<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 1998.
FILE NO. 333-53395
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
VIALOG CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
MASSACHUSETTS 4813 04-3305282
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
----------------
35 NEW ENGLAND BUSINESS CENTER, SUITE 160
ANDOVER, MASSACHUSETTS 01810
(978) 975-3700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
GLENN D. BOLDUC
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VIALOG CORPORATION
35 NEW ENGLAND BUSINESS CENTER, SUITE 160
ANDOVER, MASSACHUSETTS 01810
(978) 975-3700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
DAVID L. LOUGEE, ESQ. LAWRENCE A. LAROSE, ESQ.
JEFFREY L. DONALDSON, ESQ. ALAN J. RICE, ESQ.
MIRICK, O'CONNELL, DEMALLIE & LOUGEE, CADWALADER, WICKERSHAM & TAFT
LLP 100 MAIDEN LANE
1700 BANKBOSTON TOWER NEW YORK, NEW YORK 10038
100 FRONT STREET (212) 504-6000
WORCESTER, MASSACHUSETTS 01608-1477
(508) 791-8500
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value............... $67,175,988 $19,816.91(1)
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) A fee of $16,962.50 was paid with the initial filing of this Registration
Statement with the Commission on May 22, 1998. A supplemental fee of
$1,764.10 was paid in connection with the filing of Pre-Effective
Amendment No. 1 on July 8, 1998. A second supplemental fee of $1,090.31 is
being paid in connection with this filing, $948.10 of which was
transmitted on July 24, 1998 and $142.21 of which was transmitted on July
27, 1998.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION--DATED JULY 27, 1998
- --------------------------------------------------------------------------------
4,867,826 Shares
[VIALOG LOGO APPEARS HERE]
Common Stock
- --------------------------------------------------------------------------------
Of the 4,867,826 shares of common stock, $.01 par value per share (the "Common
Stock"), offered hereby (the "Offering"), 4,600,000 shares are being sold by
VIALOG Corporation (the "Company") and 267,826 are being sold by a selling
stockholder (the "Selling Stockholder"). The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholder. See "Principal
and Selling Stockholders."
Prior to the Offering, there has been no public market for the Common Stock. It
is currently anticipated that the initial public offering price will be between
$10 and $12 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company has
applied for inclusion of the Common Stock in The Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "VLOG."
SEE "RISK FACTORS" ON PAGES 10 TO 17 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholder
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
- --------------------------------------------------------------------------------
Total(3)....................... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company, its Operating Centers (as defined in the Prospectus Summary)
and the Selling Stockholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
$1,500,000.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 730,173 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such additional shares are
purchased by the Underwriters, the total Price to Public will be $ , the
total Underwriting Discounts and Commissions will be $ , the total
Proceeds to Company will be $ and the total proceeds to the Selling
Stockholder will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are being offered by the several Underwriters,
subject to delivery by the Company and acceptance by the Underwriters, to prior
sale and to withdrawal, cancellation or modification of the offer without
notice. Delivery of the shares to the Underwriters is expected to be made
through the facilities of The Depository Trust Company, New York, New York, on
or about , 1998.
PRUDENTIAL SECURITIES INCORPORATED JEFFERIES & COMPANY, INC.
, 1998
<PAGE>
[LOGO OF VIALOG APPEARS HERE]
[PHOTO DESCRIPTION: THREE OPERATORS]
GROUP COMMUNICATIONS DEFINED.
[PHOTO DESCRIPTION: SEVERAL PERSONS SEATED AROUND CONFERENCE TABLE]
[PHOTO DESCRIPTION: PERSON AT WORKSTATION]
THE BUSINESS MEETING REDEFINED.
[PHOTO DESCRIPTION: PERSON AT
WORKSTATION; MONITOR DISPLAY SPLIT
SCREEN WITH THREE PERSONS]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK AND THE EXCHANGE NOTES (AS DEFINED
HEREIN) TO STABILIZE THEIR RESPECTIVE MARKET PRICES, PURCHASES OF THE COMMON
STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED
BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
related notes appearing elsewhere in this Prospectus. Unless otherwise
indicated, (i) all references to "VIALOG Corporation" mean VIALOG Corporation
as a stand alone entity, (ii) all references to "VIALOG" or the "Company" refer
to VIALOG Corporation and include its consolidated subsidiaries and (iii) the
information in this Prospectus assumes that the Underwriters' over-allotment
option will not be exercised.
