230 $ 390 $ 804
Working capital.............................. 351 475 141 759
Total assets................................. 1,516 1,991 3,672 4,605
Total long-term debt, including current por-
tion........................................ 565 626 2,416 2,052
Stockholders' equity......................... 750 1,156 872 1,770
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED DECEMBER 31, 1997 TO
------------------------------------ NOVEMBER 12,
1993 1994 1995 1996 1997
-------- ------ ------- --------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CSI STATEMENT OF OPERA-
TIONS DATA:
Net revenues.............. $ 1,228 $2,331 $ 3,808 $ 5,868 $ 5,579
Cost of revenues, exclud-
ing depreciation......... 892 1,256 1,617 2,438 2,052
Selling, general and ad-
ministrative expenses.... 640 707 905 998 831
Depreciation expense...... 122 235 292 393 356
-------- ------ ------- --------- ---------
Operating income (loss)... (426) 133 994 2,039 2,340
Interest expense, net..... 19 124 160 165 120
-------- ------ ------- --------- ---------
Net income (loss)......... $ (445) $ 9 $ 834 $ 1,874 $ 2,220
======== ====== ======= ========= =========
Net income (loss) per
share - basic and dilut-
ed....................... $(445.00) $ 9.00 $834.00 $1,874.00 $2,220.00
======== ====== ======= ========= =========
Weighted average shares
outstanding.............. 1,000 1,000 1,000 1,000 1,000
======== ====== ======= ========= =========
CSI OTHER FINANCIAL DATA:
EBITDA(1)................. $ (304) $ 368 $ 1,286 $ 2,432 $ 2,696
Cash flows provided by
operating activities..... (241) 53 721 2,128 2,897
Cash flows used in
investing activities..... (163) (476) (225) (41) (311)
Cash flows provided by
(used in) financing ac-
tivities................. 395 426 (144) (2,144) (2,801)
<CAPTION>
DECEMBER 31,
------------------------------------
1993 1994 1995 1996
-------- ------ ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CSI BALANCE SHEET DATA:
Cash and cash
equivalents.............. $ 20 $ 23 $ 375 $ 318
Working capital
(deficit)................ (681) (805) (322) 445
Total assets.............. 591 1,378 2,037 2,293
Total long-term debt,
including current
portion.................. 867 1,590 1,446 1,405
Stockholders' equity
(deficit)................ (483) (474) 360 676
</TABLE>
- --------
(1) EBITDA represents income from continuing operations before income taxes,
depreciation and amortization. EBITDA is not a measurement presented in
accordance with generally accepted accounting principles and should not be
considered as an alternative to net income as a measure of operating
results or as an alternative to cash flows as a better measure of
liquidity. EBITDA does not represent funds available for management's
discretionary use. The Company believes that EBITDA is accepted by the
telecommunications industry as a generally recognized measure of
performance and is used by analysts to report publicly on the performance
of telecommunications companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
VIALOG Corporation was founded on January 1, 1996 with the intention of
becoming a leading provider of value-added electronic group communications
services. These services include audio, video and data teleconferencing. On
November 12, 1997, VIALOG Corporation consummated agreements to acquire (the
"Acquisition") six private conference service bureaus (the "Acquired
Companies", each an "Operating Center", and collectively, the "Operating
Centers"), all of which became wholly-owned subsidiaries of VIALOG Corporation
(together, the "Company"). Through the six acquisitions, the Company
established one of the largest and most geographically diverse networks of
sales and operations centers focused solely on the electronic group
communications market.
21
<PAGE>
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the consolidated
financial statements and related notes thereto for the years ended December
31, 1996 and 1997 included elsewhere in this Report.
INTRODUCTION
The Company's net revenues are primarily derived from fees charged to
customers for audio and enhanced teleconferencing services. Cost of revenues,
excluding depreciation consists primarily of long distance telephone charges,
salaries and benefits for operators, and maintenance of telephone bridging
equipment. Selling, general and administrative expenses consist primarily of
compensation and benefits to executive officers and general and administrative
employees, marketing expenses, occupancy costs and professional fees.
Prior to the Acquisition, the Acquired Companies had been managed as
independent private companies, and, as such, their results of operations
reflect different tax structures (S corporations and C corporations) which
have influenced, among other things, their levels of historical compensation.
Certain officers and employees have agreed to reductions in their compensation
and benefits in connection with the organization of the Company and the
Acquisitions. The differential between the previous compensation and benefits
of these individuals and the compensation and benefits they have agreed to
accept subsequent to the Acquisitions is referred to as "Compensation
Differential." This Compensation Differential and the related income tax
effect have been reflected as pro forma adjustments in the Company's pro forma
combined financial statements included in Note 2 "Acquisitions" of the Notes
to Consolidated Financial Statements.
The Company, which has only conducted operations since November 12, 1997
(other than in connection with certain financing transactions, the issuance of
Senior Notes and the Acquisitions), intends to integrate certain operations
and administrative functions of the Acquired Companies over a period of time.
This integration process may present opportunities to reduce costs through the
elimination of duplicative functions and through economies of scale,
particularly from expected reductions in long distance telephone charges as
existing agreements entered into by the Acquired Companies lapse and are
replaced with new contracts negotiated by the Company. The Company is
currently unable to quantify these savings. It is anticipated that these
savings will be partially offset by the costs related to the Company's new
management. In addition, it is anticipated that increased marketing costs will
initially be required to establish the Company's brand name in the
marketplace. As a result of these various costs and possible cost-savings,
comparisons of historical operating results may not be meaningful, and such
results may not be indicative of future performance.
VIALOG CORPORATION
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
VIALOG Corporation ("VIALOG") was incorporated on January 1, 1996. Prior to
the November 12, 1997 Acquisitions, VIALOG did not conduct any operations, and
all activities conducted by it were related to the Acquisitions and the
completion of financing transactions to fund the Acquisitions.
VIALOG Corporation incurred a net loss of $785,000 and $15.8 million for the
years ended December 31, 1996 and 1997, respectively. The 1996 net loss
represented general and administrative expenses, which consisted primarily of
legal costs of $93,000, travel costs of $133,000, salaries of $583,000,
consulting fees of $301,000, occupancy costs of $71,000 and all other costs of
$126,000, which were offset by an income tax benefit of $522,000, all related
to the organization of VIALOG Corporation and the consummation of business
combination agreements with the Operating Centers. The 1997 net loss included
expenses incurred prior to the Acquisitions, as well as consolidated net
revenues and expenses of the Operating Centers from the date of the
Acquisitions through December 31, 1997. The $15.8 million net loss included
$4.8 million of consolidated net revenues and $2.5 million of consolidated
cost of revenues from the date of the Acquisitions through December 31, 1997,
$7.2 million of selling, general and administrative expenses (which included
approximately $2.0 million related to an offering of
22
<PAGE>
Common Stock which was terminated in early 1997 and a $958,000 non-cash charge
relating to the modification of certain stock options), $306,000 of
amortization of goodwill and intangibles related to the Acquisitions, $273,000
of depreciation expense, an $8.0 million non-recurring charge relating to the
write-off of purchased in-process research and development, $1.8 million of
interest expense relating primarily to the Senior Notes and $522,000 of income
tax expense. Selling, general and administrative expenses of $7.2 million for
the year ended December 31, 1997 consisted primarily of the following:
compensation, benefits and travel expenses of $3.0 million (including the
$958,000 non-cash charge discussed above), certain marketing expenses,
including advertising, promotions, and consulting, of $490,000, professional
services expenses of $3.4 million (including the approximate $2.0 million
charge discussed above), occupancy costs of $216,000 and all other costs of
$92,000.
The $8.0 million write-off of purchased in-process research and development
noted above represents the amount of the purchase price of the Acquisitions
allocated to incomplete research and development projects. This allocation
represents the estimated fair value based on risk-adjusted cash flows related
to the incomplete products. The acquired in-process research and development
represents engineering and test activities associated with the introduction of
new enhanced services and information systems. The Operating Centers are
working on projects that are essential to offering high quality, secure and
reliable products including unattended audio conferencing, video and data
teleconferencing, integrated voice response and broadcast fax services. Since
these projects had not yet reached technological feasibility and have no
alternative future uses, there can be no guarantee as to the achievability of
the projects or the ascribed values. Accordingly, these costs were expensed as
of November 12, 1997, the date VIALOG Corporation acquired the Operating
Centers. These projects are expected to be completed within 18 months at a
cost of approximately $2.0 million in 1998 and $300,000 in 1999. The Company
expects to begin realizing incremental benefits as the projects are completed.
VIALOG had net operating loss carryforwards of $0 and $3.9 million at
December 31, 1996 and 1997, respectively, which expire in 2012. Utilization of
the net operating losses may be subject to an annual limitation provided by
change in ownership provisions of Section 382 of the Internal Revenue Code of
1986, as amended (the "Code") and similar state provisions. In assessing the
realizability of deferred tax assets, VIALOG considers whether it is more
likely than not that some portion or all of the deferred tax assets will not
be realized. Based on management's projections for future taxable income, a
valuation allowance has been established for the deferred tax assets. See Note
9 to VIALOG's Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated negative cash flows of $178,000 and $4.1 million from
operating activities for the years ended December 31, 1996 and 1997,
respectively. Cash flows used in investing activities of $7,000 and $53.8
million for the years ended December 31, 1996 and 1997, respectively,
represent cash paid in connection with the Acquisitions of $0 and $53.3
million, respectively, as well as purchases of property and equipment of
$7,000 and $454,000, respectively. Cash provided by financing activities of
$522,000 and $67.1 million for the years ended December 31, 1996 and 1997,
respectively, represent issuance of long-term debt and common stock, offset by
payments of previously issued debt and payments of indebtedness of the
Acquired Companies.
On November 12, 1997, VIALOG 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 VIALOG 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 VIALOG 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
23
<PAGE>
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 VIALOG 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, debt service
requirements and planned 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.
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, limit through 1999 the Company's ability to change the location of
an Operating Center's facilities (except for the Montgomery Center),
physically merge the Operating Center's operations with another operation,
change the position of those employees who received employment agreements
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 December
31, 1997. 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 millennium (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 Acquired Companies, 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
24
<PAGE>
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.
Due to the relative low levels of inflation experienced in 1995, 1996 and
1997, inflation did not have a significant effect on the results of the
combined companies in those years.
COMBINED ACQUIRED COMPANIES AND VIALOG CORPORATION
The combined Acquired Companies' and VIALOG Corporation's Statements of
Operations data for the years ended December 31, 1995, 1996 and 1997 do not
purport to present the financial results or the financial condition of the
combined Acquired Companies and VIALOG Corporation in accordance with
generally accepted accounting principles. Such data represents merely a
summation of the net revenues and cost of revenues of the individual Acquired
Companies and VIALOG Corporation on an historical basis, and excludes the
effects of pro forma adjustments. This combined data prior to the Acquisitions
will not be comparable to and may not be indicative of the Company's post-
combination results of operations because the Acquired Companies were not
under common control or management.
RESULTS OF OPERATIONS--COMBINED ACQUIRED COMPANIES AND VIALOG CORPORATION
The following unaudited combined data of the Acquired Companies and VIALOG
Corporation on an historical basis are derived from the respective audited and
unaudited financial statements. Such data excludes the effects of pro forma
adjustments and is set forth as a percentage of net revenues for the periods
presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues..................... $21,855 100.0% $29,005 100.0% $35,917 100.0%
Cost of revenues, excluding
depreciation.................... 11,747 53.7% 14,572 50.2% 18,287 50.9%
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net revenues. All Acquired Companies reflected an increase in net revenues
during the year ended December 31, 1997 compared to the year ended December
31, 1996. Combined net revenues increased $6.9 million, or 23.8%, from $29.0
million in 1996 to $35.9 million in 1997. Overall, the increase was primarily
due to increased call volumes for audio conferencing services. The major
components of this increase were (i) an increase in Access' net revenues of
$3.5 million, or 38.5%, from $9.1 million in 1996 to $12.6 million in 1997,
which consisted of increased sales of teleconferencing services of $2.2
million and $1.3 million to existing and new customers, respectively, (ii) an
increase in Call Points' net revenues of $1.0 million, or 12.9%, from $7.5
million in 1996 to $8.5 million in 1997, which was primarily attributable to
sales of teleconferencing services to existing customers and sales to new
customers, and (iii) an increase in TCC's net revenues of $725,000, or 21.3%,
from $3.4 million in 1996 to $4.1 million in 1997, which was primarily
attributable to sales to existing customers and new customers. This growth was
achieved despite the fact that TCC's net revenues for 1996 included $707,000
of net revenues from a portion of TCC's business that was divested in December
1996.
Cost of revenues, excluding depreciation. Combined cost of revenues,
excluding depreciation increased $3.7 million, or 25.5%, from $14.6 million in
1996 to $18.3 million in 1997 and increased slightly as a percentage of net
revenues from 50.2% in 1996 to 50.9% in 1997. The dollar increase was
primarily attributable to (i) an increase in Access' cost of revenues,
excluding depreciation of $1.9 million, or 54.3%, from $3.6 million in 1996 to
$5.5 million in 1997 related to the substantial investment made in personnel
and related costs associated with video conferencing and increased
telecommunications and personnel expense associated with the growth in
revenues, (ii) an increase in Americo's cost of revenues, excluding
depreciation of $609,000, or 74.4%, from $818,000 in 1996 to $1.4 million in
1997 primarily due to telecommunications costs and personnel expenses to
support the current and expected call volume, and (iii) an increase in Call
Points' cost of revenues,
25
<PAGE>
excluding depreciation of $626,000, or 11.9%, from $5.3 million in 1996 to
$5.9 million in 1997, which was primarily attributable to increased
telecommunications costs and personnel expenses to support the increased call
volume.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net revenues. All Acquired Companies reflected an increase in net revenues
during 1996. Combined net revenues increased by $7.1 million, or 32.7%, from
$21.9 million in 1995 to $29.0 million in 1996. Overall, the increase was
primarily due to increased call volume for audio conferencing service
experienced by all of the Acquired Companies. The major components of this
increase were (i) an increase in Access' net revenues of $2.6 million, or
39.4%, from $6.5 million in 1995 to $9.1 million in 1996 resulting from
increased sales of $1.4 million and $1.2 million to existing and new
customers, respectively, (ii) an increase in CSI's revenues of $2.1 million,
or 54.1%, from $3.8 million in 1995 to $5.9 million in 1996 resulting from a
$2.2 million increase in net revenues from two significant customers, and
(iii) an increase in TCC's net revenues of $1.1 million, or 45.8%, from $2.3
million in 1995 to $3.4 million in 1996 resulting from additional sales of
audio teleconferencing services to existing customers and sales to new
customers.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation increased by $2.8 million, or 24.1%, from $11.7 million in 1995
to $14.6 million in 1996 and decreased as a percentage of net revenues from
53.7% in 1995 to 50.2% in 1996. The dollar increase in cost of revenues,
excluding depreciation was primarily attributable to (i) an increase in CSI's
cost of revenues, excluding depreciation of $821,000, or 50.8%, from $1.6
million in 1995 to $2.4 million in 1996 resulting from increased
telecommunications costs associated with increased call volumes and costs
associated with the addition of nine operators, (ii) an increase in Access'
cost of revenues, excluding depreciation of $543,000, or 18.0%, from $3.0
million in 1995 to $3.6 million in 1996 resulting from increased
telecommunications, personnel and occupancy costs and the salaries and
benefits for 16 additional operators associated with increased call volumes,
and (iii) an increase in TCC's cost of revenues, excluding depreciation of
$618,000, or 58.2%, from $1.1 million in 1995 to $1.7 million in 1996
resulting from increased telecommunications and personnel costs associated
with increased call volumes.
NEW ACCOUNTING PRONOUNCEMENTS
In 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"). As permitted by
SFAS 123, the Company measures compensation cost in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees". Therefore, the adoption of SFAS 123 was not material to the
Company's financial condition or results of operations; however, the proforma
impact on earnings and earnings per share have been disclosed in the Notes to
the Consolidated Financial Statements as required by SFAS 123 for companies
that continue to account for stock options under APB 25.
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share." SFAS 128 establishes a different
method of computing net income (loss) per share than was required under the
provisions of Accounting Principles Board Opinion No. 15. Under SFAS 128, the
Company presents both basic net income (loss) per share and diluted net income
(loss) per share. The impact on diluted net income (loss) per share was not
material. Prior periods presented have been restated to comply with provisions
of SFAS 128.
In June 1997, the Financial Accounting Standards Board issued Statement 130
(SFAS 130), "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Under this concept, all revenues,
expenses, gains and losses recognized during the period are included in
income, regardless of whether they are considered to be the results of
operations of the period. SFAS 130, which becomes effective for the Company in
its year ending December 31, 1998, is not expected to have a material impact
on the consolidated financial statements of the Company.
26
<PAGE>
In June 1997, the Financial Accounting Standards Board issued Statement 131
(SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way that public business
enterprises report selected information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131, which
becomes effective for the Company in its year ending December 31, 1998, is
currently not expected to have a material impact on the Company's consolidated
financial statements and disclosures as the Company does not have multiple
reportable operating segments.
ACCESS AND CSI
The selected historical financial information presented in the tables below
for the selected Acquired Companies is derived from, and should be read in
conjunction with, the respective audited financial statements and related
notes thereto of the individual Acquired Companies included elsewhere herein
and "Access and CSI Selected Financial Data." The individual selected
financial information for Access and CSI is presented because Access and CSI
are the Acquired Companies that are considered to represent a significant
percentage of the operating results of the Company. Specifically, Access and
CSI represented 29% and 57%, respectively, of the operating income of the
Acquired Companies on a combined basis for the period from January 1, 1997 to
November 12, 1997. The selected historical financial information for all
Acquired Companies on a combined basis, and VIALOG Corporation is included
elsewhere herein.
ACCESS
Founded in 1987, Access specializes in providing group communications
services to numerous organizations, including financial institutions,
government agencies, trade associations and professional service companies.
Access is headquartered and maintains its operations center in Reston,
Virginia.
RESULTS OF OPERATIONS--ACCESS
The following table sets forth certain historical financial data of Access
and such data as a percentage of net revenues for the periods presented:
<TABLE>
<CAPTION>
JANUARY 1, NOVEMBER 13,
YEAR ENDED DECEMBER 31, 1997 TO 1997 TO
----------------------------------------- NOVEMBER 12, DECEMBER 31,
1994 1995 1996 1997 1997
------------- ------------- ------------- ------------- ---------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $5,114 100.0% $6,508 100.0% $9,073 100.0% $10,945 100.0% $ 1,620 100.0 %
Cost of revenues,
excluding
depreciation........... 2,608 51.0% 3,021 46.4% 3,564 39.3% 4,791 43.8% 709 43.8 %
Selling, general and
administrative
expenses............... 1,691 33.1% 2,484 38.2% 3,332 36.7% 4,124 37.7% 2,603 160.6 %
Depreciation and
amortization expense... 269 5.2% 496 7.6% 630 6.9% 823 7.5% 183 11.3 %
------ ------ ------ ------ ------ ------ ------- ----- ------- ------
Operating income
(loss)................. $ 546 10.7% $ 507 7.8% $1,547 17.1% $ 1,207 11.0% $(1,875) (115.7)%
====== ====== ====== ====== ====== ====== ======= ===== ======= ======
</TABLE>
Periods January 1 to November 12, 1997 and November 13 to December 31, 1997
compared to Year Ended December 31, 1996
Net revenues. Net revenues increased from $9.1 million for the year ended
December 31, 1996 to $10.9 million and $1.6 million for the periods January 1
to November 12, 1997 and November 13 to December 31, 1997, respectively. The
increase in net revenues consisted of additional sales of teleconferencing
services, due to increased call volumes, to existing and new customers. Sales
to new customers were approximately $1.1 million and $167,000 for the periods
January 1 to November 12, 1997 and November 13 to December 31, 1997,
respectively. These increases reflect a substantial increase in net revenues
from audio and enhanced teleconferencing services, as well as revenues of
$228,000, $53,000 and $13,000 for video conferencing services for the periods
January 1 to November 12, 1997 and November 13 to December 31, 1997 and the
year ended December 31, 1996, respectively.
27
<PAGE>
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation increased from $3.6 million for the year ended December 31, 1996
to $4.8 million and $709,000 for the periods January 1 to November 12, 1997
and November 13 to December 31, 1997, respectively. As a percentage of net
revenues, cost of revenues increased 4.5 percentage points, from 39.3% for the
year ended December 31, 1996 to 43.8% for each of the periods January 1 to
November 12, 1997 and November 13 to December 31, 1997. The percentage
increase is primarily the result of the substantial investment in personnel
and related costs made in video conferencing during the periods January 1 to
November 12, 1997 and November 13 to December 31, 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased from $3.3 million for the year ended
December 31, 1996 to $4.1 million and $2.6 million for the periods January 1
to November 12, 1997 and November 13 to December 31, 1997, respectively. The
dollar increase was primarily the result of (i) a $2.2 million write-off of
in-process research and development costs during the period November 13 to
December 31, 1997, relating to the acquisition of Access by VIALOG
Corporation, (ii) a $481,000 charge related to acquisition consulting services
provided to the former stockholders of Access in connection with the sale of
Access to VIALOG Corporation and the write-off of a consulting agreement and
an agreement not to compete which were determined by Access to have no future
value as of November 12, 1997 and (iii) additional operating expenses
consistent with the increase in net revenues experienced by Access.