THE COMPANY
VIALOG is a leading independent provider of teleconferencing and other group
communications services, consisting primarily of operator-attended and
operator-on-demand audio teleconferencing, as well as video and data
conferencing services. The Company believes it is the largest company focused
solely on teleconferencing and other group communications services, with six
operating centers, approximately 7,326 ports of teleconferencing capability
(one "port" is required for each participating telephone line), state-of-the-
art digital conferencing technology and a national sales force, which is
expected to be fully deployed by the end of 1998. The Company believes it
differentiates itself from its competitors by providing superior customer
service and an extensive range of enhanced and customized communication
solutions. The Company has capitalized on the growth in the teleconferencing
services market to build a large, stable client base ranging from Fortune 500
companies to small institutions. Customers also include certain major long
distance telecommunications providers which have outsourced their
teleconferencing services to the Company. The Company provided services to more
than 5,000 customers representing over 30,000 accounts during the twelve months
ended June 30, 1998.
Operator-attended audio teleconferencing is the cornerstone of VIALOG's
business, and the Company believes it to be the principal service which builds
customer loyalty. The Company also offers operator-on-demand audio
teleconferencing as well as enhanced services such as digital replay, broadcast
fax and follow-up mailings. VIALOG also offers customized communications
solutions, which include teleconference event planning and coaching, as well as
customized formats, which include auctions, investor relations and automated
testing programs. The Company has designed its service delivery infrastructure
to be flexible so that comprehensive, custom solutions for each customer may be
easily designed and implemented.
The industry in which the Company operates has been experiencing significant
growth. According to 1998 industry studies published by Frost & Sullivan, 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%, and are projected to continue to grow at a compound annual
growth rate of 24% through 2003. The Company believes it will continue to
benefit from this strong industry growth, as it deploys a coordinated national
marketing, branding and sales program.
In addition to internal growth generated by strong industry fundamentals and
the Company's enhanced marketing capabilities, the Company intends to continue
to increase its wholesale, or outsourcing, business. Management believes that
the broad trend among the inter-exchange carriers ("IXCs"), local exchange
carriers ("LECs") and the Regional Bell Operating Companies ("RBOCs") to
outsource labor-intensive activities such as teleconferencing will lead to new
outsourcing contracts, particularly as RBOCs and LECs become approved to
provide long distance service. Further, the Company intends to augment its
internal growth through selective acquisitions in the teleconferencing industry
to leverage the inherent economies of scale and build upon the Company's
position as the largest company in the industry focused solely on
teleconferencing and other group communications services.
3
<PAGE>
OPERATING STRATEGY
The Company provides a full array of group communications services through
its six operating centers, all of which were acquired by the Company in
November 1997. The basic goals of the Company's operating strategy consist of
the following:
Focus exclusively on teleconferencing and other group communications
services. VIALOG believes that its dedicated focus on teleconferencing enables
it to respond to the needs of its customers better than competitors that do not
focus on teleconferencing as a core business activity. The Company's largest
competitors are long distance service providers for which teleconferencing
represents only a small fraction of their total revenues.
Deliver a broad range of services. VIALOG believes that it offers the most
comprehensive selection of audio, video and data conferencing services among
the independent teleconferencing service providers and believes that it can
leverage the diverse service capabilities and industry expertise of individual
operating centers to provide the features and pricing options to meet a wide
variety of customer needs.
Maximize operational synergies. Since November 1997, VIALOG has centralized
several of its operations, including sales, marketing, and most human resource,
benefits administration and cash management functions. VIALOG's increased size
has enabled it to (i) handle calls involving a larger number of participants,
(ii) improve network efficiency through better allocation of port capacity
among its operating centers and (iii) obtain stronger bargaining power in areas
such as long distance telecommunications, equipment, employee benefits and
marketing. The Company plans to centralize additional support activities within
the next 6 to 12 months in order to improve service and reduce operating
expenses.
Retain customers and stimulate usage. The Company intends to expand sales to
its diverse base of customers, which numbered more than 5,000 during the twelve
months ended June 30, 1998. To achieve this, VIALOG is implementing new focused
selling strategies and a comprehensive new marketing database and is increasing
its emphasis on customer service.
GROWTH STRATEGY
The Company's objective is to build upon its position as a leading
independent provider of teleconferencing and other group communications
services. The Company intends to achieve this goal through a strategy focused
on the following:
Maintain strong internal growth. Industry sources project that
teleconferencing services revenues will grow at a compound annual growth rate
of 24% through 2003. VIALOG intends to capitalize on this growth by developing
a national brand identity, pursuing cross-selling opportunities, expanding the
Company's service offerings and leveraging the Company's increased capacity to
handle larger contracts. In addition, the Company is deploying a national sales
force to access new geographic areas and national accounts, establishing a
coordinated calling effort and implementing database marketing programs.