Depreciation and amortization expense. Depreciation and amortization expense
increased from $630,000 for the year ended December 31, 1996 to $823,000 and
$183,000 for the periods January 1 to November 12, 1997 and November 13 to
December 31, 1997, respectively. The dollar increase is the result of
additional property and equipment of $1.7 million and $380,000 acquired during
the periods January 1 to November 12, 1997 and November 13 to December 31,
1997, respectively, to support the growth in net revenues and the amortization
of goodwill and intangible assets since November 12, 1997, related to the
acquisition of Access by VIALOG Corporation.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Net revenues. Net revenues increased $2.6 million, or 39.4%, from $6.5
million for the year ended December 31, 1995 to $9.1 million for the year
ended December 31, 1996. The increase in net revenues consisted of additional
sales of audio teleconferencing services, due to increased call volumes, of
$1.4 million and $1.2 million to existing and new customers, respectively.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation increased $543,000, or 18.0%, from $3.0 million for the year
ended December 31, 1995 to $3.6 million for the year ended December 31, 1996.
The dollar increase was primarily attributable to increased telecommunications
costs related to increased call volume and occupancy costs and the salaries
and benefits for 16 additional operators. As a percentage of net revenues,
cost of revenues, excluding depreciation decreased 7.1 percentage points, from
46.4% for the year ended December 31, 1995 to 39.3% for the year ended
December 31, 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $848,000, or 34.1%, from $2.5 million for
the year ended December 31, 1995 to $3.3 million for the year ended
December 31, 1996. The dollar increase was primarily the result of increased
occupancy costs, non-recurring executive compensation and bad debt expense. As
a percentage of net revenues, selling, general and administrative expenses
decreased 1.5 percentage points from 38.2% for the year ended December 31,
1995 to 36.7% for the year ended December 31, 1996.
Depreciation and amortization expense. Depreciation and amortization expense
increased $134,000, or 27.0% from $496,000 for the year ended December 31,
1995 to $630,000 for the year ended December 31, 1996. The dollar increase is
the result of additional property and equipment of $783,000 acquired during
1996 to support the growth experienced in net revenues. As a percentage of net
revenues, depreciation expense decreased
28
<PAGE>
0.7 percentage points from 7.6% for the year ended December 31, 1995 to 6.9%
for the year ended December 31, 1996.
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
Net revenues. Net revenues increased $1.4 million, or 27.3%, from $5.1
million for the year ended December 31, 1994 to $6.5 million for the year
ended December 31, 1995. The increase in net revenues consisted primarily of
additional sales of teleconferencing services, due to increased call volumes,
of $730,000 and $664,000 to existing and new customers, respectively.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation increased $413,000, or 15.8%, from $2.6 million for the year
ended December 31, 1994 to $3.0 million for the year ended December 31, 1995.
The dollar increase was primarily attributable to salaries and benefits for 10
additional operators. As a percentage of net revenues, cost of revenues,
excluding depreciation decreased 4.6 percentage points, from 51.0% for the
year ended December 31, 1994 to 46.4% for the year ended December 31, 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $793,000, or 46.9%, from $1.7 million for
the year ended December 31, 1994 to $2.5 million for the year ended December
31, 1995. The dollar increase was primarily the result of moving expenses and
additional occupancy costs associated with relocating to a larger facility. As
a percentage of net revenues, selling, general and administrative expenses
increased 5.1 percentage points from 33.1% for the year ended December 31,
1994 to 38.2% for the year ended December 31, 1995.
Depreciation and amortization expense. Depreciation and amortization expense
increased $227,000, or 84.4% from $269,000 for the year ended December 31,
1994 to $496,000 for the year ended December 31, 1995. The dollar increase is
the result of $1.4 million in purchases of additional property and equipment
during the year ended December 31, 1995 to support the growth experienced in
net revenues and the relocation to a larger facility. As a percentage of net
revenues, depreciation expense increased 2.4 percentage points from 5.2% for
the year ended December 31, 1994 to 7.6% for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES--ACCESS
The following table sets forth selected financial information from Access'
statements of cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
JANUARY 1, 1997 TO
1994 1995 1996 NOVEMBER 12, 1997
----- ------- ------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by (used in):
Operating activities............. $ 592 $ 821 $2,048 $ 2,932
Investing activities............. (557) (1,432) (795) (1,704)
Financing activities............. 22 771 (839) (1,549)
----- ------- ------ -------
Net increase (decrease) in cash and
cash equivalents.................. $ 57 $ 160 $ 414 $ (321)
===== ======= ====== =======
</TABLE>
Access had positive cash flow from operations in each year ended December
31, 1994, 1995 and 1996 and the period January 1, 1997 to November 12, 1997.
Cash used in investing activities related primarily to the acquisition of
property and equipment. Net cash provided by financing activities was
primarily the result of borrowings on notes payable to finance the acquisition
of property and equipment. Net cash used in financing activities consisted of
the repayment of notes payable, principal payments under capital lease
obligations, payments to a former stockholder and distributions to
stockholders. Distributions to stockholders totaled $39,000, $0, $475,000 and
$1,284,000 for the years ended December 31, 1994, 1995, and 1996 and the
period January 1, 1997 to November 12, 1997, respectively.
29
<PAGE>
CSI
Founded in 1992, CSI specializes in providing audio teleconferencing
services and enhanced services to certain facilities-based and non-facilities-
based telecommunications providers. CSI is headquartered and maintains its
operations center in Atlanta, Georgia.
RESULTS OF OPERATIONS--CSI
The following table sets forth certain historical financial data of CSI and
such data as a percentage of net revenues for the periods presented:
<TABLE>
<CAPTION>
JANUARY 1, NOVEMBER 13,
YEAR ENDED DECEMBER 31, 1997 TO 1997 TO
---------------------------------------- NOVEMBER 12, DECEMBER 31,
1994 1995 1996 1997 1997
------------ ------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $2,331 100.0% $3,808 100.0% $5,868 100.0% $5,579 100.0% $ 854 100.0 %
Cost of revenues,
excluding
depreciation........... 1,256 53.9% 1,617 42.5% 2,438 41.6% 2,052 36.8% 322 37.7 %
Selling, general and
administrative
expenses............... 707 30.3% 905 23.8% 998 17.0% 831 14.9% 3,493 409.0 %
Depreciation and
amortization
expense................ 235 10.1% 292 7.6% 393 6.7% 356 6.4% 168 19.7 %
------ ----- ------ ----- ------ ----- ------ ----- ------- ------
Operating income
(loss)................. $ 133 5.7% $ 994 26.1% $2,039 34.7% $2,340 41.9% $(3,129) (366.4)%
====== ===== ====== ===== ====== ===== ====== ===== ======= ======
</TABLE>
Periods January 1 to November 12, 1997 and November 13 to December 31, 1997
Compared to Year Ended December 31, 1996
Net Revenues. Net revenues increased from $5.9 million in 1996 to $5.6
million and $854,000 for the periods January 1 to November 12, 1997 and
November 13 to December 31, 1997, respectively. The increase is primarily due
to increased revenues from CSI's two significant customers. Net revenues from
such customers represented 70.0 % of CSI's net revenues for the year ended
December 31, 1996 and approximately 71.6% and 71.4% of CSI's net revenues for
the periods January 1 to November 12, 1997 and November 13 to December 31,
1997, respectively.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation decreased slightly from $2.4 million in 1996 to $2.1 million and
$322,000 for the periods January 1 to November 12, 1997 and November 13 to
December 31, 1997, respectively. The decrease in cost of revenues, excluding
depreciation on increased call volumes was primarily the result of lower
telecommunications rates included in a contract which became effective in
November 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased from $998,000 in 1996 to $831,000 and $3.5
million for the periods January 1 to November 12, 1997 and November 13 to
December 31, 1997, respectively. The increase was primarily the result of a
$3.4 million write-off of in-process research and development costs relating
to the acquisition of CSI by VIALOG Corporation.
Depreciation and amortization expense. Depreciation and amortization expense
increased from $393,000 for the year ended December 31, 1996 to $356,000 and
$168,000 for the periods January 1 to November 12, 1997 and November 13 to
December 31, 1997, respectively. The increase was the result of additional
property and equipment acquired to support the growth in net revenues and the
amortization of goodwill and intangible assets since November 12, 1997,
related to the acquisition of CSI by VIALOG Corporation.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net revenues. Net revenues increased $2.1 million, or 54.1%, from $3.8
million in 1995 to $5.9 million in 1996. Virtually all of this increase was
the result of a $2.2 million increase in net revenues from two significant
customers of CSI. Net revenues from such customers represented 54.0% and 70.0%
of CSI's net revenues for the years ended December 31, 1995 and 1996,
respectively.
30
<PAGE>
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation increased $821,000, or 50.8%, from $1.6 million in 1995 to $2.4
million in 1996. As a percentage of net revenues, cost of revenues, excluding
depreciation decreased 0.9 percentage point from 42.5% in 1995 to 41.6% in
1996. The dollar increase was primarily attributable to increased
telecommunications expenses associated with increased call volumes and costs
associated with the addition of nine operators.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $93,000, or 10.3%, from $905,000 in 1995 to
$998,000 in 1996. As a percentage of net revenues, selling, general and
administrative expenses decreased 6.8 percentage points from 23.8% in 1995 to
17.0% in 1996. This percentage decrease was primarily attributable to
spreading fixed costs over a larger revenue base.
Depreciation and amortization expense. Depreciation and amortization expense
increased $101,000, or 34.6%, from $292,000 for the year ended December 31,
1995 to $393,000 for the year ended December 31, 1996. The increase was the
result of additional property and equipment acquired to support the growth in
net revenues.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net revenues. Net revenues increased $1.5 million, or 63.4%, from $2.3
million in 1994 to $3.8 million in 1995. Virtually all of this increase was
the result of a $1.4 million increase in net revenues from two significant
customers of CSI. Net revenues from such customers represented 28.0% and 54.0%
of total net revenues for the years ended December 31, 1994 and 1995,
respectively.
Cost of revenues, excluding depreciation. Cost of revenues increased
$361,000, or 28.7%, from $1.3 million in 1994 to $1.6 million in 1995. As a
percentage of net revenues, cost of revenues decreased 11.4 percentage points
from 53.9% in 1994 to 42.5% in 1995. This percentage decrease was primarily
attributable to a reduction in local access charges, telecommunications
expenses and the termination of a lease for network access.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $198,000, or 28.0%, from $707,000 in 1994 to
$905,000 in 1995. As a percentage of net revenues, selling, general and
administrative expenses decreased 6.5 percentage points from 30.3% in 1994 to
23.8% in 1995. This percentage decrease was primarily attributable to
spreading such costs over a larger revenue base.
Depreciation and amortization expense. Depreciation and amortization expense
increased $57,000, or 24.3%, from $235,000 for the year ended December 31,
1994 to $292,000 for the year ended December 31, 1995. The increase was the
result of additional property and equipment acquired to support the growth in
net revenues.
LIQUIDITY AND CAPITAL RESOURCES--CSI
The following table sets forth selected financial information from CSI's
statements of cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------- JANUARY 1, 1997
1994 1995 1996 TO NOVEMBER 12, 1997
----- ----- ------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by (used in):
Operating activities............ $ 53 $ 721 $ 2,128 $ 2,897
Investing activities............ (476) (225) (41) (311)
Financing activities............ 426 (144) (2,144) (2,801)
----- ----- ------- -------
Net increase (decrease) in cash
and cash equivalents............. $ 3 $ 352 $ (57) $ (215)
===== ===== ======= =======
</TABLE>
CSI had a positive cash flow from operations in each year ended December 31,
1994, 1995, 1996 and the period January 1, 1997 to November 12, 1997. Cash
used in investing activities in 1994, 1995, 1996 and the period January 1,
1997 to November 12, 1997 related solely to the acquisition of property and
equipment. Cash
31
<PAGE>
provided by financing activities consisted of the proceeds of borrowings on
long-term debt and from the refinancing of capital lease obligations. Cash
used in financing activities consisted of repayments of long-term debt and
capital lease obligations and distributions to stockholders. Stockholder
distributions totaled $1.6 million and $2.6 million for the year ended
December 31, 1996 and the period January 1, 1997 through November 12, 1997,
respectively. There were no stockholder distributions in 1994 and 1995. As of
November 12, 1997, CSI had a working capital deficit of $23,000.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
The Company is including the following cautionary statements to make
applicable and take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements
made by, or on behalf, of the Company in this Annual Report on Form 10-K.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts. Such
forward- looking statements may be identified, without limitation, by the use
of the words "anticipates," "estimates," "expects," "intends," "plans,"
"predicts," "projects," and similar expressions. From time to time, the
Company may publish or otherwise make available forward-looking statements of
this nature. All such forward-looking statements, whether written or oral, and
whether made by or on behalf of the Company, are expressly qualified by these
cautionary statements and any other cautionary statements which may accompany
the forward-looking statements. In addition, the Company disclaims any
obligation to update any forward-looking statements to reflect events or
circumstances after the date hereof.
Forward-looking statements involve risks and uncertainties which could cause
actual results or outcomes to differ materially from those expressed in the
forward-looking statements. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to
have a reasonable basis, including without limitation, management's
examination of historical operating trends, data contained in the Company's
records and other data available from third parties, but there can be no
assurance that management's expectations, beliefs or projections will result
or be achieved or accomplished. In addition to other factors and matters
discussed elsewhere herein, some of the important factors that, in the view of
the Company, could cause actual results to differ materially from those
discussed in the forward-looking statements include the following:
Substantial Leverage and Ability to Service Debt. The Company is highly
leveraged, with substantial debt service in addition to operating expenses and
planned capital expenditures. The Acquired Companies have historically
operated at substantially lower levels of debt than that at which the Company
currently operates. The Company's level of indebtedness will have several
important effects on its future operations, including, without limitation, (i)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of interest and principal on its indebtedness, (ii)
covenants contained in the Company's Indenture will require the Company to
meet certain financial tests, and other restrictions will limit its ability to
borrow additional funds or to dispose of assets, and may affect the Company's
flexibility in planning for, and reacting to, changes in its business,
including possible acquisition activities, (iii) the Company's leveraged
position will substantially increase its vulnerability to adverse changes in
general economic, industry and competitive conditions, and (iv) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate and other purposes may be
limited. The Company's ability to meet its debt service obligations and to
reduce its total indebtedness will be dependent upon the Company's future
performance, which will be subject to general economic, industry and
competitive conditions. There can be no assurance that the Company's business
will continue to generate cash flow at or above current levels. If the Company
is unable to generate sufficient cash flow from operations in the future to
service its debt, it may be required, among other things, to seek additional
financing in the debt or equity markets, to refinance or restructure all or a
portion of its indebtedness, including the Notes, to sell selected assets, or
to reduce or delay planned capital expenditures. There can be no assurance
that any such measures would be sufficient to enable the Company to service
its debt, or that any of these measures could be effected on satisfactory
terms, if at all.
32
<PAGE>
Senior Credit Facility; Effective Subordination. The Company anticipates
entering into a credit facility to provide additional liquidity. The Company
has accepted a proposal and is currently negotiating the terms for a senior
credit facility ("Senior Credit Facility") (a revolving credit, term loan and
capital expenditures facility in the aggregate principal amount of $15.0
million). However, the Company has not yet entered into a binding agreement
and, accordingly, there can be no assurance that the Company will be able to
obtain the Senior Credit Facility, or any similar credit facility. If the
Company is unable to obtain a credit facility, it may be required to postpone
and/or change significant elements of its business strategy. In addition, the
terms of the proposed commitment for the Senior Credit Facility require a
pledge of substantially all of the assets of the Company and the Subsidiary
Guarantors. Accordingly, the Notes and Subsidiary Guarantees will be
effectively subordinated to the extent of the collateral used to secure such
bank indebtedness. In the event of a default on the Notes, or a bankruptcy,
liquidation or reorganization of the Company, such assets will be available to
satisfy obligations with respect to the indebtedness secured thereby before
any payment therefrom could be made on the Notes.
Absence of Consolidated Operating History. VIALOG Corporation was founded on
January 1, 1996 and has only conducted operations and generated revenues since
November 12, 1997, the date of the Acquisitions. The Acquired Companies
operated as separate, independent businesses prior to the closing of the
Acquisitions. The Company has used the purchase method of accounting to record
the Acquisitions. Consequently, the pro forma combined financial information
contained in this Report may not be indicative of the Company's future
operating results and financial condition.
Difficulty of Integrating the Acquired Companies. The Acquisition agreements
place restrictions on the Company's ability to make certain changes for a two-
year period following the Acquisitions. The successful and timely integration
of the operations of the Acquired Companies is critical to the Company's
future financial performance. There can be no assurance that the Company will
be successful in integrating any of the operations of the Acquired Companies
or, if integrated, that such combined operations will not demonstrate
significant operating inefficiencies. The failure of the Company to integrate
the operations of the Acquired Companies successfully could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Pretax Losses. Certain of the Acquired Companies incurred pretax losses in
1996 and 1995. There can be no assurance that such Acquired Companies will
achieve profitability going forward. The failure of such Acquired Companies to
achieve profitability will have a material adverse effect on the Company's
business, financial condition and results of operations.
Competition. The teleconferencing services industry is highly competitive
and subject to rapid change. The Company currently competes with companies
which have substantially greater financial, sales, marketing, managerial,
operational and other resources, as well as greater name recognition, than the
Company. As a result, potential competitors may be able to respond more
effectively than the Company to new or emerging technologies and changes in
customer requirements, to initiate or withstand significant price decreases or
to devote substantially greater resources than the Company in order to develop
and promote new services. There can be no assurance that new competitors,
including current customers that choose to insource their teleconferencing
services, will not enter the Company's markets or that consolidations or
alliances among current competitors will not create significant new
competition. In order to remain competitive, the Company will be required to
provide superior customer service and to respond effectively to the
introduction of new and improved services offered by its competitors. Any
failure of the Company to accomplish these tasks or otherwise to respond to
competitive threats could have a material adverse effect on the Company's
business, financial condition and results of operations.
Potential Acquisitions. One element of the Company's business strategy is to
acquire additional electronic group communications service businesses.
However, the Company is aware of only a limited number of potential
acquisition candidates. Certain of the Company's principal competitors have
each recently acquired a private conference service bureau ("PCSB"), which may
increase competition for the remaining acquisition opportunities in the
teleconferencing industry. Continued consolidation in the industry, and the
potential entry of RBOCs into the teleconferencing industry, may intensify
such competition and increase the price which the
33
<PAGE>
Company would have to pay in connection with any future acquisitions. The
Company currently has no binding agreements to effect any acquisitions,
although the Company is currently in discussions with several acquisition
candidates. During the course of negotiating and planning the Acquisitions,
VIALOG Corporation entered into discussions with a number of PCSBs, including
the Acquired Companies, regarding their possible participation in the
combination of the Acquired Companies. Discussions with any company which did
not participate in the Acquisitions could resume at any time and one or more
acquisitions could occur within a short period of time thereafter. However,
there can be no assurance that any discussions will in fact resume or that
there will be any additional acquisitions. The inability of the Company to
implement its acquisition strategy successfully or the failure to integrate
new businesses or operations into its current operations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Technological Considerations. The Company currently derives a substantial
portion of its net revenues from the sale of audio teleconferencing services.
If the manufacturers of private branch exchanges ("PBXs"), the equipment used
by most businesses and institutions to handle their internal telephone
requirements, develop improved, cost-effective PBX capabilities for handling
teleconferencing calls with the quality and functionality of existing MCUs
used in the teleconferencing business, the Company's customers could choose to
purchase such equipment and hire the personnel necessary to service their
teleconferencing needs through internal telephone systems. The loss of such
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, if Internet
technology can be modified to accommodate multipoint voice transmission with
audio quality comparable to that of MCUs used in the teleconferencing
business, the availability of such technology could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Long Distance Services Contracts. A significant portion of the Company's
direct costs are attributable to the purchase of local and long distance
telephone services. There can be no assurance that competition in the long
distance services market will continue to increase, that any increased
competition will reduce the cost of long distance services or that the
Company's purchasing strategy will result in cost savings. If the costs of
long distance services increase over time, the Company's current purchasing
strategy, which calls for shorter-term contracts, may place it at a
competitive disadvantage with respect to competitors that have entered into
longer-term contracts for long distance services. There can be no assurance
that the Company's analysis of the future costs of long distance services will
be accurate, and the failure to predict future cost trends accurately could
have a material adverse effect on the Company's business, financial condition
and results of operations. Certain of the Company's existing contracts have
remaining terms in excess of one year and require the Company to pay premiums
over current market rates for long distance services. These contracts impose
substantial monetary penalties for early termination. Although the Company
intends to attempt to renegotiate these contracts to obtain more favorable
rates, there can be no assurance that the Company will be able to do so. The
failure of the Company to renegotiate these contracts will require the Company
to continue to pay premiums over current market rates for long distance
services.