Pursue outsourced services opportunities. The Company has deployed a
wholesale sales organization to sell outsourced services to IXCs, LECs and
RBOCs. VIALOG currently has contracts to provide outsourced services to a
number of facilities-based and non-facilities-based telecommunications service
providers. The Company believes that it is well-positioned to compete for
outsourced teleconferencing business from the IXCs, LECs and RBOCs, because it
(i) does not compete with IXCs, LECs or RBOCs in their core businesses, (ii)
has the capacity and resources to handle significant teleconferencing volume
and (iii) has experience in providing services on an outsourced basis.
4
<PAGE>
Expand through acquisitions. The Company intends to augment its internal
growth through selective acquisitions of complementary businesses. VIALOG's
strategy is to target acquisitions that will allow it to increase market share,
broaden geographic coverage and augment existing service offerings with new
capabilities and industry-specific experience. The Company believes that its
position (following the completion of this Offering) as the largest publicly-
traded company focused solely on the teleconferencing market will make it
attractive to potential acquisition candidates.
THE OPERATING CENTERS
On November 12, 1997, VIALOG Corporation acquired, in separate transactions
(each, an "Acquisition," and collectively, the "Acquisitions"), six private
conference service bureaus (each, an "Operating Center," and collectively, the
"Operating Centers") in exchange for cash and shares of its Common Stock. Each
Operating Center is a wholly-owned subsidiary of the Company. All of the
Company's operations are presently conducted through the Operating Centers,
which are located in Virginia, Georgia, Alabama, Massachusetts, New Jersey and
Connecticut. All primary operating functions are conducted in at least two
different Operating Centers in order to mitigate the impact of events that
could impair operations. The Company intends to build upon the unique
competencies in each Operating Center, enabling it to deliver a full range of
high quality services to its customers. As of June 30, 1998, the Operating
Centers employed a total of 360 persons and had a combined capacity of
approximately 7,326 ports.
5
<PAGE>
VIALOG AND ITS OPERATING CENTERS
VIALOG Corporation is a Massachusetts corporation founded on January 1, 1996.
The Company's executive offices are located at 35 New England Business Center,
Suite 160, Andover, Massachusetts 01810, and its telephone number is (978) 975-
3700.
<TABLE>
<S> <C>
RESTON, VIRGINIA
Teleconferencing Ports: 1,800 The Reston Center specializes in
Employees: 120 providing services to financial
1997 Revenues (in institutions, government agencies,
millions): $12.6 trade associations and
professional services firms. In
addition, it serves as the primary
center for delivering video, fax
and custom interactive voice
response applications.
ATLANTA, GEORGIA
Teleconferencing Ports: 1,584 The Atlanta Center is the primary
Employees: 61 center that provides wholesale and
1997 Revenues (in private label teleconferencing
millions): $6.4 services to telecommunications
providers.
MONTGOMERY, ALABAMA
Teleconferencing Ports: 2,613 The Montgomery Center specializes
Employees: 77 in providing teleconferencing
1997 Revenues (in services to the retail and
millions): $8.5 services industries. It is also
the primary engineering center
responsible for the development
and deployment of advanced bridge
technology.
CAMBRIDGE, MASSACHUSETTS
Teleconferencing Ports: 576 The Cambridge Center provides a
Employees: 40 wide range of high value-added
1997 Revenues (in applications for general business.
millions): $4.1 It is also responsible for the
design and deployment of data
conferencing services that allow
participants to review and modify
documents simultaneously.
ORADELL, NEW JERSEY
Teleconferencing Ports: 456 The Oradell Center specializes in
Employees: 34 providing advanced technology
1997 Revenues (in applications, including automated
millions): $2.2 audio teleconferencing, to a
general business clientele.
DANBURY, CONNECTICUT
Teleconferencing Ports: 297 The Danbury Center specializes in
Employees: 28 delivery of a wide range of
1997 Revenues (in teleconferencing and customized
millions): $2.1 group communications solutions to
the pharmaceutical industry.
</TABLE>
Numbers of teleconferencing ports and employees are as of June 30, 1998.