Regulation. In general, the telecommunications industry is subject to
extensive regulation by federal, state and local governments. Although there
is little or no direct regulation in the United States of the core electronic
group communications services offered by the Company, various government
agencies, such as the Federal Communications Commission (the "FCC"), have
jurisdiction over some of the Company's current and potential suppliers of
telecommunications services, and government regulation of those services may
have a direct impact on the cost of the Company's electronic group
communications services. The Telecommunications Act of 1996 is being contested
both administratively and in the courts, and opinions vary widely as to the
effects and timing of various aspects of the law. There can be no assurances
at this time that the Telecommunications Act of 1996 will create any
opportunities for the Company, that local access services will be provided by
the IXCs, or that the RBOCs will be able to offer long distance services
including teleconferencing. The Telecommunications Act of 1996 has effected
significant changes in the telecommunications industry and the Company is
unable to predict the extent to which such changes or the implementation of
the Telecommunications Act of 1996 by the FCC may ultimately affect its
business. There can be no assurance that the FCC or other government agencies
will not seek in the future to regulate the prices, conditions or other
aspects of the electronic group communications
34
<PAGE>
services offered by the Company, that the FCC will not impose registration,
certification or other requirements on the provision of those services, or
that the Company would be able to comply with any such requirements. In
addition, the Company is subject to laws and regulations that affect its
ability to provide certain of its enhanced services, such as those relating to
privacy and the recording of telephone calls. Changes in the current federal,
state or local legislation or regulation could have a material adverse effect
on the Company's business, financial condition and results of operations.
Moreover, government regulations in countries other than the United States
vary widely and may restrict the Company's ability to offer its services in
those countries.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Set forth below is a listing of the Consolidated Financial Statements of the
Company with reference to the page numbers in this Form 10-K at which such
Statements are disclosed.
<TABLE>
<CAPTION>
PAGE NUMBERS
------------
<S> <C>
VIALOG CORPORATION
Report of Management............................................... 36
Independent Auditors' Report....................................... 37
Consolidated Balance Sheets........................................ 38
Consolidated Statements of Operations.............................. 39
Consolidated Statements of Stockholders' Equity (Deficit).......... 40
Consolidated Statements of Cash Flows.............................. 41
Notes to Consolidated Financial Statements......................... 42
TELEPHONE BUSINESS MEETINGS, INC. ("ACCESS")
Independent Auditors' Report....................................... 56
Balance Sheets..................................................... 57
Statements of Operations........................................... 58
Statements of Stockholders' Equity................................. 59
Statements of Cash Flows........................................... 60
Notes to Financial Statements...................................... 61
CONFERENCE SOURCE INTERNATIONAL, INC. ("CSI")
Independent Auditors' Report....................................... 67
Balance Sheets..................................................... 68
Statements of Operations........................................... 69
Statements of Stockholders' Equity................................. 70
Statements of Cash Flows........................................... 71
Notes to Financial Statements...................................... 72
</TABLE>
35
<PAGE>
REPORT OF MANAGEMENT
The accompanying consolidated financial statements and related information
of VIALOG Corporation and subsidiaries (the "Company") have been prepared by
management, which is responsible for their integrity and objectivity. The
statements have been prepared in conformity with generally accepted accounting
principles and necessarily include some amounts based on management's best
estimates and judgments.
Management is also responsible for maintaining a system of internal controls
as a fundamental requirement for the operational and financial integrity of
results. The Company has established and maintains a system of internal
controls designed to provide reasonable assurance that the books and records
reflect the transactions of the Company and that its established policies and
procedures are carefully followed. The Company's internal control system is
based upon standard procedures, policies and guidelines and organizational
structures that provide an appropriate division of responsibility and the
careful selection and training of qualified personnel.
The Company's accompanying consolidated financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants,
whose audit was made in accordance with generally accepted auditing standards.
Management has made available to KPMG Peat Marwick LLP all of the Company's
financial records and related data, as well as the minutes of stockholders'
and directors' meetings. Furthermore, management believes that all
representations made to KPMG Peat Marwick LLP during its audit were valid and
appropriate. The Report of Independent Public Accountants appears below.
Glenn D. Bolduc John J. Dion
Chief Executive Officer, Vice President--Finance
President and Treasurer
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
VIALOG Corporation:
We have audited the accompanying consolidated balance sheets of VIALOG
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the years in the two-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VIALOG
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 20, 1998
37
<PAGE>
VIALOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 337 $ 9,567
Accounts receivable, net of allowance for doubtful
accounts of $0 and $32, respectively.............. -- 5,686
Prepaid expenses................................... -- 156
Deferred offering costs............................ 377 --
Other current assets............................... 13 101
------ --------
Total current assets............................. 727 15,510
Property and equipment, net.......................... 7 7,544
Deferred debt issuance costs......................... -- 7,324
Goodwill and intangible assets, net.................. -- 44,391
Deferred income taxes................................ 522 --
Other assets......................................... 7 314
------ --------
Total assets..................................... $1,263 $ 75,083
====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt.................. $ -- $ 397
Accounts payable................................... 313 2,129
Accrued expenses................................... 663 5,725
------ --------
Total current liabilities........................ 976 8,251
Long-term debt, less current portion................. -- 71,539
Other long-term liabilities.......................... -- 175
Commitments and contingencies
Stockholders' equity (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; 2,695,300 and 3,486,380 shares,
respectively, issued and outstanding.............. 28 35
Additional paid-in capital......................... 1,044 11,689
Retained deficit................................... (785) (16,606)
------ --------
Total stockholders' equity (deficit)............. 287 (4,882)
------ --------
Total liabilities and stockholders' equity
(deficit)....................................... $1,263 $ 75,083
====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Net revenues........................................ $ -- $ 4,816
Cost of revenues, excluding depreciation............ -- 2,492
Selling, general and administrative expenses........ 1,308 7,178
Depreciation expense................................ -- 273
Amortization of goodwill and intangibles............ -- 306
Write-off of purchased in-process research
and development.................................... -- 8,000
----------- -----------
Operating loss.................................... (1,308) (13,433)
Interest income (expense), net...................... 1 (1,866)
----------- -----------
Loss before income taxes.......................... (1,307) (15,299)
Income tax benefit (expense)........................ 522 (522)
----------- -----------
Net loss.......................................... $ (785) $ (15,821)
=========== ===========
Net loss per share - basic and diluted.............. $ (0.38) $ (5.48)
=========== ===========
Weighted average shares outstanding................. 2,088,146 2,889,005
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT EQUITY (DEFICIT)
--------- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Initial investment at
incorporation on
January 1, 1996........ 1,332,800 $14 $ (7) $ -- $ 7
Additional shares issued
in connection with
initial
capitalization......... 360,000 4 21 -- 25
Issuance of common
stock:
Contribution of common
stock to capital..... (250,000) (2) 2 -- --
Outsiders by private
placement dated May
8, 1996.............. 378,000 4 101 -- 105
Outsiders by private
placement dated
October 22, 1996..... 380,000 4 756 -- 760
Employees in lieu of
payment for
services............. 242,500 2 91 -- 93
Consultants in lieu of
payment for
services............. 177,000 2 28 -- 30
Options exercised..... 75,000 -- 2 -- 2
Options granted to
consultants............ -- -- 50 -- 50
Net loss................ -- -- -- (785) (785)
--------- --- ------- -------- --------
Balance at December 31,
1996................... 2,695,300 28 1,044 (785) 287
Options exercised....... 104,000 -- 2 -- 2
Conversion of 10%
Subordinated
Convertible Notes
Payable................ 127,750 1 254 -- 255
Issuance of common stock
in connection with
acquisitions........... 559,330 6 3,211 -- 3,217
Warrants related to 8%
Notes Payable dated
February 24, 1997...... -- -- 129 -- 129
Warrants related to 12
3/4% Senior Notes
Payable dated November
12, 1997............... -- -- 6,091 -- 6,091
Options granted to
consultants............ -- -- 180 -- 180
Options granted to
employees.............. -- -- 778 -- 778
Net loss................ -- -- -- (15,821) (15,821)
--------- --- ------- -------- --------
Balance at December 31,
1997................... 3,486,380 $35 $11,689 $(16,606) $ (4,882)
========= === ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1997
----- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $(785) $(15,821)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ............................................... -- 273
Amortization of goodwill and intangibles.................... -- 306
Amortization of debt issuance costs and debt discount....... -- 545
Provision for doubtful accounts............................. -- 32
Deferred income taxes....................................... (522) 522
Write-off of deferred offering costs........................ -- 377
Compensation expense for issuance of common stock and
options.................................................... 173 958
Write-off of purchased in-process research and development.. -- 8,000
Changes in operating assets and liabilities, net of effects
from acquisitions of businesses:
Accounts receivable......................................... -- (576)
Prepaid expenses and other current assets................... (13) (68)
Other assets................................................ (7) (64)
Accounts payable............................................ 313 (351)
Accrued expenses............................................ 663 1,716
Other long-term liabilities................................. -- 3
----- --------
Cash flows used in operating activities..................... (178) (4,148)
----- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired.............. -- (53,308)
Additions to property and equipment........................... (7) (454)
----- --------
Cash flows used in investing activities..................... (7) (53,762)
----- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt and warrants......... -- 75,755
Payments of long-term debt of businesses acquired............. -- (2,239)
Payments of long-term debt.................................... -- (533)
Proceeds from issuance of common stock........................ 899 2
Deferred offering costs....................................... (377) --
Deferred debt issuance costs.................................. -- (5,845)
----- --------
Cash flows provided by financing activities................. 522 67,140
----- --------
Net increase in cash and cash equivalents...................... 337 9,230
Cash and cash equivalents at beginning of period............... -- 337
----- --------
Cash and cash equivalents at end of period..................... $ 337 $ 9,567
===== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.................................................... $ -- $ 72
===== ========
Taxes....................................................... $ -- $ 1
===== ========
Non-cash investing and financing transactions:
Conversion of 10% Subordinated Convertible Notes Payable...... $ -- $ 256
===== ========
Issuance of common stock in connection with acquisitions...... $ -- $ 3,217
===== ========
Issuance of warrants to the initial purchaser of the Senior
Notes and included in deferred debt issuance costs........... $ -- $ 1,740
===== ========
Acquisitions of businesses:
Assets acquired............................................. $ -- $ 66,523
Liabilities assumed and issued.............................. -- (9,096)
Common stock issued......................................... -- (3,217)
----- --------
Cash paid................................................... -- 54,210
Less cash acquired.......................................... -- (902)
----- --------
Net cash paid for acquisitions of businesses.............. $ -- $ 53,308
===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
VIALOG Corporation ("VIALOG") was incorporated in Massachusetts on January
1, 1996 as Interplay Corporation. In January 1997, the Company changed its
name to VIALOG Corporation. For purposes of these Notes to Consolidated
Financial Statements, "VIALOG" means VIALOG Corporation on a stand alone basis
prior to November 12, 1997 and VIALOG Corporation and its consolidated
subsidiaries on and after November 12, 1997. VIALOG was formed to create a
national provider of electronic group communications services, consisting
primarily of operator-attended and operator-on-demand audio teleconferencing,
as well as video and data conference services. On November 12, 1997, VIALOG
closed a private placement of $75.0 million in Senior Notes due in 2001 (the
"Private Placement"). Contemporaneously with the closing of the Private
Placement, VIALOG acquired six private conference service bureaus located in
the United States (See Note 2 "Acquisitions").
Prior to November 12, 1997, VIALOG did not conduct any operations, and all
activities related to the acquisitions and the completion of financing
transactions to fund the acquisitions.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of VIALOG and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(c) Management Estimates
Management of VIALOG has made a number of estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
(d) Revenue Recognition
Revenue from conference calls is recognized upon completion of the call.
Revenue from services is recognized upon performance of the service.
(e) Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and short-term investments
with original maturities of three months or less.
(f) Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment is provided on a straight-line basis over the estimated useful lives
of the respective assets. The estimated useful lives are as follows: three to
ten years for office furniture, fixtures and equipment, five to ten years for
conferencing equipment, and three to seven years for computer equipment.
Capitalized lease equipment and leasehold improvements are amortized over the
lives of the leases, ranging from three to ten years.
VIALOG capitalizes costs related to software obtained for internal use.
These costs are included in computer equipment and amortized accordingly.
During 1996 and 1997, these costs were not significant.
42
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(g) Goodwill and Intangible Assets
Goodwill and identifiable intangible assets, which consisted of assembled
workforce and developed technology, result from the excess of the purchase
price over the net assets of businesses acquired. The cost approach method and
the income approach method were used to value the assembled workforce and
developed technology, respectively. Goodwill and intangibles are being
amortized on a straight-line basis over the following periods: 6 years for
developed technology, 13 years for assembled workforce and 20 years for
goodwill, which represent their estimated useful lives. VIALOG measures
impairment of goodwill and intangible assets by considering a number of
factors as of each balance sheet date including (i) current operating results
of the applicable Acquired Companies, (ii) projected future operating results
of the applicable Acquired Companies, and (iii) any other material event or
circumstance that indicates the carrying amount of the assets may not be
recoverable. Recoverability of goodwill and intangible assets is measured by a
comparison of the carrying amount of the asset to future undiscounted net cash
flows expected to be generated by the Acquired Company. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of
the assets.
Goodwill and intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Goodwill...................................................... $ -- $41,457
Developed technology.......................................... -- 1,930
Assembled workforce........................................... -- 1,310
----- -------
-- 44,697
Less: accumulated amortization................................ -- (306)
----- -------
$ -- $44,391
===== =======
</TABLE>
(h) Research and Development
VIALOG maintains technical support and engineering departments that, in
part, develop features and products for group communications. In accordance
with SFAS No. 2, Accounting for Research and Development Costs, VIALOG charges
to expense when incurred (included in cost of revenues) that portion of the
department costs which relate to research and development activities. Prior to
the acquisition of the businesses described in Note 2 "Acquisitions", VIALOG
did not conduct any research and development activities. Research and
development costs for the period ended December 31, 1997 reflect the
activities of the acquired businesses from November 12, 1997 through December
31, 1997 and were not significant.
(i) Stock-Based Compensation
Effective January 1, 1996, VIALOG adopted the provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation". VIALOG has elected to continue to account for stock
options at intrinsic value under Accounting Principles Board Opinion No. 25
with disclosure of the effects of fair value accounting on net income on a pro
forma basis (See Note 11 "Employee Benefit Plans").
(j) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying
43
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
VIALOG adopted the provisions of SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, during 1996.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of this Statement did not have a
material impact on VIALOG's financial position, results of operations, or
liquidity.
(l) Loss Per Share
In 1997, VIALOG adopted the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128 requires the
presentation of basic earnings per share and diluted earnings per share for
all periods presented. As VIALOG has been in a net loss position for the years
ended December 31, 1996 and 1997, common stock equivalents of 249,813 and
896,900, for the years ended December 31, 1996 and 1997, respectively, were
excluded from the diluted loss per share calculation as they would be
antidilutive. As a result, diluted loss per share is the same as basic loss
per share, and has not been presented separately.
(2) ACQUISITIONS
On November 12, 1997, VIALOG acquired all of the issued and outstanding
stock of Telephone Business Meetings, Inc. ("Access"), Conference Source
International, Inc. ("CSI"), Kendall Square Teleconferencing, Inc. ("TCC"),
American Conferencing Company, Inc. ("Americo") and Communication Development
Corporation ("CDC"), and substantially all of the net assets of Call Points,
Inc. ("Call Points") (together, the "Acquired Companies"). These acquisitions
occurred contemporaneously with the closing of the Private Placement of a
total of $75.0 million in Senior Notes due 2001 (See Note 6 "Long-Term Debt").
The acquisitions were accounted for using the purchase method.
The following table sets forth for each Acquired Company the consideration
paid its common stockholders in cash and in shares of common stock of VIALOG.
<TABLE>
<CAPTION>
CASH(1) SHARES OF
($000'S) COMMON STOCK
-------- ------------
<S> <C> <C>
Access................................................. $19,000 --
CSI.................................................... 18,675 --
Call Points............................................ 8,000 21,000
TCC.................................................... 3,645 166,156
Americo................................................ 1,260 267,826
CDC.................................................... 2,400 104,348
------- -------
Total Consideration.................................... $52,980 559,330
======= =======
</TABLE>
- --------
(1) Excludes tax reimbursements of approximately $925,000 to certain
stockholders of certain of the Acquired Companies.
44
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The total purchase price of the Acquired Companies was $57.6 million and
consisted of approximately $53.0 million in cash paid to the stockholders of
the Acquired Companies (the "Sellers"), $500,000 of acquisition costs, the
issuance of 559,330 shares of common stock to the Sellers and approximately
$925,000 related to tax reimbursements The shares of common stock were valued
at $5.75 per share which represents the estimated fair market value based on
arms-length negotiations with the former stockholders of the Acquired
Companies. The total purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Working capital deficit......................................... $ (618)
Property and equipment, net..................................... 7,356
Goodwill and intangible assets.................................. 44,697
Purchased in-process research and development................... 8,000
Other assets.................................................... 200
Long-term liabilities........................................... (2,014)
-------
$57,621
=======
</TABLE>
The purchase price exceeded the fair value of the net assets acquired by
$52.7 million. The excess was allocated to goodwill and other intangibles
which are being amortized over periods from 6 to 20 years. In addition, at the
time of the acquisitions, VIALOG repaid $2.2 million of long-term debt of the
Acquired Companies.
In connection with the acquisitions, VIALOG recorded a non-recurring charge
of $8.0 million related to the fair value of purchased in-process research and
development. The $8.0 million write-off of purchased research and development
noted above represents the amount of the purchase price of the Acquisitions
allocated to incomplete research and development projects. This allocation
represents the estimated fair value based on risk-adjusted cash flows related
to the incomplete products. The acquired in-process research and development
represents engineering and test activities associated with the introduction of
new enhanced services and information systems. The Acquired Companies are
working on projects that are essential to offering high quality, secure and
reliable products including unattended audio conferencing, video and data
teleconferencing, integrated voice response and broadcast fax services. Since
these had not yet reached technological feasibility and have no alternative
future uses, there can be no guarantee as to the achievability of the projects
or the ascribed values. Accordingly, these costs were expensed as of the date
of the Acquisition.
The operating results of the Acquired Companies have been included in the
Consolidated Statement of Operations from the date of acquisition. The
unaudited pro forma consolidated historical results for the years ended
December 31, 1996 and 1997 below assume the acquisitions occurred at the
beginning of fiscal 1996:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net revenues....................................... $ 28,298 $ 35,917
Net loss........................................... $ (11,529) $ (15,752)
Net loss per share................................. $ (4.35) $ (4.68)
</TABLE>
The pro forma results include amortization of the goodwill and intangible
assets described above, interest expense on debt assumed issued to finance the
acquisitions and reductions to selling, general and administrative expenses
related to certain royalties, compensation and benefits that were eliminated
or reduced as a result of the acquisitions. The pro forma results do not
include the write-off of in-process research and development expenses at the
date of acquisition. The pro forma results are not necessarily indicative of
the results that would have been obtained had these events actually occurred
at the beginning of the periods presented, nor are they necessarily indicative
of future consolidated results.
The acquisition agreements, pursuant to which the Acquired Companies were
acquired, limit through 1999 the Company's ability to change the location of
an Acquired Company's facilities, physically merge the Acquired
45
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's operations with another operation, change the position of those
employees who received employment agreements 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 Acquired Company. Based on the term of these
limitations and since 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.
(3) CASH AND CASH EQUIVALENTS
VIALOG classifies all investments with an original maturity of less than
ninety days as cash equivalents and values them at cost which approximates
market. VIALOG's policy is to invest cash primarily in income producing short-
term instruments and to keep uninvested cash balances at minimum levels.
VIALOG's financial investments consist of cash, cash equivalents, accounts
receivable, accounts payable, other accrued liabilities and long-term debt.
Except for long-term debt, the carrying amounts of such financial instruments
approximate fair value due to their short maturities. The fair value of
VIALOG's long-term debt at December 31, 1997 is based on quoted market values.
The fair value of long-term debt was not materially different from its
carrying amount.
(4) ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Prior to the acquisitions discussed in Note 2 "Acquisitions", VIALOG had no
accounts receivable. At acquisition, the accounts receivable of the Acquired
Companies were recorded at fair market value. The allowance for doubtful
accounts at December 31, 1997 represents the provision charged to operations
for the period November 12, 1997 through December 31, 1997.
<TABLE>
<CAPTION>
BALANCE AT BEGINNING PROVISION CHARGED TO NET DEDUCTIONS BALANCE AT
OF PERIOD OPERATIONS FROM ALLOWANCE END OF PERIOD
-------------------- -------------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended December 31,
1997................... $-- $ 32 $-- $ 32
Year Ended December 31,
1996................... $-- $-- $-- $--
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
---- ------
(IN
THOUSANDS)
<S> <C> <C>
Office furniture and equipment.................................. $ 7 $ 869
Conferencing equipment.......................................... -- 5,163
Computer equipment.............................................. -- 697
Equipment under capital lease................................... -- 898
Leasehold improvements.......................................... -- 190
---- ------
7 7,817
Less: accumulated depreciation and amortization................. -- (273)
---- ------
$ 7 $7,544
==== ======
</TABLE>
46
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
---- -------
(IN
THOUSANDS)
<S> <C> <C>
12 3/4% Senior Notes Payable, due 2001, net of unamortized
discount of $0 and $4,203, respectively..................... $-- $70,797
Capitalized lease obligations................................ -- 1,044
Other long-term debt......................................... -- 95
---- -------
Total long-term debt..................................... -- 71,936
Less current portion..................................... -- 397
---- -------
Total long-term debt, less current portion............... $-- $71,539
==== =======
</TABLE>
NOTES PAYABLE
On February 24, 1997, VIALOG issued $500,000 of 8% promissory notes due on
the earlier of (a) ten days following the closing of an initial public
offering or (b) one year from their issue date. Warrants to purchase 111,118
common shares at an exercise price of $4.50 were issued in conjunction with
the promissory notes. The value of the warrants was determined using the
minimum value method. The value of the warrants at the date of issuance
totaled $129,000 and was amortized as interest expense. The warrants may be
exercised between November 1997 and February 1999. In November 1997, the
promissory notes were repaid, including accrued interest, from the proceeds of
the Private Placement, which was completed on November 12, 1997. In
conjunction with the Private Placement, the warrants issued to the note
holders were increased to a total of 153,378 in accordance with anti-dilution
provisions contained in the promissory notes.
CONVERTIBLE BRIDGE FACILITY
In October 1997, VIALOG completed a private placement to certain of its
existing investors of $255,500 of 10% subordinated convertible promissory
notes due on the earlier of (a) five days after the closing of a sale of
VIALOG's equity securities or debt securities for an aggregate price of $50.0
million or more, or (b) January 1, 1998. The notes were convertible at the
option of the holders at any time prior to and including the due date into
such number of shares of VIALOG's common stock as determined by dividing the
aggregate unpaid principal amount of the notes by the conversion price of
$2.00 per share, subject to adjustment pursuant to the terms of the notes. The
conversion price of $2.00 per share was equal to the estimated fair market
value of VIALOG'S common stock on the date of issuance. In November 1997, the
notes were converted into 127,750 shares of VIALOG's common stock.
SENIOR NOTES PAYABLE
On November 12, 1997, VIALOG 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 Acquired
Companies (see Note 15) and mature on November 15, 2001 and are redeemable in
whole or in part at the option of VIALOG 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 VIALOG 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 (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
47
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 VIALOG to purchase, redeem or otherwise acquire or retire any
VIALOG common stock or warrants, rights or options to acquire VIALOG 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 VIALOG 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 at December 31, 1997. Warrants to purchase 1,059,303 common shares
at an exercise price of $.01 per share were issued in conjunction with the
Senior Notes. Of the total issued, 756,645 warrants were attached to the
Senior Notes and 302,658 were issued to Jefferies and Company, Inc., the
initial purchaser of the Senior Notes, as part of its compensation for
services rendered in connection with such offering. The value of the warrants
attached to the Senior Notes was $4.4 million and was recorded as debt
discount and additional paid-in capital. The value of the warrants issued,
which represented additional consideration to the initial purchaser of the
Senior Notes, was $1.7 million and was recorded as deferred debt issuance
costs. In addition, the Company incurred commissions of $3.8 million and legal
and other costs of $2.1 million. The deferred debt issuance costs are being
amortized over the life of the Senior Notes. The warrants may be exercised
between November 1997 and November 2001. The proceeds from the Senior Notes
were used to complete the acquisitions (see Note 2 "Acquisitions"), repay
outstanding indebtedness and fund working capital requirements. On February
12, 1998, VIALOG offered to exchange Senior Notes, Series B for Senior Notes,
Series A (see Note 16 "Subsequent Events").
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net for the years ended December 31, 1996 and
1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
---------------
(IN THOUSANDS)
<S> <C> <C>
Interest income............................................. $ 1 $ 56
Interest expense............................................ -- (1,922)
----- ---------
Interest income (expense), net............................ $ 1 $ (1,866)
===== =========
</TABLE>
(7) ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997 consist primarily of accrued
interest of $0 and $1.3 million respectively; accrued payroll and related
costs of $257,000 and $1.1 million respectively; accrued acquisition and
financing related expenses of $406,000 and $1.6 million respectively; and
other accrued expenses of $0 and $1.7 million respectively.
(8) COMMITMENTS AND CONTINGENCIES
VIALOG conducts its operations primarily in leased facilities under
operating lease arrangements expiring on various dates through May 2008.
Certain long-term capital leases have been included in Property and Equipment
and Long-Term Debt in the accompanying consolidated balance sheets.
48
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under capital and operating leases with
initial terms of one year or more are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
------------------------ -------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
1998......................................... $ 485 $1,035
1999......................................... 434 980
2000......................................... 232 938
2001......................................... 90 809
2002......................................... 1 750
Thereafter................................... -- 2,241
------ ------
Total minimum lease payments................. 1,242 $6,753
======
Less: Amount representing interest on capital
leases...................................... 198
------
Present value of minimum lease payments at
December 31, 1997........................... $1,044
======
</TABLE>
Total operating lease rental expense for VIALOG for the years ended December
31, 1996 and 1997 were $0 and $198,000, respectively.
(9) PROVISION FOR INCOME TAXES
Income tax (expense) benefit for the years ended December 31, 1996 and 1997
consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
December 31, 1996:
Federal............................................ $ -- $ 398 $ 398
State.............................................. -- 124 124
----- ----- -----
$ -- $ 522 $ 522
===== ===== =====
December 31, 1997:
Federal............................................ $ -- $(398) $(398)
State.............................................. -- (124) (124)
----- ----- -----
$ -- $(522) $(522)
===== ===== =====
</TABLE>
Income tax benefit differed from the amounts computed by applying the U.S.
statutory federal income tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1996 1997
---- -------
(IN
THOUSANDS)
<S> <C> <C>
Computed "expected" tax benefit............................. $445 $ 5,202
State and local income taxes, net of federal tax benefit.... 82 918
Non deductible amounts and other differences................ (5) (167)
Change in valuation allowance for deferred taxes allocated
to income tax expense...................................... -- (6,469)
Other....................................................... -- (6)
---- -------
Tax benefit (expense)..................................... $522 $ (522)
==== =======
</TABLE>
49
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portion of deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1996 1997
---- -------
(IN
THOUSANDS)
<S> <C> <C>
Deferred tax asset:
Organizational expenditures and start-up costs............. $522 $ 2,029
Accrual to cash accounting adjustment...................... -- (162)
Purchased in-process research and development, amortized
for tax purposes over 15 years............................ -- 3,040
Net operating loss carry forwards.......................... -- 1,563
Capital loss and charitable contribution carry forwards.... -- 2
Property and equipment..................................... -- (92)
Bad debts.................................................. -- 24
Original issue discount amortization....................... -- 13
Other...................................................... -- 52
Valuation allowance........................................ -- (6,469)
---- -------
Net deferred tax assets.................................. $522 $ --
==== =======
</TABLE>
VIALOG had net operating loss carryforwards of $0 and $3.9 million at
December 31, 1996 and 1997, respectively, which expire in 2012. Utilization of
the net operating losses may be subject to an annual limitation provided by
change in ownership provisions of Section 382 of the Internal Revenue Code of
1986 and similar state provisions.
In assessing the realizability of deferred tax assets, VIALOG considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Based on management's projections for future
taxable income, a valuation allowance has been established for the deferred
tax assets.
In accordance with FAS 109, the accounting for the tax benefits of acquired
deductible temporary differences, which are not recognized at the acquisition
date because a valuation allowance is established, and are recognized
subsequent to the Acquisitions will be applied first to reduce to zero any
goodwill and other noncurrent intangible assets related to the acquisitions.
Any remaining benefits would be recognized as a reduction of income tax
expense. As of December 31, 1997, $144,260 of the Company's net operating loss
carryforward deferred tax asset of $1.6 million pertains to the Acquired
Companies and all of the Company's $2,000 capital loss and charitable
contribution carryforward deferred tax asset pertains to the Acquired
Companies, the future benefit of which will be applied first to reduce to zero
any goodwill and other noncurrent intangible assets related to the
acquisitions prior to reducing the Company's income tax expense.
(10) STOCKHOLDERS' EQUITY
(a) Sale of Common Stock
During 1996, VIALOG sold common stock through several private placements.
The proceeds of the sales were used primarily for expenses relating to the
business acquisition agreements and a proposed financing. A total of 758,000
shares of common stock were sold for aggregate net proceeds of $865,000.
(b) Common Stock Grants
Between February and November 1996, VIALOG issued a total of 419,500 shares
of common stock to consultants and employees as an inducement to them to
provide services to VIALOG. Compensation expense of $123,000, which represents
the estimated fair market value of the stock granted, was recorded in
connection with these transactions.
50
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(c) Common Stock Split
On October 16, 1997, the Board of Directors approved a 2-for-1 stock split
of VIALOG's common stock. All prior periods have been restated to reflect this
stock split effected as a recapitalization.
(d) Preferred Stock
On February 14, 1997, the stockholders voted to authorize 10,000,000 shares
of preferred stock. No shares of preferred stock are issued and outstanding.
(e) Warrants
During 1997, VIALOG issued warrants to purchase common stock in connection
with certain financing transactions (see Note 6 "Long-Term Debt").
(11) EMPLOYEE BENEFIT PLANS
(a) The 1996 Stock Plan
On February 14, 1996, the Board of Directors and VIALOG's stockholders
approved VIALOG's 1996 Stock Plan (the "Plan"). The purpose of the Plan is to
provide directors, officers, key employees, consultants and other service
providers with additional incentives by increasing their ownership interests
in VIALOG. Individual awards under the plan may take the form of one or more
of: (i) incentive stock options ("ISOs"); (ii) non-qualified stock options
("NQSOs"); (iii) stock appreciation rights ("SARs"); and (iv) restricted
stock.
The Compensation Committee administers the Plan and generally selects the
individuals who will receive awards and the terms and conditions of those
awards. The maximum number of shares of common stock that may be subject to
outstanding awards, determined immediately after the grant of any award, may
not exceed 3,000,000 and 3,250,000 shares as of December 31, 1996 and 1997,
respectively. Shares of common stock attributable to awards which have
expired, terminated or been canceled or forfeited are available for issuance
or use in connection with future awards.
The Plan will remain in effect until February 14, 2006 unless terminated
earlier by the Board of Directors. The Plan may be amended by the Board of
Directors without the consent of the stockholders of VIALOG, except that any
amendment, although effective when made, will be subject to stockholder
approval if required by any Federal or state law or regulation by the rules of
any stock exchange or automated quotation system on which the common stock may
then be listed or quoted.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1995......... -- $ --
Granted........................................ 1,746,132 0.29
Exercised...................................... (75,000) 0.03
Canceled....................................... (576,000) 0.03
--------- -----
Options outstanding at December 31, 1996......... 1,095,132 0.45
Granted........................................ 763,849 4.14
Exercised...................................... (104,000) 0.03
Canceled....................................... (400,110) 1.03
--------- -----
Options outstanding at December 31, 1997......... 1,354,871 $2.39
========= =====
</TABLE>
The options generally vest in equal quarterly installments over 3 years and
have a 10 year term. At December 31, 1996 and 1997, 75,000 and 467,771
options, respectively, were exercisable at weighted average
51
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exercise prices of $.2775 and $1.03 per share, respectively. At December 31,
1997, there were 1,296,629 additional shares available for grant under the
Plan.
The following is a summary of options outstanding and exercisable at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER WEIGHTED AVERAGE REMAINING NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$0.025-$0.278....... 547,552 $0.19 6.7 years 360,306 $0.21
$2.00........... 387,470 2.00 9.4 43,720 2.00
$4.50-$5.75........ 419,849 5.63 9.0 63,745 4.97
--------- -------
1,354,871 2.39 467,771 1.03
========= =======
</TABLE>
In 1996 VIALOG granted a total of 111,112 options to consultants.
Compensation expense of $50,000 has been recorded in connection with these
transactions in 1996. During 1997, modifications were made to the vesting and
expiration periods of certain outstanding options. Compensation expense of
$958,000 has been recorded in 1997 in connection with these modifications.
VIALOG applies APB Opinion No. 25 accounting for stock issued to employees
in accounting for its Plan and, accordingly, compensation cost is only
recognized in the financial statements for stock options granted to employees
when the fair value on the grant date exceeds the exercise price. Had VIALOG
determined compensation cost based on the fair value at grant date for its
stock options under SFAS No. 123, its net loss would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
----------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net loss
As reported...................................... $ (785) $ (15,821)
Pro forma........................................ $ (800) $ (15,901)
Loss per share
As reported...................................... $ (0.38) $ (5.48)
Pro forma........................................ $ (0.38) $ (5.50)
</TABLE>
The per share weighted-average fair value of stock options granted during
1996 and 1997, respectively, were $.135 and $1.00 for ISOs and $.37 and $1.30
for NQSOs on the date of grant using the minimum value option-pricing model
with the following weighted-average assumptions used for grants in 1996 and
1997, respectively: no expected dividend yields for both periods, risk-free
interest rates of 6.1% and 5.88%, and expected lives of 5 years for both
periods.
(b) Retirement Plan
Access, one of the Acquired Companies, maintains a defined contribution
retirement plan (the "Plan") under Section 401(k) of the Internal Revenue Code
which covers all eligible employees. Employee contributions are voluntary and
vest with the employee immediately. The Plan provides for matching
contributions by Access of 50% of employee contributions, up to certain limits
as defined in the Plan. Access' matching contributions vest over the
employee's period of service. Access' matching contributions to the Plan for
the period ended December 31, 1997 was $1,000.
Effective December 31, 1997, all employees became fully vested in Access'
matching contributions. Effective January 1, 1998, Access' matching
contributions were discontinued.
52
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(c) Employment Agreements
Certain of the executive officers of VIALOG have entered into employment
agreements with VIALOG which provide for severance payments in the event their
employment is terminated prior to the expiration of their employment terms.
The severance terms range from six months to three years, depending on the
timing and circumstances of the termination.
(12) SIGNIFICANT CUSTOMERS
During the year ended December 31, 1997, VIALOG had one customer which
represented 8.4% of total net revenues.
(13) RELATED PARTY TRANSACTIONS
The following summarizes the significant related party transactions:
(a) During 1997 VIALOG paid $1.8 million for legal fees to a firm having a
member who is also a director of VIALOG.
(b) From December 1997 to February 1998, one of VIALOG's stockholders provided
consulting services to VIALOG for a monthly fee of $10,000.
(c) TCC provides teleconferencing services to customers of a company owned by
the spouse of a stockholder of VIALOG.
(d) VIALOG has implemented a policy whereby neither VIALOG nor any subsidiary
(which includes the Acquired Companies) will enter into contracts or business
arrangements with persons or entities owned in whole or in part by officers or
directors of VIALOG or any subsidiary except on an arms-length basis and with
the approval of VIALOG's Board of Directors. VIALOG's bylaws require that any
approval must be by a majority of the independent directors then in office who
have no interest in such contract or transaction.
(14) LITIGATION
In connection with the acquisition of Call Points, one of the Acquired
Companies, VIALOG 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. VIALOG has not been named as a party to
these claims, however, complainants in these cases could seek to name VIALOG
as a defendant in such pending litigation and could seek to hold VIALOG liable
for damages resulting from the litigation as a successor in interest to Call
Points. 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. The principal stockholder of Call Points agreed
to indemnify VIALOG from any liability relating to such claims and placed
$250,000 of the proceeds from the sale of Call Points in escrow with a third
party to secure such indemnification obligations. In light of such
indemnification, VIALOG does not believe that the resolution of these claims
will have a material adverse effect on VIALOG's results of operations or
financial position.
A former employee of CSI, one of the Acquired Companies, 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 Aquisition 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. VIALOG and the
former stockholders of CSI believe that such claim is without merit.
53
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) 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 year ended December 31, 1997. 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 DECEMBER 31, 1997
Total current assets..... $ 11,799 $ 725 $ 431 $ 1,506 $ 556 $ 5 $ 488 $ -- $ 15,510
Property and equipment,
net..................... 70 3,306 961 1,617 883 611 96 -- 7,544
Investment in
subsidiaries............ 57,121 -- -- -- -- -- -- (57,121) --
Goodwill and intangible
assets, net............. -- 15,899 15,202 3,872 3,945 2,970 2,503 -- 44,391
Other assets............. 7,430 34 86 -- 12 73 3 -- 7,638
-------- ------- ------- ------- ------ ------ ------ -------- --------
Total assets............ $ 76,420 $19,964 $16,680 $ 6,995 $5,396 $3,659 $3,090 $(57,121) $ 75,083
======== ======= ======= ======= ====== ====== ====== ======== ========
Current liabilities...... $ 3,145 $ 1,976 $ 471 $ 824 $ 680 $1,038 $ 117 $ -- $ 8,251
Long-term debt........... 70,797 24 449 -- 195 74 -- -- 71,539
Other liabilities........ -- 155 -- -- -- -- 20 -- 175
Stockholders' equity
(deficit)............... 2,478 17,809 15,760 6,171 4,521 2,547 2,953 (57,121) (4,882)
-------- ------- ------- ------- ------ ------ ------ -------- --------
Total liabilities and
stockholders' equity
(deficit).............. $ 76,420 $19,964 $16,680 $ 6,995 $5,396 $3,659 $3,090 $(57,121) $ 75,083
======== ======= ======= ======= ====== ====== ====== ======== ========
STATEMENT OF OPERATIONS
INFORMATION FOR THE YEAR
ENDED DECEMBER 31,
1997(1)
Net revenues............. $ -- $ 1,620 $ 854 $ 1,142 $ 567 $ 290 $ 353 $ (10) $ 4,816
Cost of revenues,
excluding depreciation.. -- 709 322 806 279 212 174 (10) 2,492
Selling, general and
administrative
expenses................ 6,117 403 93 159 190 134 82 -- 7,178
Depreciation expense..... 10 80 60 79 27 9 8 -- 273
Amortization of goodwill
and intangibles......... -- 103 108 33 26 20 16 -- 306
Write-off of in-process
research and
development............. -- 2,200 3,400 2,000 120 160 120 -- 8,000
-------- ------- ------- ------- ------ ------ ------ -------- --------
Operating loss.......... (6,127) (1,875) (3,129) (1,935) (75) (245) (47) -- (13,433)
Interest income
(expense), net.......... (1,828) (16) (12) 2 (4) (8) -- -- (1,866)
-------- ------- ------- ------- ------ ------ ------ -------- --------
Loss before taxes....... (7,955) (1,891) (3,141) (1,933) (79) (253) (47) -- (15,299)
Income tax expense....... (522) -- -- -- -- -- -- -- (522)
-------- ------- ------- ------- ------ ------ ------ -------- --------
Net loss................ $ (8,477) $(1,891) $(3,141) $(1,933) $ (79) $ (253) $ (47) $ -- $(15,821)
======== ======= ======= ======= ====== ====== ====== ======== ========
<CAPTION>
CASH FLOW INFORMATION FOR
THE
YEAR ENDED DECEMBER 31,
1997(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash flows provided by
(used in) operating ac-
tivities................ $ (7,072) $ 1,663 $ 407 $ 320 $ 65 $ 264 $ 205 $ -- $ (4,148)
Cash flows provided by
(used in) investing ac-
tivities................ (54,281) 192 90 169 56 (8) 20 -- (53,762)
Cash flows provided by
(used in) financing ac-
tivities................ 69,412 (1,415) (546) -- (75) (189) (47) -- 67,140
-------- ------- ------- ------- ------ ------ ------ -------- --------
Net increase in cash and
cash
equivalents............. 8,059 440 (49) 489 46 67 178 -- 9,230
Cash and cash equivalents
at the beginning of
year.................... 337 -- -- -- -- -- -- -- 337
-------- ------- ------- ------- ------ ------ ------ -------- --------
Cash and cash equivalents
at the end of year...... $ 8,396 $ 440 $ (49) $ 489 $ 46 $ 67 $ 178 $ -- $ 9,567
======== ======= ======= ======= ====== ====== ====== ======== ========
</TABLE>
- --------
(1)Represents operating results of the Acquired Companies from the date of
Acquisition on November 12, 1997.
54
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(16) SUBSEQUENT EVENT
On February 12, 1998, VIALOG 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, VIALOG 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. VIALOG did not receive any
proceeds from the Exchange Offer.
55
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Telephone Business Meetings, Inc.:
We have audited the accompanying balance sheets of Telephone Business
Meetings, Inc. ("Access") as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the year
ended December 31, 1994, the period January 1, 1995 to April 9, 1995, the
period April 10, 1995 to December 31, 1995, the year ended December 31, 1996
and for the period January 1, 1997 to November 12, 1997. These financial
statements are the responsibility of Access' management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Telephone Business
Meetings, Inc. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the year ended December 31, 1994, the period
January 1, 1995 to April 9, 1995, the period April 10, 1995 to December 31,
1995, the year ended December 31, 1996 and the period January 1, 1997 to
November 12, 1997, in conformity with generally accepted accounting
principles.