6
<PAGE>
RECENT DEVELOPMENTS
VIALOG Corporation has recently executed an Agreement and Plan of
Reorganization with A Business Conference-Call, Inc. ("ABCC") pursuant to which
VIALOG Corporation intends to acquire all of the outstanding capital stock of
ABCC by merger for a purchase price of $14.0 million in cash plus (i) an
additional amount, based on ABCC's closing date balance sheet, equal to the
balances of cash plus accounts receivable (net of a bad debt reserve of 5%)
less all liabilities as of the closing date and (ii) approximately $100,000
related to tax reimbursements discussed below. Based on ABCC's June 30, 1998
balance sheet, the amount of such additional consideration would be
approximately $252,000. In addition, the Company expects to incur approximately
$200,000 of acquisition costs. ABCC had net revenues of approximately $5.7
million and income from operations of approximately $2.2 million for the fiscal
year ended December 31, 1997 and had net revenues of approximately $3.6 million
and income from operations of approximately $1.6 million for the six months
ended June 30, 1998. ABCC had 480 teleconferencing ports and 43 employees as of
June 30, 1998. ABCC services a general corporate clientele with a specialty in
the communications industry.
VIALOG Corporation and ABCC have agreed to make an election to treat the
purchase and sale of the capital stock of ABCC as a purchase and sale of
assets. VIALOG Corporation will reimburse the stockholders of ABCC
approximately $100,000, which is the difference between the taxes incurred by
such stockholders as a result of such election and the taxes which would have
been incurred by such stockholders had no such election been made. ABCC will
make distributions to its stockholders of all cash and income on an accrual
basis prior to or upon consummation of the merger. The two stockholders of ABCC
will each enter into one-year employment contracts and receive incentive stock
options for the purchase of 37,500 shares of Common Stock at an exercise price
equal to the fair value of the Common Stock at the effective date of the
acquisition of ABCC. The options will vest as to 3,125 shares on the effective
date of the merger and an additional 3,125 shares on each October 1, January 1,
April 1 and July 1 thereafter until fully vested. The consummation of the
acquisition is subject to certain customary conditions, including completion of
this Offering.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 4,600,000 shares(1)
Common Stock Offered by the Selling 267,826 shares
Stockholder.................................
Common Stock to be Outstanding after the 8,265,072 shares(2)
Offering....................................
Use of Proceeds.............................. For working capital, general
corporate purposes and the
acquisition of ABCC. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol....... VLOG
</TABLE>
- --------
(1) Does not include 730,173 shares of Common Stock that may be issued if the
Underwriters' over-allotment option is exercised in full. See
"Underwriting."
(2) Does not include (a) 1,806,404 shares subject to options outstanding under
the Company's 1996 Stock Plan as of June 30, 1998, (b) 668,904 additional
shares reserved for issuance under the Company's 1996 Stock Plan as of June
30, 1998, (c) 153,378 shares issuable upon exercise of warrants issued by
the Company in connection with a bridge financing, and (d) 1,059,303 shares
issuable upon exercise of warrants issued by the Company in connection with
a private placement of notes. See "Management--1996 Stock Plan" and
"Description of Capital Stock--Warrants."
RISK FACTORS
Investors should consider the risk factors involved in connection with an
investment in the Common Stock and the impact to investors from various events
which could adversely affect the Company's business. See "Risk Factors."
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary consolidated financial data presented below for the years ended
December 31, 1996 and 1997 are derived from the consolidated financial
statements of VIALOG Corporation, which financial statements have been audited
by KPMG Peat Marwick LLP, independent certified public accountants. The summary
consolidated financial data presented below for the six months ended June 30,
1997 and 1998 and as of June 30, 1998 are derived from the unaudited
consolidated financial statements of VIALOG Corporation. In the opinion of
management, the unaudited consolidated financial statements have been prepared
on the same basis as the audited consolidated financial statements and include
all adjustments (consisting of only normal recurring adjustments) necessary for
a fair presentation of the financial position and results of operations for
such periods. The summary consolidated financial data for the six month period
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998.