As discussed in note 4 to the financial statements, effective April 10,
1995, Access repurchased all of the common stock of one of Access' founding
stockholders, representing a 50% interest in Access. As a result of the change
in control, the financial information for the periods after the change in
control is presented on a different cost basis than that for the periods
before the change in control and, therefore, is not comparable.
KPMG Peat Marwick LLP
Washington, D.C.
July 2, 1998
56
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
<S> <C> <C>
ASSETS (note 3)
Current assets:
Cash and cash equivalents...................................... $ 390 $ 804
Trade accounts receivable, less allowance for doubtful accounts
of $33 and $206 at December 31, 1995 and December 31, 1996,
respectively.................................................. 802 1,103
Prepaid expenses and other current assets...................... 108 161
------ ------
Total current assets......................................... 1,300 2,068
------ ------
Property and equipment, net (note 2)............................. 2,032 2,201
Restricted cash.................................................. 105 110
Excess of purchase price over the fair value of the interest in
net assets of the former stockholders, net of accumulated
amortization of $12 and $28 at December 31, 1995 and December
31, 1996 (note 4)............................................... 231 215
Other assets..................................................... 4 11
------ ------
Total assets................................................. $3,672 $4,605
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 3)................ $ 732 $ 654
Current installments of note payable to former stockholder
(note 4)...................................................... 109 116
Current installments of obligations under capital leases (note
7)............................................................ 28 32
Accounts payable............................................... 4 141
Accrued expenses (note 6)...................................... 276 366
Income taxes payable........................................... 10 --
------ ------
Total current liabilities.................................... 1,159 1,309
------ ------
Long-term debt, excluding current installments (note 3)........ 1,029 880
Note payable to former stockholder, excluding current
installments
(note 4)...................................................... 439 323
Obligations under capital leases, excluding current
installments (note 7)......................................... 79 47
Deferred rent.................................................. 94 128
------ ------
Total liabilities............................................ 2,800 2,687
------ ------
Common stock issued to employees with redemption option, 15.464
shares at liquidation value (note 5)............................ -- 148
------ ------
Stockholders' equity (notes 4 and 5):
Common stock, $.01 par value. Authorized and issued 1,000
shares; 500 shares outstanding................................ -- --
Additional paid-in capital..................................... 660 660
Retained earnings.............................................. 212 1,110
------ ------
Total stockholders' equity................................... 872 1,770
------ ------
Commitments and contingencies (notes 7 and 8)
Total liabilities and stockholders' equity..................... $3,672 $4,605
====== ======
</TABLE>
See accompanying notes to financial statements.
57
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD PERIOD JANUARY 1,
YEAR ENDED JANUARY 1, APRIL 10, TO YEAR ENDED 1997 TO
DECEMBER 31, TO APRIL 9, DECEMBER 31, DECEMBER 31, NOVEMBER 12,
1994 1995 1995 1996 1997
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues............ $ 5,114 $ 1,590 $ 4,918 $ 9,073 $ 10,945
Cost of revenues,
excluding
depreciation........... 2,608 760 2,261 3,564 4,791
Selling, general and
administrative
expenses............... 1,691 498 1,986 3,332 4,124
Depreciation and amorti-
zation expense......... 269 121 375 630 823
------- -------- ------- --------- ---------
Income from
operations........... 546 211 296 1,547 1,207
Interest expense, net... 49 12 140 174 132
------- -------- ------- --------- ---------
Income before income
tax expense
(benefit)............ 497 199 156 1,373 1,075
Income tax expense
(benefit).............. 52 8 (56) -- --
------- -------- ------- --------- ---------
Net income............ $ 445 $ 191 $ 212 $ 1,373 $ 1,075
======= ======== ======= ========= =========
Net income per share -
basic and
diluted ............. $445.00 $ 191.00 $424.00 $2,746.00 $2,150.00
======= ======== ======= ========= =========
Weighted average
shares
outstanding ......... 1,000 1,000 500 500 500
======= ======== ======= ========= =========
</TABLE>
See accompanying notes to financial statements.
58
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- TOTAL
NUMBER OF ADDITIONAL RETAINED STOCKHOLDERS'
SHARES PAR VALUE PAID IN CAPITAL EARNINGS EQUITY
--------- --------- --------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... 1,000 $-- $ 4 $ 715 $ 719
Disbursements........... -- -- -- (39) (39)
Net income.............. -- -- -- 445 445
----- ---- ---- ------ ------
Balance at December 31,
1994................... 1,000 -- 4 1,121 1,125
Net income.............. -- -- -- 191 191
----- ---- ---- ------ ------
Balance at April 9,
1995................... 1,000 $-- $ 4 $1,312 $1,316
===== ==== ==== ====== ======
Balance subsequent to
repurchase of 50%
interest (note 4)...... 500 $-- $660 $ -- $ 660
Net income.............. -- -- -- 212 212
----- ---- ---- ------ ------
Balance at December 31,
1995................... 500 -- 660 212 872
Distributions........... -- -- -- (475) (475)
Net income.............. -- -- -- 1,373 1,373
----- ---- ---- ------ ------
Balance at December 31,
1996................... 500 -- 660 1,110 1,770
Distributions........... -- -- -- (1,284) (1,284)
Net income.............. -- -- -- 1,075 1,075
----- ---- ---- ------ ------
Balance at November 12,
1997................... 500 $-- $660 $ 901 $1,561
===== ==== ==== ====== ======
</TABLE>
See accompanying notes to financial statements.
59
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD PERIOD JANUARY 1,
YEAR ENDED JANUARY 1, APRIL 10, 1995 YEAR ENDED 1997 TO
DECEMBER 31, TO APRIL 9, TO DECEMBER 31, DECEMBER 31, NOVEMBER 12,
1994 1995 1995 1996 1997
------------ ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ $ 445 $ 191 $ 212 $1,373 $1,075
Adjustments to
reconcile net income
to net cash
provided by operating
activities:
Depreciation and
amortization......... 269 121 375 630 823
Deferred income
taxes................ 24 -- (62) -- --
Compensation expense
for issuance of
common stock......... -- -- -- 148 402
Changes in operating
assets and
liabilities:
Trade accounts
receivable, net..... (71) (170) (108) (301) (589)
Prepaid expenses and
other current
assets.............. (58) 62 (5) (53) 146
Accounts payable and
accrued expenses.... (17) 90 22 227 711
Income taxes
payable............. -- -- -- (10) --
Deferred rent........ -- -- 93 34 --
Other non current
liabilities......... -- -- -- -- 364
----- ------ ------- ------ ------
Net cash provided by
operating
activities......... 592 294 527 2,048 2,932
----- ------ ------- ------ ------
Cash flows from
investing activities:
Additions to property
and equipment........ (560) (123) (1,227) (783) (1,704)
Restricted cash....... -- -- (105) (5) --
Other assets.......... 3 (40) 63 (7) --
----- ------ ------- ------ ------
Net cash used in
investing
activities......... (557) (163) (1,269) (795) (1,704)
----- ------ ------- ------ ------
Cash flows from
financing activities:
Proceeds from long-
term debt............ 484 2,149 -- 587 (765)
Principal repayments
of long-term debt.... (338) (626) (389) (814)
Principal repayments
of notes payable to
stockholders......... (85) -- (51) (109) 500
Principal payments
under capital lease
obligations.......... -- -- (12) (28) --
Cash portion of
consideration paid to
former
stockholder.......... -- -- (300) -- --
Distributions to
stockholders......... (39) -- -- (475) (1,284)
----- ------ ------- ------ ------
Net cash provided by
(used in) financing
activities......... 22 1,523 (752) (839) (1,549)
----- ------ ------- ------ ------
Net increase
(decrease) in cash
and cash
equivalents.......... 57 1,654 (1,494) 414 (321)
Cash and cash
equivalents at
beginning of period.. 173 230 1,884 390 804
----- ------ ------- ------ ------
Cash and cash
equivalents at end of
period............... $ 230 $1,884 $ 390 $ 804 $ 483
===== ====== ======= ====== ======
Supplemental
disclosures of cash
flow information:
Cash paid during the
period for:
Interest.............. $ 49 $ 18 $ 169 $ 191 $ 108
===== ====== ======= ====== ======
Income taxes.......... $ 22 $ -- $ -- $ 10 $ --
===== ====== ======= ====== ======
Supplemental disclosure
of noncash investing
and
financing activities:
Capital lease
obligations.......... $ -- $ -- $ 120 $ -- $ --
===== ====== ======= ====== ======
Issuance of note
payable in partial
consideration to
former stockholder... $ -- $ -- $ 599 $ -- $ --
===== ====== ======= ====== ======
</TABLE>
See accompanying notes to financial statements.
60
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Telephone Business Meetings, Inc. ("Access"), which operates under the names
ACCESS Conference Call Service and ACCESS Teleconferencing International,
provides telephone and video group communications services to a broad spectrum
of individuals and businesses throughout the United States. Access' operations
center is located in Reston, Virginia.
On November 12, 1997, VIALOG Corporation acquired all of the outstanding
stock of Access for cash, and Access became a wholly-owned subsidiary of
VIALOG Corporation. The acquisition of Access was accounted for by the
purchase method. Accordingly, all of the identified tangible and intangible
assets and liabilities were recorded at their current fair market value and
the excess of the purchase price over the fair value of the net assets
acquired were recorded as intangible assets, which are being amortized over
periods up to 20 years. Under the terms of the acquisition agreement, the
stockholders of Access agreed to make an election under Section 338(h)(10) of
the Internal Revenue Code in order for the acquisition to be treated as an
asset purchase for tax purposes.
At the time of the acquisition, the tax election of Access under the
provisions of the Internal Revenue Code was changed from an S corporation to a
C Corporation. As a result, Access will be subject to corporate income taxes
subsequent to the date of the acquisition.
(c) Use of Estimates
Management of Access has made a number of estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
(d) Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and short-term investments
with original maturities of three months or less.
(e) Restricted Cash
Restricted cash consists of a certificate of deposit which is security for
Access' commitment under its office lease and is classified as long-term in
the accompanying balance sheets.
(f) Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment is provided on the straight-line basis over the estimated useful
lives of the respective assets. The estimated useful lives are as follows:
five to seven years for office furniture and equipment; seven years for
conferencing equipment; and three to five years for computer equipment.
Capitalized lease equipment and leasehold improvements are amortized over the
lives of the leases, ranging from three to ten years.
(g) Intangible Assets
Access monitors its excess of purchase price over the fair value of interest
in net assets of the former stockholders (goodwill) to determine whether any
impairment of goodwill has occurred. In making such determination with respect
to goodwill, Access evaluates the performance, on an undiscounted basis, of
the underlying business which gave rise to such amount. Amortization of
goodwill is recorded on a straight-line basis over the estimated useful life
of 15 years.
(h) Research and Development
Access maintains a technical support and engineering department that, in
part, develops features and products for group communications. In accordance
with SFAS No. 2, Accounting for Research and Development
61
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Costs, Access charges to expense (included in cost of revenues) that portion
of this department's costs which are related to research and development
activities. Access' research and development expenses for the years ended
December 31, 1994, 1995, 1996 and the period January 1, 1997 to November 12,
1997 were $128,000, $207,000, $288,000 and $253,000 respectively.
(i) Income Taxes
Access has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, Access does not pay income
taxes on its taxable income. Instead, stockholders of Access are liable for
individual federal income taxes for their respective shares of Access' taxable
income. Notwithstanding the federal Subchapter S election, franchise income
taxes were payable through May of 1995 to the District of Columbia, which does
not recognize the Subchapter S election. As of June 1995, Access moved all of
its property and office facilities to the State of Virginia.
(j) Revenue Recognition
Revenue for conference calls is recognized upon completion of the call.
Revenue for services is recognized upon performance of the service.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Access adopted the provisions of SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, during 1996.
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Adoption of this Statement did not have a material impact on
Access' financial position, results of operations, or liquidity.
(l) Earnings Per Share
Access adopted the provisions of SFAS No. 128, "Earnings per Share," during
1997. This statement requires the presentation of basic earnings per share and
diluted earnings per share for all periods presented. For the years ended
December 31, 1994, 1995 and 1996, and for the period January 1, 1997 to
November 12, 1997, basic earnings per share were calculated based on weighted
average common shares outstanding. There were no common stock equivalents
outstanding for any of the periods presented; accordingly, basic and fully
diluted earnings per share are the same.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
<S> <C> <C>
Office furniture and equipment.............................. $ 66 $ 88
Conferencing equipment...................................... 1,982 2,632
Computer equipment.......................................... 456 567
Capitalized lease equipment................................. 120 120
Leasehold improvements...................................... 234 234
------ ------
2,858 3,641
Less: accumulated depreciation and amortization............. 826 1,440
------ ------
Property and equipment, net............................... $2,032 $2,201
====== ======
</TABLE>
62
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Note payable to a bank, interest at the prime rate plus 0.75%
(9.25% at September 30, 1997), monthly principal payments of
13,890 plus interest, balance due in May 2000................. $ -- $ --
Note payable to a bank, interest only at 9.33% payable monthly
through October 1995 and then monthly principal payments of
$38,095 plus interest until February 1999, with the balance
due in March 1999............................................. 1,486 1,029
Note payable to a bank, interest at the prime rate plus 0.75%
(9.25% at September 30, 1997), monthly principal payments of
$7,000 plus interest, balance due in March 1999............... -- 187
Note payable to a bank, interest at 9.5%, monthly principal
payments of $9,400 plus interest, balance due in October
1999.......................................................... -- 318
Note payable to a bank, interest at 9.33%, repaid in full in
September 1996................................................ 275 --
------- -------
Total long-term debt......................................... 1,761 1,534
Less current installments.................................... 732 654
------- -------
Long-term debt, excluding current installments............... $ 1,029 $ 880
======= =======
</TABLE>
All of Access' assets are collateral for the bank notes. In addition,
Access' majority stockholder is a guarantor of each of the bank notes. The
terms of each of the bank notes include certain financial and other covenants.
As of December 31, 1996, as a result of the stock awards discussed in note 5,
Access was not in compliance with a covenant which limits the amount of the
annual increase in executive compensation. Subsequent to December 31, 1996,
Access obtained a waiver of the noncompliance from the lender.
The aggregate maturities of all notes payable, including the note payable to
the former stockholder (see note 4), are as follows (in thousands):
<TABLE>
<S> <C>
1997................................................. $ 770
1998................................................. 777
1999................................................. 357
2000................................................. 69
------
$1,973
======
</TABLE>
In November 1997, all of the bank notes were repaid in full. On November 12,
1997, Access became a joint and several guarantor of VIALOG's $75.0 million
Senior Notes.
(4) RELATED PARTY TRANSACTIONS
On April 10, 1995, under a Share Purchase Agreement, as amended, all of the
common stock, 500 shares, of one of Access' founding stockholders
(representing a 50 percent interest in Access) was repurchased by Access for
total consideration of $899,000. The consideration consisted of $300,000 of
cash paid at closing and a note payable of $599,000 due May 2000, bearing
interest at 6%, with equal quarterly principal and interest payments. As of
the date of the repurchase, Access experienced a change in control and,
accordingly, the acquired 50% interest in the net assets of Access was
recognized at fair market value, which approximated book value. The excess
consideration paid over the fair market value of the interest in the net
assets of the former stockholder was approximately $240,000.
Concurrent with the repurchase of the shares, Access and the former
stockholder entered into an agreement for consulting services and an agreement
not to compete for a five-year period in exchange for total consideration
63
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of $625,000 payable in equal quarterly payments by Access of $31,000
commencing with the first quarter subsequent to the closing and continuing
through April 2000.
As of December 31, 1995, and December 31, 1996, $548,000, and $439,000
respectively, were due under the note payable to the former stockholder, of
which $109,000, and $116,000 respectively, were current. During the period
from April 10, 1995 to December 31, 1995, the year ended December 31, 1996,
and the period January 1, 1997 to November 12, 1997 Access paid the former
stockholder $62,000, $125,000 and $433,000, respectively, under the agreements
for consulting services and not to compete.
As stipulated in the business combination agreement between Access and
VIALOG, $662,000 of the purchase price was paid directly to the related party
to retire the note and to pay the remaining obligation under the agreement for
consulting services and an agreement not to compete.
During the period from January 1, 1997 to November 12, 1997 Access expensed
$340,000 of the $662,000 of the purchase price paid to the related party by
VIALOG.
(5) EMPLOYEE BENEFITS
Stock Awards
During 1996, Access awarded 7.732 shares of common stock to each of two
executive officers of Access. The shares are fully vested but are restricted
as to transfer by each of the executive officers. In the event of termination
of the executive officers' employment with Access, Access has the right at its
sole option to require the executives to sell their shares back to Access and
the executives have the right to require Access to repurchase their shares,
all at the then determined fair market value. In the event of a public
offering of Access' shares or the sale of Access, all such restrictions,
rights, and options terminate.
As a result of the executive officers' right to require Access to repurchase
the shares upon termination of employment, the awards have been accounted for
using variable plan accounting, whereby compensation expense is recognized
each period for the increase, if any, in the estimated fair market value of
Access' common stock. During the year ended December 31, 1996 and the period
January 1, 1997 to November 12, 1997, Access recognized a total of $148,000
and $402,000, respectively, of compensation expense relating to the stock
awards. Further, the liquidation value of the shares has been reflected
between total liabilities and stockholders' equity in the accompanying balance
sheets.
In connection with the acquisition by VIALOG, as described in note 1, these
shares were acquired by VIALOG.
Retirement Plan
Access maintains a defined contribution retirement plan (the "Plan") under
Section 401(k) of the Internal Revenue Code which covers all eligible
employees. Employee contributions are voluntary and vest with the employee
immediately. The Plan provides for matching contributions by Access of 50
percent of employee contributions, up to certain limits as defined in the
Plan. Access' matching contributions vest over the employee's period of
service. Contributions by Access to the Plan were approximately $27,000,
$7,000, $20,000, $42,000 and $43,000 for the year ended December 31, 1994, the
period January 1, 1995 to April 9, 1995, the period April 10, 1995 to December
31, 1995, the year ended December 31, 1996, and the period January 1, 1997 to
November 12, 1997, respectively.
64
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
<S> <C> <C>
Accrued salaries, wages and benefits........................ $ 86 $ 215
Accrued fees and other expenses............................. 190 151
------ ------
$276 $ 366
====== ======
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
Operating Lease
Access leases office space for its teleconferencing facility under a
noncancelable operating lease in Reston, Virginia. The lease is for a total of
ten years expiring May 31, 2005.
Future minimum payments under this lease are approximately as follows (in
thousands):
<TABLE>
<S> <C>
1997................................................. $ 362
1998................................................. 373
1999................................................. 384
2000................................................. 396
2001................................................. 407
Thereafter........................................... 1,485
------
$3,407
======
</TABLE>
Total rent expense was approximately $185,000, $51,000, $287,000, $396,000
and $363,000 for the year ended December 31, 1994, the period from January 1,
1995 to April 9, 1995, the period from April 10, 1995 to December 31, 1995,
the year ended December 31, 1996 and the period January 1, 1997 to November
12, 1997, respectively.
As of December 31, 1996, Access had an outstanding letter of credit in the
amount of $100,000 with a commercial bank which secures Access' obligations
under the office lease.
Capital Leases
Access has entered into noncancelable capital leases for various computer
equipment. The leases, which expire between June 1998 and June 2000, consist
of two 36 month leases and one 60 month lease. Interest rates range from 9.07%
to 10.31%.
65
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum payments under the leases are as follows (in thousands):
<TABLE>
<S> <C>
1997.................................................... $38
1998.................................................... 28
1999.................................................... 17
2000.................................................... 8
---
91
Less: imputed interest.................................. 12
---
Net present value of future lease obligations........... 79
Less: current portion................................... 32
---
Obligations under capital leases, net of current
portion................................................ $47
===
</TABLE>
66
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors Conference Source International, Inc.
We have audited the accompanying balance sheets of Conference Source
International, Inc. ("CSI") as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1996 and for the period
January 1, 1997 to November 12, 1997. These financial statements are the
responsibility of CSI's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Conference Source
International, Inc. as of December 31, 1995 and 1996 and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996, and the period January 1, 1997 to November 12, 1997
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
July 2, 1998
67
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
<S> <C> <C>
ASSETS (NOTE 3)
Current assets:
Cash and cash equivalents...................................... $ 375 $ 318
Trade account receivables, less allowance for doubtful accounts
of $5 and $10 at December 31, 1995 and December 31, 1996,
respectively (note 6)......................................... 692 801
Due from stockholder (note 4).................................. 72 --
Prepaid expenses and other current assets...................... -- 24
------ ------
Total current assets......................................... 1,139 1,143
------ ------
Property and equipment, net (notes 2 and 5)...................... 866 1,059
Other assets..................................................... 32 91
------ ------
Total assets................................................. $2,037 $2,293
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 3)................ $1,089 $ 111
Current installments of obligations under capital leases (note
5)............................................................ 141 375
Accounts payable............................................... 201 121
Accrued expenses............................................... 30 91
------ ------
Total current liabilities.................................... 1,461 698
------ ------
Long-term debt, excluding current installments (note 3).......... 43 219
Obligations under capital leases, excluding current installments
(note 5)........................................................ 173 700
------ ------
Total liabilities............................................ 1,677 1,617
------ ------
Stockholders' equity:
Common stock, $1.00 par value. Authorized 100,000 shares;
issued and outstanding 1,000 shares........................... 1 1
Additional paid-in capital..................................... 349 349
Retained earnings.............................................. 10 326
------ ------
Total stockholders' equity................................... 360 676
------ ------
Commitments and contingencies (notes 5 and 7)
Total liabilities and stockholders' equity................... $2,037 $2,293
====== ======
</TABLE>
See accompanying notes to financial statements.
68
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD FROM JANUARY 1,
------------------------ 1997 TO NOVEMBER 12,
1994 1995 1996 1997
------ ------- --------- ----------------------
<S> <C> <C> <C> <C>
Net revenues (note 6)......... $2,331 $ 3,808 $ 5,868 $ 5,579
Cost of revenues, excluding
depreciation................. 1,256 1,617 2,438 2,052
Selling, general and
administrative expenses...... 707 905 998 831
Depreciation expense.......... 235 292 393 356
------ ------- --------- ---------
Income from operations...... 133 994 2,039 2,340
Interest expense, net......... 124 160 165 120
------ ------- --------- ---------
Net income.................. $ 9 $ 834 $ 1,874 $ 2,220
====== ======= ========= =========
Net income per share - basic
and
diluted.................... $ 9.00 $834.00 $1,874.00 $2,220.00
====== ======= ========= =========
Weighted average shares
outstanding ............... 1,000 1,000 1,000 1,000
====== ======= ========= =========
</TABLE>
See accompanying notes to financial statements.
69
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN RETAINED STOCKHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS EQUITY
--------- --------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... 1,000 $ 1 $349 $ (833) $ (483)
Net income............ -- -- -- 9 9
----- ---- ---- ------- -------
Balance at December 31,
1994................... 1,000 1 349 (824) (474)
Net income............ -- -- -- 834 834
----- ---- ---- ------- -------
Balance at December 31,
1995................... 1,000 1 349 10 360
Net income............ -- -- -- 1,874 1,874
Distributions......... -- -- -- (1,558) (1,558)
----- ---- ---- ------- -------
Balance at December 31,
1996................... 1,000 1 349 326 676
Net income............ -- -- -- 2,220 2,220
Distributions......... -- -- -- (2,636) (2,636)
----- ---- ---- ------- -------
Balance at November 12,
1997................... 1,000 $ 1 $349 $ (90) $ 260
===== ==== ==== ======= =======
</TABLE>
See accompanying notes to financial statements.
70
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1997
--------------------- TO NOVEMBER 12,
1994 1995 1996 1997
----- ----- ------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 9 $ 834 $ 1,874 $ 2,220
Adjustments to reconcile net income to
net cash provided by operating
activities:
Loss on sale of property and
equipment............................ -- -- -- 5
Depreciation and amortization......... 235 292 393 356
Changes in operating assets and
liabilities:
Trade accounts receivable, net....... (205) (312) (109) 5
Due from stockholder................. (6) (66) 72 --
Prepaid expenses and other assets.... (35) 4 (83) 36
Accounts payable and accrued
expenses............................ 55 (31) (19) 275
----- ----- ------- -------
Net cash provided by operating
activities......................... 53 721 2,128 2,897
----- ----- ------- -------
Cash flows from investing activities:
Additions to property and equipment.... (476) (225) (41) (317)
Cash proceeds from disposal of property
and equipment......................... -- -- -- 6
----- ----- ------- -------
Net cash used in investing activities.. (476) (225) (41) (311)
----- ----- ------- -------
Cash flows from financing activities:
Proceeds from borrowings on long-term
debt.................................. 652 201 -- 573
Principal repayment of long-term debt.. (100) (197) (438) (400)
Proceeds from refinancing of
obligations under capital leases...... -- -- 142 --
Principal repayment of obligations
under capital leases.................. (126) (148) (290) (338)
Distributions to stockholder........... -- -- (1,558) (2,636)
----- ----- ------- -------
Net cash provided by (used in)
financing activities............... 426 (144) (2,144) (2,801)
----- ----- ------- -------
Net increase (decrease) in cash and cash
equivalents............................ 3 352 (57) (215)
Cash and cash equivalents at beginning
of period.............................. 20 23 375 318
----- ----- ------- -------
Cash and cash equivalents at end of
period................................. $ 23 $ 375 $ 318 $ 103
===== ===== ======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest.............................. $ 119 $ 162 $ 169 $ 127
===== ===== ======= =======
Noncash transaction:
Equipment purchased under capital
lease obligations.................... $ 296 $ -- $ 545 $ --
===== ===== ======= =======
</TABLE>
See accompanying notes to financial statements.
71
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Conference Source International, Inc. ("CSI") is a provider of group
communications to a variety of customers located primarily in the United
States. CSI was incorporated in February, 1992, and is headquartered in
Atlanta, Georgia.
(b) Sale of Business
On November 12, 1997, VIALOG Corporation acquired all of the outstanding
stock of CSI for cash, and CSI became a wholly-owned subsidiary of VIALOG
Corporation. The acquisition of CSI was accounted for by the purchase method.
Accordingly, all of the identified tangible and intangible assets and
liabilities were recorded at their current fair market value and the excess of
the purchase price over the fair value of the net assets acquired were
recorded as intangible assets, which are being amortized over periods up to 20
years. Under the terms of the acquisition agreement, the stockholders of CSI
agreed to make an election under Section 338(h) (10) of the Internal Revenue
Code in order for the acquisition to be treated as an asset purchase for tax
purposes.
At the time of the acquisition, the tax election of CSI under the provisions
of the Internal Revenue Code was changed from an S corporation to a C
corporation. As a result, CSI will be subject to corporate income taxes
subsequent to the date of the acquisition.
In November 1997, the remaining balance of long-term debt described in note
3 was repaid in full, plus accrued interest.
(c) Use of Estimates
Management of CSI has made a number of estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
(d) Cash and Cash Equivalents
CSI considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents. At December 31, 1995 and December
31, 1996, certain cash deposits with financial institutions are in excess of
the $100,000 Federal Depository Insurance Corporation (FDIC) guarantee.
(e) Property and Equipment
Property and equipment is stated at cost. Equipment under capital leases is
stated at the present value of minimum lease payments. Depreciation is
calculated using accelerated methods over the estimated useful lives of the
respective assets. Estimated useful lives are as follows: five years for
vehicles; five to seven years for office equipment; five to seven years for
bridge equipment; and five years for computer software. Equipment under
capital leases is amortized using accelerated methods over the shorter of the
lease term or the estimated useful life of the asset, ranging from five to
seven years.
(f) Income Taxes
CSI has elected by consent of its stockholders to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under those
provisions, CSI does not pay corporate income taxes on its taxable income.
Instead, the stockholders are liable for individual income taxes on CSI's
taxable income. Accordingly, these financial statements do not contain a
provision for income taxes.
72
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(g) Revenue Recognition
Revenue for conference calls is recognized upon completion of the call.
Revenue for services is recognized upon performance of the service.
(h) Research and Development
CSI maintains a technical support and engineering department that, in part,
develops features and products for group communications. In accordance with
SFAS No. 2, Accounting for Research and Development Costs, CSI charges to
expense (included in cost of revenues) that portion of this department's costs
which are related to research and development activities. CSI's research and
development expenses for the years ended December 31, 1994, 1995 and 1996 were
$179,000, $209,000 and $218,000, respectively. CSI's research and development
expenses for the period from January 1, 1997 to November 12, 1997 were
$139,000.
(i) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
CSI adopted the provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, during 1996.
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Adoption of this Statement did not have a material impact on
CSI's financial position, results of operations, or liquidity.
(j) Earnings Per Share
CSI adopted the provisions of SFAS No. 128 "Earnings per Share," during
1997. This statement requires the presentation of basic earnings per share and
diluted earnings per share for all periods presented. For the years ended
December 31, 1994, 1995 and 1996, and for the period January 1, 1997, to
November 12, 1997, basic earnings per share were calculated based on weighted
average common shares outstanding. There were no common stock equivalents
outstanding for any of the periods presented; accordingly, basic and fully
diluted earnings per share are the same.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996
----- ------
<S> <C> <C>
Vehicles....................................................... $ 27 $ 27
Office equipment............................................... 123 148
Bridge equipment............................................... 1,313 1,874
Computer software.............................................. 62 62
----- ------
1,525 2,111
Less: accumulated depreciation and amortization.............. 659 1,052
----- ------
Property, and equipment, net............................... $ 866 $1,059
===== ======
</TABLE>
73
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Note payable to bank in monthly installments of $18,412,
including interest at 9.5%, matures May 2000; collateralized
by equipment and cash surrender value of life insurance and
personal guarantee of stockholder............................. $ -- $ --
Note payable to bank in monthly installments of $10,597,
including interest at 10.25%, matures August 1999;
collateralized by accounts receivable and cash surrender value
of life insurance and personal guarantee of stockholders...... 634 286
Note payable to bank in monthly installments of $1,029,
including interest at 10.5%, matures October 1999;
collateralized by equipment, accounts receivable, and cash
surrender value of life insurance and personal guarantee of
stockholders.................................................. 39 30
Notes payable for bridge equipment purchases; balances were
converted to a capital lease obligation during 1996........... 437 --
Note payable to bank in monthly installments of $846, including
interest at 9.20%, matures May 1998; collateralized by
vehicles...................................................... 22 14
------ -----
Total long-term debt........................................... 1,132 330
Less: current installments..................................... 1,089 111
------ -----
Long-term debt, excluding current installments................. $ 43 $ 219
====== =====
</TABLE>
The aggregate maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1997.................................................................. $111
1998.................................................................. 127
1999.................................................................. 92
----
$330
====
</TABLE>
On November 12, 1997, CSI became a joint and several guarantor of VIALOG's
$75.0 million Senior Notes.
(4) RELATED PARTY TRANSACTIONS
(a) Advance to Stockholder
CSI loaned one of the stockholders a total of $72,000 during 1994 and 1995.
The note had no set repayment schedule and was interest free. The amount was
repaid in full during 1996.
(b) Lease Transactions
CSI paid monthly lease payments to a stockholder for use of certain
equipment. Total payments under these arrangements during the years ended
December 31, 1994, 1995 and 1996 were approximately $53,000 per year and for
the period January 1, 1997 to November 12, 1997 were approximately $9,000. The
leases expired during May 1997.
74
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES
(a) Leases
CSI is obligated under noncancelable operating leases covering its office
facilities and certain equipment. Rent expense amounted to $261,000, $205,000
and $192,000 for the years ended December 31, 1994, 1995 and 1996,
respectively, and $87,000 for the period January 1, 1997 to November 12, 1997,
respectively. Future minimum lease payments under noncancelable operating
leases are as follows (in thousands):
<TABLE>
<S> <C>
November 13 to December 31, 1997....................................... $183
1998................................................................... 164
1999................................................................... 158
2000................................................................... 152
2001................................................................... 152
2002 and thereafter.................................................... 139
----
Total minimum operating lease payments............................... $948
====
</TABLE>
CSI is also obligated under various capital leases for equipment that are
guaranteed by one of the owners. The gross amounts of equipment and related
accumulated amortization recorded under capital leases were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
<S> <C> <C>
Equipment..................................................... $1,243 $1,788
Less: accumulated amortization................................ 521 852
------ ------
$ 722 $ 936
====== ======
</TABLE>
Future minimum payments under capital leases are as follows (in thousands):
<TABLE>
<S> <C>
1997................................................................. $ 482
1998................................................................. 312
1999................................................................. 287
2000................................................................. 157
2001................................................................. 69
-----
Total minimum capital lease payments............................... 1,307
Less: amounts representing interest (at rates ranging from 10% to
18%)................................................................ 232
-----
Present value of minimum capital lease payments.................... 1,075
Less: current installments of obligations under capital leases....... 375
-----
Obligations under capital leases, excluding current installments... $ 700
=====
</TABLE>
(b) Purchase Agreements
CSI has entered into purchase agreements with two long distance telephone
service providers. CSI is committed to minimum monthly purchases under the
agreements which amount to $48,000 in 1997 and 1998, and $23,000 in 1999.
75
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(c) Consulting Agreement
CSI has entered into a consulting agreement with a stockholder and former
officer of CSI. Total payments under the agreement amount to $120,000, payable
in equal monthly payments through December 1997.
(d) Dispute
A former employee of CSI has claimed that he may be entitled to 5% of the
stock of CSI based on an unsigned paper outlining possible employment terms.
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. CSI
believes that such claim is without merit.
(6) SIGNIFICANT CUSTOMERS
Two customers accounted for the following percentages of revenues and
accounts receivable:
<TABLE>
<CAPTION>
PERCENTAGE OF ACCOUNTS
PERCENTAGE OF NET REVENUES RECEIVABLE
--------------------------- ------------------------
PERIOD
JANUARY 1,
YEAR ENDED 1997 TO
DECEMBER 31, NOVEMBER 12, DECEMBER 31,
-------------- ------------ ------------------------
1994 1995 1996 1997 1995 1996
---- ---- ---- ---- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Customer A.............. 14% 30% 49% 47% 47% 58%
Customer B.............. 14% 24% 21% 25% 26% 26%
</TABLE>
76
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with regard to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Chief Executive Officer, President,
Glenn D. Bolduc(1).......... 45 Treasurer and Director
John J. Dion................ 39 Vice President--Finance
Vice President--Marketing and Business
Robert F. Moore............. 43 Development
Gary G. Vilardi............. 43 Vice President--Sales
John R. Williams............ 37 Vice President--Operations
Michael Shepherd............ 34 Vice President--Wholesale Sales
C. Raymond Marvin........... 59 Vice President
Joanna M. Jacobson(1)(2).... 38 Director
David L. Lougee(1)(2)....... 58 Director
David L. Lipsky............. 52 Director and President--Americo
Patti R. Bisbano............ 53 Director and President--CDC
William P. Pucci............ 52 President--Access
Judy B. Crawford............ 45 President--CSI
Courtney P. Snyder.......... 48 President--TCC
Olen E. Crawford............ 45 President--Call Points, Inc.
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
GLENN D. BOLDUC has served as Chief Executive Officer, President and a
Director of the Company since October 1, 1996 and as Treasurer since July 9,
1997. From July 1989 to September 1996, Mr. Bolduc served as Chief Financial
Officer of MutliLink, Inc., an independent supplier of audio conferencing
bridges.
JOHN J. DION has served as Vice President--Finance for the Company since
November 1996, and served as a Director from July 9, 1997 to November 12,
1997. From August 1985 to August 1995, Mr. Dion served in various financial
positions for DSC Communications Corporation, a manufacturer of
telecommunications hardware and software. Mr. Dion's final position with DSC
was Director of Accounting.
ROBERT F. MOORE joined the Company on November 1, 1997 as Vice President--
Marketing and Business Development. Mr. Moore served as Vice President--Sales
and Marketing for Citizens Communication Corporation, a division of Citizens
Utilities, Inc. from March 1997 to October 31, 1997. From January 1994 to
February 1997, Mr. Moore was with Hill Holliday Connors Cosmopulos, Inc.
Advertising. For the 17 years prior to that, Mr. Moore served in various sales
and marketing positions with Southern New England Telephone, the last four
years of which he served as President of SNET Mobility, Inc., the cellular
communications subsidiary of SNET.
GARY G. VILARDI has served as Vice President--Sales of the Company since
April 1, 1997. He has spent 17 years in sales and sales management and has
focused on audio, video, and document conferencing sales during the last eight
years. From October 1995 to December 1996 Mr. Vilardi was Vice President--
Sales with
77
<PAGE>
Video-On, Inc., a GE Capital Company specializing in video conferencing. From
June 1995 to October 1995 he served as Eastern Regional Vice President for
Network MCI teleconferencing, and from March 1990 to June 1995 he was Vice
President of U.S. Sales for Darome Teleconferencing.
JOHN R. WILLIAMS joined the Company on November 1, 1997 as Vice President--
Operations. Mr. Williams had served as General Manager of the Sprint
Conference Line, Sprint's audio conferencing service bureau business, since
July 1995. Prior to this assignment, Mr. Williams held positions in product
development, marketing, and strategic planning in the Sprint Long Distance
Division. From June 1984 to November 1989 he was a National Account Manager at
IBM.
MICHAEL D. SHEPHERD joined the Company on February 2, 1998 as Vice
President--Wholesale Sales. Mr. Shepherd served as Vice President of Carrier
Sales at Citizens Communications Corporation, a division of Citizens Utilities
Companies, Inc. from November 1997 to February 1998. From April 1997 to
November of 1997, Mr. Shepherd served as Director--Major Accounts (Western
Region) with Citizens Communications Corporation where he was responsible for
managing the business relationships with AT&T Communications, Inc, U.S. West
Communications, Inc., Pacific Telesis, and several National Wireless
Companies. From April 1986 to February 1995, Mr. Shepherd held various sales
positions with WorldCom, Inc., and MCI Communications, Inc.
RAYMOND MARVIN has served as a Vice President of the Company since December
31, 1997. He founded Access in 1987 and served as President and Chief
Executive Officer of Access from its inception to December 31, 1997 and as a
director of Access from its inception to November 12, 1997.
JOANNA M. JACOBSON served as a consultant to VIALOG Corporation prior to,
and became a Director of the Company on November 12, 1997. Since April 1996,
Ms. Jacobson has been President of Keds, a distributor of athletic footwear
and a division of Stride-Rite Corporation. From February 1995 to March 1996,
she was a partner in Core Strategy Group, a strategic marketing consulting
firm. From December 1991 to September 1994, Ms. Jacobson was a Senior Vice
President of Marketing and Product Development for Converse, Inc., a
distributor of athletic footwear.
DAVID L. LOUGEE became a Director of the Company on November 12, 1997. Mr.
Lougee has been a partner of the law firm of Mirick, O'Connell, DeMallie &
Lougee, LLP since 1972. Mr. Lougee is also a director of Meridian Medical
Technology, Inc., a public company in the medical devices and drug delivery
business. Mirick, O'Connell, DeMallie & Lougee, LLP serves as outside general
counsel to VIALOG Corporation.
DAVID L. LIPSKY founded Americo in August 1987 and has served as President,
Chief Executive Officer and as a director of Americo since its inception. From
1983 until 1996, Mr. Lipsky also served as President and Chief Executive
Officer of Resource Objectives, Inc., a seller of communications equipment
that merged into Americo in 1996. Mr. Lipsky became a Director of the Company
on November 12, 1997.
PATTI R. BISBANO co-founded CDC in April 1990 and has served as President,
Treasurer and as a director of CDC since its inception. Ms. Bisbano became a
Director of the Company on November 12, 1997.
WILLIAM P. PUCCI has served as President of Access since December 31, 1997
and served as Vice President--Operations for the Company from May 1996 to
December 1997. Prior to joining the Company, Mr. Pucci spent 28 years in the
telecommunications industry with New England Telephone, AT&T, and NYNEX.
JUDY B. CRAWFORD co-founded CSI in February 1992 and has served as
President, Chief Executive Officer and as a director of CSI since its
inception.
COURTNEY P. SNYDER founded TCC in 1987 and has served as President, Chief
Executive Officer and as a director of TCC since its inception.
OLEN E. CRAWFORD co-founded CSI in February 1992 and served as Executive
Vice President until his appointment as President of Call Points in November
1997. From March 1988 until January 1992, Mr. Crawford was a principal in
Crawford and Associates, a telecommunications consulting firm. During 1990 and
78
<PAGE>
1991, Mr. Crawford served as Executive Vice President and General Manager of
Call Points. Between 1972 and 1988, Mr. Crawford held positions at South
Central Bell Telephone Company and other telecommunications related entities.
The Company's Board of Directors is divided into three classes, with one
class of directors elected each year at the annual meeting of stockholders for
a three-year term of office. All directors of one class hold their positions
until the annual meeting of stockholders at which the terms of the directors
in such class expire and until their respective successors are elected and
qualified. Mr. Lipsky serves in the class whose terms expire in 1998, Ms.
Jacobson and Ms. Bisbano serve in the class whose terms expire in 1999, and
Mr. Bolduc and Mr. Lougee serve in the class whose term expire in 2000.
Executive officers of the Company are elected annually by the Board of
Directors and serve at the discretion of the Board of Directors or until their
successors are duly elected and qualified.
On January 6, 1998, the Board of Directors established an Audit Committee
and a Compensation Committee. The Audit Committee will review the scope and
results of the annual audit of the Company's consolidated financial statements
conducted by the Company's independent accountants, proposed changes in the
Company's financial and accounting standards and principles, and the Company's
policies and procedures with respect to its internal accounting, auditing and
financial controls, and will make recommendations to the Board of Directors on
the engagement of the independent accountants, as well as other matters which
may come before it or as directed by the Board of Directors. The Compensation
Committee will administer the Company's compensation programs, including the
1996 Stock Plan, and will perform such other duties as may from time to time
be determined by the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
do not receive additional compensation for serving as directors. Each Director
who is not an employee of the Company or one of its subsidiaries has received
upon his or her election as a Director an option to purchase 12,000 shares of
common stock at its then fair market value, and will receive a fee of $500 for
attendance at each Board of Directors meeting and $250 for each committee
meeting (unless held on the same day as a Board of Directors meeting).
Directors are also reimbursed for out-of-pocket expenses incurred in attending
meetings of the Board of Directors or committees thereof or otherwise incurred
in their capacity as Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On January 6, 1998, the Company's Board of Directors established a
Compensation Committee, consisting of Mr. Bolduc, Ms. Jacobson and Mr. Lougee.
Prior to the establishment of the Compensation Committee, decisions as to
executive compensation were made by the Board of Directors. From January 1,
1997 until February 21, 1997, the Board of Directors consisted of John J.
Hassett, Mr. Bolduc and Thomas M. Carroll. Mr. Carroll is the brother-in-law
of Mr. Hassett. On February 21, 1997, Mr. Carroll resigned as Director and was
replaced by Bruce T. Guzowski. On July 9, 1997, Mr. Guzowski resigned and was
replaced by John J. Dion. On November 12, 1997, John Dion and John Hassett
resigned as Directors, and David L. Lougee, Patti R. Bisbano, Joanna Jacobson
and David L. Lipsky were appointed Directors.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the individual who
served as the Company's President during the year ended December 31, 1997 and
the Company's four most highly-compensated executive officers other than the
President who were serving as executive officers on December 31, 1997 (the
"Named Executive Officers").
79
<PAGE>
SUMMARY COMPENSATION TABLE
FISCAL YEAR 1997
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- --------------------- ---
AWARDS PAYOUTS
---------- ----------
SECURITIES
RESTRICTED UNDERLYING ALL
OTHER ANNUAL STOCK OPTIONS/ OTHER
SALARY BONUS COMPENSATION AWARD(S) SARS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($) ($)(3) (#) ($)
- --------------------------- ------- ------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Glenn D. Bolduc......... 33,000 270,000(1) (2) 0 75,000 0
President and CEO
C. Raymond Marvin....... 242,000 121,000 (2) 0 0 0
Vice President
David L. Lipsky......... 238,000 94,000 (2) 0 75,000 $5,218(5)
Director, President--
Americo
Courtney P. Snyder...... 145,000 0 (2) 0 75,000 $9,460(6)
President--TCC
Judy B. Crawford........ 118,000 0 20,000(4) 0 0 $ 505(7)
President--CSI
</TABLE>
- --------
(1) Pursuant to an employment agreement executed by the Company and Mr. Bolduc
in 1996, Mr. Bolduc began to earn an annual salary of $250,000 and a
monthly automobile allowance of $1,000 effective November 12, 1997, the
date of closing of a private placement (the "Private Placement") of $75
million in aggregate principal amount of 12 3/4% Senior Notes. In January
1998, the Company paid Mr. Bolduc a one-time bonus equal to 1/365th of his
annualized salary and automobile allowance multiplied by the number of
days from the date of his employment by VIALOG Corporation to the closing
of the Private Placement.
(2) The aggregate amount of the Named Executive Officer's Compensation
reportable under this category falls below the reporting threshold under
Item 402(b)(2)(iii)(C)(1) of Regulation S-K.
(3) None of the Named Executive Officers received compensation for their
services in the form of restricted stock awards during the fiscal year
ended December 31, 1997. However, as of December 31, 1997, each of the
Named Executive Officers held restricted shares of the Company's common
stock as follows:
<TABLE>
<CAPTION>
VALUE($)
NAMED EXECUTIVE OFFICERS RESTRICTED SHARES(#) ($5.75/SHARE)
- ------------------------ -------------------- -------------
<S> <C> <C>
Glenn D. Bolduc............................. 32,500 186,875
C. Raymond Marvin........................... 0 0
David L. Lipsky............................. 267,826 1,539,999
Courtney P. Snyder.......................... 48,780 280,485
Judy B. Crawford............................ 0 0
</TABLE>
The Company has no current plans to pay dividends on the above-referenced
restricted shares.
(4) Consists of an aggregate auto allowance of approximately $17,000 and
aggregate country club dues of approximately $3,000.
(5) In 1997, Americo paid an aggregate of $2,545 in premiums on a split-dollar
term life insurance policy on the life of Mr. Lipsky. The proceeds of the
policy are to be divided equally between Americo and Mr. Lipsky's spouse.
Additionally, in 1997, Americo paid $2,673 in premiums on a term life
insurance policy on the life of Mr. Lipsky's spouse. The proceeds of that
policy are payable to Mr. Lipsky.
(6) In 1997, TCC paid an aggregate of $9,460 in premiums on a whole life
insurance policy on the life of Mr. Snyder. The proceeds of the policy are
payable to a beneficiary designated by Mr. Snyder. The policy's cash
surrender value, $27,114 as of March 1998, is payable to Mr. Snyder.
(7) In 1997, CSI paid an aggregate of $505 in premiums on a term life
insurance policy on the life of Ms. Crawford. The proceeds of the policy
are payable to a beneficiary designated by Ms. Crawford.
80
<PAGE>
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
The following table sets forth a summary of the terms of the employment
agreements that were entered into with the Named Executive Officers.
<TABLE>
<CAPTION>
NAME POSITION SALARY TERM
- ---- -------- ------ ----
<S> <C> <C> <C>
Glenn D. Bolduc(1)................ President and CEO--VIALOG $250,000 indefinite
C. Raymond Marvin(2).............. Vice President--VIALOG $242,000 2 years
David L. Lipsky(3)................ President--Americo $225,000 3 years
Courtney P. Snyder(4)............. President--TCC $160,000 3 years
Judy B. Crawford(5)............... President--CSI $255,000 1 year
</TABLE>
- --------
(1) Pursuant to an employment agreement executed by the Company and Mr. Bolduc
in 1996, Mr. Bolduc began to earn an annual salary of $250,000 and a
monthly automobile allowance of $1,000 upon the closing of the Private
Placement. In January, 1998, the Company paid Mr. Bolduc a one-time bonus
equal to 1/365th of his annualized salary and automobile allowance
multiplied by the number of days from the date of his employment by VIALOG
Corporation to the closing of the Private Placement. Mr. Bolduc's
employment agreement also provides for a severance payment of 18 months'
then current salary and the continuation of all fringe benefits for 18
months at the Company's expense after the termination of his employment.
(2) Mr. Marvin's employment agreement provides that if Mr. Marvin's employment
terminates during the term of his employment other than for cause, death
or disability, he will be entitled to receive his base compensation and
group insurance benefits during a period equal to the greater of (i) one
year or (ii) the remainder of the term of his employment contract.
(3) Mr. Lipsky's employment agreement provides that if Mr. Lipsky's employment
is terminated by Americo other than for cause, disability or death, he
will be entitled to receive his base compensation and group insurance
benefits during a period equal to the greater of (i) one year or (ii) the
remainder of the term of his employment agreement. Mr. Lipsky is entitled
to a monthly automobile allowance of $750.
(4) Mr. Snyder's employment agreement provides that if Mr. Snyder's employment
is terminated by TCC other than for cause, disability or death, he will be
entitled to receive his base compensation and group insurance benefits
during a period equal to the greater of (i) one year or (ii) the remainder
of the term of the employment agreement. TCC also maintains a life
insurance policy on the life of Mr. Snyder in the face amount of $750,000,
the proceeds of which are payable to a beneficiary to be designated by
him. He is also entitled to a monthly automobile allowance of $400.
(5) Ms. Crawford's employment agreement provides that if Ms. Crawford's
employment is terminated by CSI other than for cause, disability or death,
she will be entitled to receive her base compensation and group insurance
benefits during a period equal to the remainder of the term of her
employment agreement. CSI also maintains a life insurance policy on the
life of Ms. Crawford in the face amount of $1.0 million, the proceeds of
which are payable to a beneficiary to be designated by her. She is also
entitled to a monthly automobile allowance of $1,440.
1996 STOCK PLAN
On February 14, 1996, the Board of Directors and the Company's stockholders
approved the Company's 1996 Stock Plan (the "Plan"). The purpose of the Plan
is to provide directors, officers, key employees, consultants and other
service providers with additional incentives by increasing their ownership
interests in the Company. Individual awards under the Plan may take the form
of one or more of (i) incentive stock options ("ISOs"), (ii) non-qualified
stock options ("NQSOs"), (iii) stock appreciation rights ("SARs") and (iv)
restricted stock.
The Compensation Committee administers the Plan and generally selects the
individuals who will receive awards and the terms and conditions of those
awards. The maximum number of shares of common stock that may be issued or
issuable under the Plan, determined immediately after the grant of any award,
may not exceed 3,250,000 shares. Shares of common stock subject to awards
which have expired, terminated or been canceled or forfeited are available for
issuance or use in connection with future awards.
81
<PAGE>
The Plan will remain in effect until February 14, 2006 unless terminated
earlier by the Board of Directors. The Plan may be amended by the Board of
Directors without the consent of the stockholders of the Company, except that
any amendment, although effective when made, will be subject to stockholder
approval if required by any Federal or state law or regulation or by the rules
of any stock exchange or automated quotation system on which the common stock
may then be listed or quoted.
The following table sets forth all options granted to the Named Executive
Officers in 1997:
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF
UNDERLYING EMPLOYEES IN EXERCISE STOCK PRICE
OPTIONS FISCAL PRICE EXPIRATION APPRECIATION FOR
GRANTED(#) YEAR(%) ($/SHARE)(1) DATE OPTION TERM(3)
---------- ------------ ------------ ---------- ---------------------
5%($) 10%($)
---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Glenn D. Bolduc......... 75,000 14.7(4) 2.00 (2) 94,334 239,061
C. Raymond Marvin....... 0 0 0 (2) -- --
David L. Lipsky......... 75,000 14.7(5) 5.75 (2) 271,211 687,301
Courtney P. Snyder...... 75,000 14.7(5) 5.75 (2) 271,211 687,301
Judy B. Crawford........ 0 0 0 (2) -- --
</TABLE>
- --------
(1) All options were granted at fair market value as determined by the Board
of Directors of the Company on the date of grant. The Board of Directors
determined the market value of the common stock based on various factors,
including the illiquid nature of an investment in the Company's common
stock, the absence of any operating history and the Company's future
prospects.
(2) All options granted to the Named Executive Officers terminate on the
earlier of (i) the date of termination of employment if the Named
Executive Officer ceases to be employed by the Company or (ii) 10 years
from date of grant.
(3) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration
of their term, assuming the specified compounded rates of appreciation of
the Company's common stock over the term of the options. These numbers are
calculated based on rules promulgated by the Securities and Exchange
Commission and do not represent the Company's estimate of future stock
price growth. Actual gains, if any, on stock option exercises and common
stock holdings are dependent on timing of such exercise and future
performance of the Company's common stock. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that
the amounts reflected will be received by the Named Executive Officers.
This table does not take into account any appreciation in the price of the
common stock from the date of grant to current date. The values shown are
net of the option exercise price, but do not include deductions for taxes
or other expenses associated with the exercise.
(4) This option vests over a three year period vesting as to 25,000 shares on
the first anniversary of the grant date and as to 6,250 shares on the last
day of each quarter thereafter until the option has vested in full.
(5) This option vests over a three year period vesting as to 5,700 shares on
December 31, 1997 and as to 6,300 shares on the last day of each quarter
thereafter until the option has vested in full.
82
<PAGE>
The following table sets forth the value of all unexercised options held by
the Named Executive Officers at the end of 1997:
1997 FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR END(#) YEAR END($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Glenn D. Bolduc............. 66,690 168,310 $381,601 $815,170
C. Raymond Marvin........... 0 0 0 0
David L. Lipsky............. 5,700 69,300 0 0
Courtney P. Snyder.......... 5,700 69,300 0 0
Judy B. Crawford............ 0 0 0 0
</TABLE>
- --------
(1) There was no public trading market for the common stock on December 31,
1997. Accordingly, solely for the purposes of this table, the values in
this column have been calculated on the basis of a determination of the
fair market value of the common stock on December 31, 1997 ($5.75 per
share), less the aggregate exercise price of the options.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the common stock of the Company as of March 15, 1998 by (i) each
person known to the Company to beneficially own more than five percent of the
outstanding shares of common stock, (ii) each of the Company's Directors,
(iii) each Named Executive Officer, and (iv) all executive officers and
Directors as a group. All persons listed have an address in care of the
Company's principal executive office and have sole voting and investment power
with respect to their shares unless otherwise indicated. As of March 15, 1998,
the Company had outstanding 3,531,410 shares of common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED(1) OF CLASS
- ---- --------------------- --------
<S> <C> <C>
John J. Hassett................................ 937,762 (2) 26.6
J. Michael Powell.............................. 327,800 (3) 9.3
Reynolds E. Moulton............................ 187,500 5.3
Glenn D. Bolduc................................ 142,520 (4) 4.0
David L. Lougee................................ 74,674 (5) 2.1
Joanna M. Jacobson............................. 6,000 (6) *
David L. Lipsky................................ 279,826 (7) 7.9
Patti R. Bisbano............................... 62,594 1.8
Courtney P. Snyder............................. 60,780 (8) 1.6
C. Raymond Marvin.............................. 0 *
Judy B. Crawford............................... 12,000 (9) *
Jefferies & Company, Inc....................... 358,145(10) 10.1
All executive officers and directors as a group
(15 persons).................................. 642,928 22.1
</TABLE>
- --------
* Less than 1%.
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage owned
by such person, but not deemed outstanding for the purpose of calculating
the percentage owned by each other person listed.
83
<PAGE>
(2) Includes 837,762 shares held by Mr. Hassett and 100,000 shares held by
Susan C. Hassett, the spouse of Mr. Hassett. Does not include 60,000
shares held by J. Michael Powell as Trustee for Mr. Hassett's two minor
children, as to which Mr. Hassett disclaims beneficial ownership.
(3) Includes 267,800 shares held by Mr. Powell individually and 60,000 shares
held by Mr. Powell as Trustee.
(4) Includes 32,500 shares held by Mr. Bolduc, 80,020 shares with respect to
which options held by Mr. Bolduc may be exercised as of June 1, 1998 and
30,000 shares held by Grace K. Bolduc, the spouse of Mr. Bolduc, as
Trustee for their three minor children.
(5) Includes 70,000 shares held by Mr. Lougee and 4,674 shares with respect to
which options held by Mr. Lougee may be exercised as of June 1, 1998.
(6) Includes 6,000 shares with respect to which options held by Ms. Jacobson
may be exercised as of June 1, 1998.
(7) Includes 267,826 shares issued to Mr. Lipsky in connection with the
Acquisitions and 12,000 shares with respect to which options granted to
Mr. Lipsky may be exercised as of June 1, 1998.
(8) Includes 48,780 shares issued to Mr. Snyder in connection with the
Acquisitions and 12,000 shares with respect to which options granted to
Mr. Snyder may be exercised as of June 1, 1998.
(9) Includes 12,000 shares with respect to which options granted to Ms.
Crawford on January 1, 1998 may be exercised as of June 1, 1998.
(10) Includes 358,145 shares with respect to which warrants issued to
Jefferies & Company, Inc. in connection with the Private Placement may be
exercised.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ORGANIZATION OF THE COMPANY
On November 12, 1997, VIALOG Corporation acquired (i) by merger, all of the
issued and outstanding stock of five Acquired Companies, and (ii) by purchase,
the assets of one Acquired Company. The aggregate consideration paid by VIALOG
Corporation for the Acquisitions was 559,330 shares of common stock valued at
$5.75 per share, approximately $53.0 million in cash and approximately
$925,000 in cash related to tax reimbursements. The consideration paid was
determined through arm's length negotiations among VIALOG Corporation, the
Acquired Companies and the stockholders of the Acquired Companies, and was
based upon a multiple of each Acquired Company's historical net revenue
adjusted to compare each Acquired Company on a consistent basis. The purchase
price of each Acquired Company was generally based upon such company's
customer base, current operating results, geographic market, type and
condition of its equipment and facilities, and potential cost savings
resulting from the Acquisitions. The following table sets forth the
approximate consideration paid for each of the Acquired Companies.
<TABLE>
<CAPTION>
NAME CASH CONSIDERATION SHARES
- ---- ------------------ -------
<S> <C> <C>
Access............................................... $19,000,000(1) --
CSI.................................................. 18,675,000(2) --
Call Points.......................................... 8,000,000(3) 21,000
TCC.................................................. 3,645,000 166,156
Americo.............................................. 1,260,000 267,826
CDC.................................................. 2,400,000 104,348
----------- -------
Total Acquisition Consideration...................... $52,980,000 559,330
=========== =======
</TABLE>
- --------
(1) VIALOG Corporation and Access agreed to make an election under Section
338(h)(10) of the Code to treat the purchase and sale of the capital stock
of Access as a purchase and sale of assets. VIALOG Corporation agreed to
reimburse the stockholders of Access an amount, estimated to be $700,000,
equal to the difference between the taxes incurred by such stockholders as
a result of the Section 338(h)(10) election and the taxes which would have
been incurred by such stockholders had no Section 338(h)(10) election been
made, together with the costs incurred in connection with making such
calculations. Such reimbursements have not been included in the Total
Acquisition Consideration shown above.
84
<PAGE>
(2) VIALOG Corporation and CSI agreed to make an election under Section
338(h)(10) of the Code to treat the purchase and sale of the capital stock
of CSI as a purchase and sale of assets. VIALOG Corporation has reimbursed
the stockholders of CSI $225,000, an amount estimated to equal the
difference between the taxes incurred by such stockholders as a result of
the Section 338(h)(10) election and the taxes which would have been
incurred by such stockholders had no Section 338(h)(10) election been
made, together with the costs incurred in connection with making such
calculations. Such reimbursements have not been included in the Total
Acquisition Consideration shown above.
(3) Ropir Industries, Inc., the principal stockholder of Call Points, received
$1.0 million of the cash consideration of $8.0 million as compensation for
entering into a noncompetition agreement with VIALOG Corporation.
From June 30, 1997 to September 30, 1997, certain of the Acquired Companies
made S corporation distributions of $936,000. Additional S corporation
distributions of approximately $751,000 were made prior to or upon the
consummation of the Acquisitions. In addition, during the course of
operations, certain of the Acquired Companies incurred indebtedness or entered
into capital leases which were guaranteed by their principal stockholders. At
September 30, 1997, the aggregate amount of indebtedness and capital leases of
the Acquired Companies that was subject to such personal guarantees was
approximately $3.5 million. The Company repaid approximately $2.2 million of
such indebtedness upon the closing of the Private Placement, and the Company
agreed to use its best efforts to cause all such guarantees to be released. If
the Company cannot obtain such releases, it has agreed to arrange for the
discharge of such indebtedness.
The following is a discussion of the material information regarding the
Acquired Companies and their principal stockholders:
VIALOG Corporation (i) caused a subsidiary of VIALOG Corporation to merge
with Access, whereby Access became a wholly owned subsidiary of VIALOG
Corporation and (ii) delivered to the stockholders of Access approximately
$19.0 million in cash in exchange for their shares of Access. VIALOG
Corporation granted options for 142,850 shares of common stock exercisable at
$5.75 per share to certain key employees of Access. In the event the Company
completes an initial public offering of its shares or is acquired or otherwise
merges with another entity and the consideration for such transaction is less
than $13.75 per share, such option holders will receive additional options
exercisable at $5.75 per share on a pro rata basis such that the total
aggregate value of such options equals $1.0 million. If an employee's
employment is terminated, other than by reason of death or disability, the
option must be exercised within 90 days thereafter or it will expire. Such
terminated employees will be entitled to cash bonuses equal to the
consideration required to be paid upon exercise of an option if such option is
exercised. On the date of the Acquisitions, stockholders' equity of Access was
approximately $2.1 million. The Company repaid approximately $1.4 million of
indebtedness of Access, of which C. Raymond Marvin was the guarantor. Such
indebtedness was to mature through 2000 and bore interest at rates ranging
from 9.25% to 9.5% per annum. From June 30, 1997 to September 30, 1997, Access
made S corporation tax distributions of $165,000. Additional S corporation
distributions of approximately $487,000 were made prior to or upon the
consummation of the Acquisitions. Mr. Marvin entered into a two-year
employment agreement with Access which included a covenant not to compete
expiring no earlier than the latter of the third anniversary of the merger or
one year after the expiration of his severance period under such agreement.
VIALOG Corporation (i) caused a subsidiary of VIALOG Corporation to merge
with CSI, whereby CSI became a wholly owned subsidiary of VIALOG Corporation
and (ii) delivered to the stockholders of CSI approximately $18.7 million in
cash in exchange for their shares of CSI. On the date of the Acquisitions,
stockholders' equity of CSI was approximately $260,000. Judy B. Crawford
remained as President of CSI following the closing of this Offering and
received approximately $9.3 million in cash. The Company repaid approximately
$500,000 of indebtedness of CSI, of which Ms. Crawford was the guarantor. Such
indebtedness was to mature in 2000 and bore interest at 9.5% per annum. In
addition, Ms. Crawford had guaranteed all of CSI's capital leases, which had
remaining lease payments of approximately $774,000. The Company agreed to
arrange for the release of such guarantees or to arrange for the discharge of
indebtedness underlying such guarantees. From June 30, 1997 to September 30,
1997, CSI made S corporation profit and tax distributions of
85
<PAGE>
$757,000. Additional S corporation distributions of approximately $123,000
were made prior to or upon the consummation of the Acquisitions. Ms. Crawford
entered into a one-year employment agreement with CSI which included a
covenant not to compete expiring no earlier than the third anniversary of the
merger.
VIALOG Corporation (i) caused a subsidiary of VIALOG Corporation to acquire
substantially all of the assets of, and assumed specified liabilities of, Call
Points, (ii) delivered to Call Points $7.0 million in cash and 21,000 shares
of common stock in exchange for such assets and (iii) delivered to the
principal stockholder of Call Points $1.0 million in cash in exchange for a
noncompetition agreement. On the date of the Acquisitions, the net value of
the assets acquired from Call Points was approximately $2.4 million. VIALOG
Corporation obtained noncompetition agreements with a two-year noncompetition
period from the principal stockholder and a key employee of Call Points.
VIALOG Corporation (i) caused a subsidiary of VIALOG Corporation to merge
with TCC, whereby TCC became a wholly owned subsidiary of VIALOG Corporation
and (ii) delivered to the stockholders of TCC 166,156 shares of common stock
and approximately $3.6 million in cash in exchange for their shares of TCC. On
the date of the Acquisitions, stockholders' equity of TCC was approximately
$629,000. In 1996, TCC distributed certain technology and hardware with a net
book value of approximately $12,000 to certain stockholders of TCC. Courtney
P. Snyder remained as President of TCC and received 48,780 shares of common
stock and approximately $841,000 in cash. VIALOG Corporation granted to Mr.
Snyder options for 75,000 shares of common stock exercisable at the fair
market value as of the closing of the Private Placement as determined by the
VIALOG Corporation Board of Directors. Such options are exercisable for 5,700
shares on December 31, 1997 and an additional 6,300 shares on the last day of
each of the 11 calendar quarters thereafter. The options will expire on the
third anniversary of the Private Placement closing. John J. Hassett, a
principal stockholder of VIALOG Corporation and of TCC, received 44,512 shares
of common stock and approximately $768,000 in cash. See "Principal
Stockholders." The Company repaid approximately $66,000 of indebtedness of
TCC, of which Mr. Snyder and Mr. Hassett were guarantors. Such indebtedness
was to mature through 1999 and bore interest at rates ranging from 9.5% to 11%
per annum. In addition, Mr. Snyder and Mr. Hassett were guarantors of all of
TCC's capital leases, which had remaining lease payments of approximately
$324,000. The Company agreed to arrange for the release of such guarantees or
to arrange for the discharge of indebtedness underlying such guarantees. From
June 30, 1997 to September 30, 1997, TCC made S corporation tax distributions
of $14,000. Additional S corporation distributions of approximately $142,000
were made prior to or upon the consummation of the Acquisitions. Mr. Snyder
entered into a three-year employment agreement with TCC which included a
covenant not to compete expiring no earlier than the third anniversary of the
merger or one year from the expiration of his severance period under such
agreement, whichever is the later to occur. VIALOG Corporation has also
obtained noncompetition agreements with a two-year noncompetition period from
certain other principal stockholders and/or employees of TCC.
VIALOG Corporation (i) caused Americo to merge with and into a wholly owned
subsidiary of VIALOG Corporation and (ii) delivered to David L. Lipsky, the
sole stockholder of Americo, 267,826 shares of common stock and approximately
$1.3 million in cash in exchange for his shares of Americo. On the date of the
Acquisitions, stockholders' deficit of Americo was approximately $273,000. Mr.
Lipsky remained as President of Americo. VIALOG Corporation granted to Mr.
Lipsky options for 75,000 shares of common stock, exercisable at the fair
market value as of the closing of the Private Placement as determined by the
VIALOG Corporation Board of Directors. Such options are exercisable for 5,700
shares on December 31, 1997 and an additional 6,300 shares on the last day of
each of the 11 calendar quarters thereafter. The options will expire on the
third anniversary of the closing of the Private Placement. The Company repaid
approximately $185,000 of indebtedness of Americo, of which Mr. Lipsky was a
guarantor. Such indebtedness was to mature at various times through June 2001
and bore interest at 10% per annum. Mr. Lipsky entered into a three-year
employment agreement with Americo which included a covenant not to compete
expiring no earlier than the latter of the third anniversary of the merger or
one year from the expiration of his severance period under such agreement.
VIALOG Corporation (i) caused a subsidiary of VIALOG Corporation to merge
with CDC, whereby CDC became a wholly owned subsidiary of VIALOG Corporation
and (ii) delivered to the stockholders of CDC
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104,348 shares of common stock and approximately $2.4 million in cash in
exchange for their shares of CDC. On the date of the Acquisitions,
stockholders' equity of CDC was approximately $418,000. Patti R. Bisbano
remained as President of CDC and received 52,174 shares of common stock and
approximately $1.2 million in cash. Maurya Suda, a principal stockholder of
CDC, received 52,174 shares of common stock and approximately $1.2 million in
cash. VIALOG Corporation granted to Ms. Bisbano and Ms. Suda options for an
aggregate of 75,000 shares of common stock exercisable at the fair market
value as of the closing of the Private Placement as determined by the VIALOG
Corporation Board of Directors. Ms. Bisbano received options for 62,500 shares
which are exercisable for 5,212 shares on December 31, 1997 and an additional
5,208 shares on the last day of each of the 11 calendar quarters thereafter.
Ms. Suda received options for 12,500 shares, which are exercisable for 3,125
shares on December 31, 1997 and an additional 3,125 shares in the last day of
each of the 3 calendar quarters thereafter. The options will expire on the
third anniversary of the closing of the Private Placement. The Company repaid
indebtedness of CDC, of which Ms. Bisbano was a guarantor, of approximately
$43,000. Such indebtedness was to mature in 2000 and bore interest at 9.5% per
annum. Ms. Bisbano entered into a three-year employment agreement with CDC
which included a covenant not to compete expiring on the later of one year
from the expiration of her employment agreement or two years from the
expiration of her severance period under such agreement. Ms. Suda entered into
a one-year employment agreement with CDC which included a covenant not to
compete expiring on the latter of one year from the expiration of her
employment agreement or two years from the expiration of her severance period
under such agreement.
The Company agreed with all of the Acquired Companies, except Call Points,
that for the two-year period following the closing of the Private Placement
there will be no (i) change in the location of an Acquired Company's
facilities, (ii) physical merging of any Acquired Company's operations with
another operation, (iii) change in the position of certain persons receiving
employment agreements authorized by the Acquisition Agreements, or (iv)
reduction in work force or termination of employment except as related to
employee performance or the contemplated reorganization of the combined
sales/marketing staff or the accounting function, without the approval of a
majority in interest of the respective Acquired Company's former stockholders.
In the case of Call Points, similar restrictions apply except that there are
no restrictions with respect to a change in the location of Call Points'
facilities.
Additionally, VIALOG Corporation agreed to maintain the Acquired Companies'
respective employee incentive compensation, fringe benefits and severance
programs, or their substantial equivalent, through December 31, 1997.
OTHER TRANSACTIONS
In December 1997, John J. Hassett began providing consulting services to the
Company for a monthly fee of $10,000. Mr. Hassett's consulting arrangement
terminates upon the consummation by the Company of an initial public offering
of its common stock.
TCC provides teleconferencing services to customers of a company owned by
Susan C. Hassett, spouse of John J. Hassett, for which TCC recorded revenues
of $86,000, $175,000 and $230,000 in 1995, 1996 and 1997, respectively.
On November 6, 1997, John J. Hassett entered into a stockholder agreement
with the Company that provides, among other things, that while any Notes
remain outstanding or any obligation of the Company or the Subsidiary
Guarantors with respect thereto remains unpaid finally and in full, (i) with
respect to all matters submitted to a vote of the stockholders of the Company
regarding the appointment, election or removal of directors or officers of the
Company, Mr. Hassett will vote any shares of voting stock of the Company over
which he has direct or indirect voting power in the same proportion as the
votes cast in favor of and against the particular matter voted upon, by all of
the other stockholders of the Company, and (ii) Mr. Hassett will not serve as
a director or officer of the Company or any subsidiary.
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Glenn D. Bolduc, President and Chief Executive Officer of the Company, owned
approximately five percent of the issued and outstanding common stock of
MultiLink, a principal supplier of MCUs to the Company. In 1995, 1996 and
1997, aggregate purchases of MCUs and ancillary services from MultiLink by the
Acquired Companies were approximately $889,000 and $811,000 and $878,000,
respectively. In 1997, MultiLink became a subsidiary of PictureTel
Corporation.
David L. Lougee, one of the Company's Directors, is a partner of Mirick,
O'Connell, DeMallie & Lougee, llp, the law firm currently retained as the
Company's legal counsel. In 1997, the Company paid Mirick, O'Connell, DeMallie
& Lougee, llp an aggregate of approximately $1.8 million in legal fees and
expenses in connection with general legal services, a withdrawn public
offering, the Acquisitions and the Private Placement.
COMPANY POLICY
The Company has implemented a policy whereby neither the Company nor any
subsidiary (which includes the Acquired Companies) will enter into contracts
or business arrangements with persons or entities owned in whole or in part by
officers or directors of the Company or any subsidiary except on an arms-
length basis and with the approval of the Company's Board of Directors. The
Company's Bylaws require that any approval must be by a majority of the
independent Directors then in office who have no interest in such contract or
transaction.
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS.
(a)Documents filed as part of this Form 10-K:
1.Financial Statements
See index to Financial Statements under ITEM 8--Financial Statements
and Supplementary Data.
2.Financial Statement Schedules
All financial statement schedules have been omitted because they are not
required, not applicable, or the information to be included in the financial
statement schedules is included in the Consolidated Financial Statements or
the notes thereto.
3.Exhibits
See Exhibit Index.
(b)Reports on Form 8-K
There were no reports on Form 8-K filed by the Company in the last quarter
of 1997.
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER+ DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization By and Among VIALOG Corporation,
TBMA Acquisition Corporation and Telephone Business Meetings, Inc. and
C. Raymond Marvin Dated as of September 8, 1997.
2.2 Amendment to Agreement and Plan of Reorganization By and Among VIALOG
Corporation, TBMA Acquisition Corporation, Telephone Business
Meetings, Inc. and C. Raymond Marvin Dated as of October 20, 1997.
2.3 Letter Agreement Dated November 5, 1997 between VIALOG Corporation,
Telephone Business Meetings, Inc. and C. Raymond Marvin.
2.4 Amended and Restated Agreement and Plan of Reorganization By and Among
VIALOG Corporation, CSII Acquisition Corporation and Conference Source
International, Inc. and Judy B. Crawford and Olen E. Crawford Dated as
of September 8, 1997.
2.5 Amended and Restated Asset Purchase Agreement By and Among VIALOG
Corporation, Call Points Acquisition Corporation, Call Points, Inc.
and Ropir Industries, Inc. Dated as of October 17, 1997.
2.6 Amended and Restated Agreement and Plan of Reorganization By and Among
VIALOG Corporation, KST Acquisition Corporation, Kendall Square
Teleconferencing, Inc., Courtney Snyder, Paul Ballantine, John Hassett
and Dwight Grader Dated as of September 30, 1997.
2.7 First Amendment to Amended and Restated Agreement and Plan of
Reorganization By and Among VIALOG Corporation, KST Acquisition
Corporation, Kendall Square Teleconferencing, Inc. and Courtney
Snyder, Paul Ballantine, John Hassett and Dwight Grader Dated October
24, 1997.
2.8 Amended and Restated Agreement and Plan of Reorganization By and Among
VIALOG Corporation, AMCS Acquisition Corporation and American
Conferencing Company, Inc. and David Lipsky Dated as of September 30,
1997.
2.9 Amended and Restated Agreement and Plan of Reorganization By and Among
VIALOG Corporation, CDC Acquisition Corporation and Communications
Development Corporation and Patti R. Bisbano and Maurya Suda Dated as
of September 30, 1997.
2.10 First Amendment to Amended and Restated Agreement and Plan of
Reorganization By and Among VIALOG Corporation, CDC Acquisition
Corporation, Communication Development Corporation and Patti R.
Bisbano and Maurya Suda Dated as of October 24, 1997.
3.1 Restated Articles of Organization of VIALOG Corporation.
3.2 Amended and Restated By-Laws of VIALOG Corporation.
3.3 Certificate of Incorporation of Communications Development
Corporation.
3.4 By-Laws of Communication Development Corporation.
3.5 Articles of Incorporation of Conference Source International, Inc.
3.6 By-Laws of Conference Source International, Inc.
3.7 Unanimous Consent of Board of Directors of Conference Source
International, Inc. Amending Section 2 of Article II of the By-Laws.
3.8 Certificate of Incorporation of Telephone Business Meetings, Inc.
3.9 Regulations of Telephone Business Meetings, Inc.
3.10 Articles of Organization of Kendall Square Teleconferencing, Inc.
(f/k/a Teleconversant, LTD)
3.11 Articles of Amendment of Certificate of Incorporation of Kendall
Square Teleconferencing, Inc. Changing the Name of the Company from
Teleconversant, Ltd. To Kendall Square Teleconferencing, Inc.
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER+ DESCRIPTION
------- -----------
<C> <S>
3.12 Articles of Amendment of Certificate of Incorporation of Kendall
Square Teleconferencing, Inc. Deleting the Stock Transfer Restrictions
in Article V in Their Entirety.
3.13 By-Laws of Kendall Square Teleconferencing, Inc.
3.14 Certificate of Incorporation of American Conferencing Company, Inc.
(f/k/a AMCS Acquisition Corporation)
3.15 Certificate of Merger of American Conferencing Company, Inc. Into AMCS
Acquisition Corporation Evidencing Name Change, Filed with the
Secretary of State of Delaware.
3.16 By-Laws of American Conferencing Company, Inc.
3.17 Certificate of Incorporation of Call Points, Inc. (f/k/a Call Points
Acquisition Corporation).
3.18 Certificate of Amendment of Certificate of Incorporation of Call
Points Evidencing Name Change, Filed with the Secretary of State of
Delaware.
3.19 By-Laws of Call Points, Inc.
4.1 Indenture Dated as of November 12, 1997 Among VIALOG Corporation,
Telephone Business Meetings, Inc., Conference Source International,
Inc., Kendall Square Teleconferencing, Inc., American Conferencing
Company, Inc., Communication Development Corporation, Inc., Call
Points, Inc. and State Street Bank and Trust Company (including Forms
of Series A Security and Series B Security attached to the Indenture
as Exhibits A-1 and A-2, respectively).
4.2 Unit Agreement Dated as of November 12, 1997 By and Among VIALOG
Corporation, Telephone Business Meetings, Inc., Conference Source
International, Inc., Call Points, Inc., Kendall Square
Teleconferencing, Inc., American Conferencing Company, Inc.,
Communications Development Corporation, and State Street Bank and
Trust Company (including Form of Unit Certificate attached to the Unit
Agreement as Exhibit A).
4.3 Warrant Agreement Dated as of November 12, 1997 Between VIALOG
Corporation and State Street Bank and Trust Company (including Form of
Warrant Certificate attached to the Warrant Agreement as Exhibit A).
4.4 Security Holders' and Registration Rights Agreement Dated as of
November 12, 1997 Among VIALOG Corporation and Jefferies & Company,
Inc.
4.5 Registration Rights Agreement Dated as of November 12, 1997 By and
Among VIALOG Corporation, Kendall Square Teleconferencing, Inc., AMCS
Acquisition Corporation, Communication Development Corporation,
Telephone Business Meetings, Inc., Conference Source International,
Inc., Call Points Acquisition Corporation and Jefferies & Company,
Inc.--see Exhibit 1.2.
4.6* Exchange Agent Agreement Dated as of February 9, 1998.
10.1 1996 Stock Plan of the Company.
10.2 Equipment Lease between CSI and Ally Capital Corporation Dated April
1, 1996.
10.3 Equipment Lease between CSI and The CIT Group/Equipment Financing,
Inc. Dated November 11, 1996.
10.4 Equipment Lease between CSI and BSFS Equipment Leasing Dated April 8,
1996.
10.5 Equipment Lease between TCC (f/k/a Teleconversant Ltd.) and Wasco
Funding Corp. Dated May 21, 1996.
10.6 Equipment Lease between TCC (f/k/a Teleconversant Ltd.) and Wasco
Funding Corp. Dated July 20, 1995.
10.7 Lease between Aetna Life Insurance Company and ACCESS, as Amended,
Dated December 6, 1994.
10.8 Lease Agreement between SPP Real Estate (Georgia II), Inc. and CSI
Dated November 1, 1996.
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER+ DESCRIPTION
------- -----------
<C> <S>
10.9 Amended & Restated Employment Agreement By and Between VIALOG
Corporation and Glenn D. Bolduc Dated May 6, 1997.
10.10 Employment Agreement By and Between Telephone Business Meetings, Inc.
and C. Raymond Marvin Dated as of November 12, 1997.
10.11 Amendment to Employment Agreement between the Company and C. Raymond
Marvin Effective as of December 31, 1997.
10.12 Employment Agreement By and Between CSII Acquisition Corporation and
Judy B. Crawford Dated as of November 12, 1997.
10.13 Employment Agreement By and Between Kendall Square Teleconferencing,
Inc. and Courtney Snyder Dated November 12, 1997.
10.14 Employment Agreement By and Between American Conferencing Company,
Inc. and David Lipsky Dated as of November 12, 1997.
10.15 Employment Agreement By and Between Communication Development
Corporation and Patti R. Bisbano Dated as of November 12, 1997.
10.16 Employment Agreement By and Between the Company and William Pucci
Dated as of October 1, 1996.
10.17 Employment Agreement By and Between the Company and John Dion Dated as
of November 4, 1996.
10.18 Employment Agreement By and Between the Company and Gary Vilardi Dated
as of April 1, 1997.
10.19 Employment Agreement By and Between the Company and Robert Moore Dated
as of October 20, 1997.
10.20 Employment Agreement By and Between the Company and John Williams
Dated as of October 14, 1997.
10.21* Employment Agreement By and Between Call Points, Inc. And Olen E.
Crawford Dated as of November 20, 1997.
10.22 Stockholder Agreement By and Among John J. Hassett and VIALOG
Corporation Dated as of November 6, 1997.
10.23 Form of Registration Rights Agreement between VIALOG Corporation and
certain of its stockholders specified in Schedules I and II attached
thereto.
10.24 Lease Between Tower Investment Group and Communication Development
Corp. Dated February 23, 1990, Including Subsequent Modifications
Thereto.
10.25 Lease Agreement by and Between 680-690 Kinderkamack Road and American
Conferencing Company, Inc. Dated June 1997.
10.26 Lease Between Robert A. Jones and K. George Najarian, Trustees of Old
Cambridge Realty Trust and Old Kendall Square Realty Trust, and
Kendall Square Teleconferencing, Inc. (f/k/a Teleconversant, Ltd.)
Dated February 15, 1996.
10.27 Lease Between Ropir Communications and Call Points, Inc. Commencing
May 1, 1995.
10.28 Amendment to Lease Between Ropir Industries, Inc. and Call Points,
Inc.
10.29 Equipment Lease between Kendall Square Teleconferencing, Inc. and
Wasco Funding Corp. Dated July 31, 1997.
10.30 Sublease between Eisai Research Institute of Boston, Inc. and VIALOG
Corporation Dated as of August 20, 1997.
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER+ DESCRIPTION
------- -----------
<C> <S>
10.31** Assignment of Lease between Telephone Business Meetings, Inc. and CMC
Datacomm, Inc. dated as of March 13, 1998.
11.1** Statement regarding Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
27.1** Financial Data Schedule.
</TABLE>
- --------
+ All non-marked Exhibits listed above are incorporated by reference to the
Exhibits to the Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on January 9, 1998 (File No. 333-44041).
All Exhibits marked with an asterisk ("*") are incorporated by reference to
the Exhibits to Amendment No. 1 to the Registration Statement on Form S-4
filed with the Securities and Exchange Commission on February 10, 1998
(File No. 333-44041). All Exhibits marked with a double asterisk ("**"),
are incorporated by reference to the Exhibits to Form 10-K filed with the
Securities and Exchange Commission on March 31, 1998 (File No. 333-22585).
92
<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
/s/ Glenn D. Bolduc
By: _________________________________
GLENN D. BOLDUC, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: August 13, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/s/ Glenn D. Bolduc President, Chief August 13, 1998
By: _________________________________ Executive Officer,
GLENN D. BOLDUC Treasurer and
Director
/s/ John J. Dion Vice President-- August 13, 1998
By: _________________________________ Finance, Principal
JOHN J. DION Financial Officer
and Principal
Accounting Officer
/s/ Joanna M. Jacobson Director August 12, 1998
By: _________________________________
JOANNA M. JACOBSON
/s/ David L. Lougee Director August 13, 1998
By: _________________________________
DAVID L. LOUGEE
/s/ Patti R. Bisbano Director August 12, 1998
By: _________________________________
PATTI R. BISBANO
/s/ Richard G. Hamermesh Director August 13, 1998
By: _________________________________
RICHARD G. HAMERMESH
93