In addition, the following summary unaudited pro forma consolidated financial
data presents certain data for the Company for the year ended December 31, 1997
and the six months ended June 30, 1998 to give effect to (i) the Acquisitions
and the acquisition of ABCC on an historical basis, (ii) certain pro forma
adjustments to the historical financial statements, (iii) the consummation of
the Unit Offering (as defined in "Risk Factors") and (iv) the consummation of
this Offering. The following summary consolidated financial data should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and the notes thereto included elsewhere in this Prospectus. See also the
Unaudited Pro Forma Consolidated Financial Statements and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
PRO FORMA PRO FORMA
CONSOLIDATED CONSOLIDATED
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1996 1997 1997(1) 1997 1998 1998(1)
--------- --------- ------------ --------- --------- ----------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues............ $ -- $ 4,816 $ 41,626 $ -- $ 23,168 $ 26,759
Cost of revenues,
excluding
depreciation(2)........ -- 2,492 20,373 -- 12,134 13,315
Selling, general and
administrative
expenses(3)............ 1,308 7,178 16,490 3,530 7,942 8,693
Depreciation expense.... -- 273 2,495 3 1,235 1,309
Amortization of goodwill
and intangible
assets(4).............. -- 306 3,178 -- 1,251 1,594
Write-off of purchased
in-process research and
development............ -- 8,000 -- -- -- --
Operating income
(loss)................. (1,308) (13,433) (910) (3,533) 606 1,848
Interest expense, net... 1 (1,866) (12,744) (66) (6,154) (6,150)
Loss before income
taxes.................. (1,307) (15,299) (13,654) (3,599) (5,548) (4,302)
Net loss................ (785) (15,821) (14,176) (3,599) (5,548) (4,302)
Net loss per share -
basic and diluted...... $ (0.38) $ (5.48) $ (1.78) $ (1.30) $ (1.55) $ (0.53)
Weighted average shares
outstanding(5)......... 2,088,146 2,889,005 7,962,284 2,773,300 3,585,370 8,185,370
OTHER FINANCIAL DATA:
EBITDA(6)............... $ (1,308) $ (4,854) $ 4,763 $ (3,530) $ 3,092 $ 4,751
Cash flows provided by
(used in) operating
activities............. (178) (4,148) 5,846 (766) (2,422) (715)
Cash flows used in
investing activities... (7) (53,762) (71,723) (66) (3,206) (3,218)
Cash flows provided by
(used in) financing
activities............. 522 67,140 104,874 502 (331) (1,631)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED(8)
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 3,608 $ 3,658 $34,838
Working capital................................ 2,203 (11,977) 33,581
Total assets................................... 70,291 85,292 116,298
Total long-term debt, including current
portion(7).................................... 72,281 72,281 72,281
Stockholders' equity (deficit)................. (10,375) (10,375) 35,183
</TABLE>
- --------
(1) Computed on the basis described in Note 4 to the Unaudited Pro Forma
Consolidated Financial Statements and does not include a non-recurring
charge of $8.0 million for purchased in-process research and development
recorded in the year ended December 31, 1997. Pro forma consolidated
results for the year ended December 31, 1997 reflects certain reductions of
approximately $1.0 million in compensation and benefits for the owners and
certain key employees and consultants of the Operating Centers to specified
amounts that the individuals agreed to accept as part of the Acquisitions
for the periods subsequent to the Acquisitions and royalties under
agreements that were terminated.
(2) Certain of the Operating Centers and ABCC have entered into new contracts
for long distance telephone service. Had these contracts been in effect as
of January 1, 1997, cost of revenues for the year ended December 31, 1997
and the six months ended June 30, 1998 would have decreased by $1.6 million
and $549,000, respectively.
(3) The pro forma consolidated results for the year ended December 31, 1997
include certain one-time charges, including (i) approximately $2.2 million
(of which approximately $2.0 million was recorded by VIALOG Corporation and
$219,000 was recorded by the Operating Centers) related to an offering of
common stock which was terminated in early 1997, (ii) a $958,000 non-cash
charge related to the modification of certain stock options and (iii) a
$312,000 charge recorded by one of the Operating Centers prior to its
Acquisition, related to the write-off of a consulting agreement and an
agreement not to compete, which were determined by such Operating Center to
have no future value. The results for the six months ended June 30, 1997
include the approximately $2.0 million one-time charge recorded by VIALOG
Corporation related to an initial public offering which was terminated in
early 1997. The results for the six months ended June 30, 1998 include a
one-time charge of $508,000 for compensation and other costs related to
severance agreements for two former employees.
(4) Reflects amortization of goodwill and intangible assets recorded as a
result of the Acquisitions and the acquisition of ABCC over periods ranging
from 6 to 20 years.
(5) Pro forma weighted average shares outstanding reflect the 4,600,000 shares
to be issued in connection with this Offering as if they had been
outstanding since January 1, 1997.
(6) 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.
(7) Net of unamortized original issue discount of $3.7 million.
(8) Adjusted to give effect to the application of the estimated net proceeds of
this Offering as described under "Use of Proceeds."
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information contained in this
Prospectus, in connection with an investment in the shares of Common Stock
offered hereby.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements regarding
among other things: (i) trends affecting the Company's financial condition or
results of operations; (ii) the Company's business, operating and growth
strategies; (iii) the use of the net proceeds to the Company from this
Offering; (iv) trends in the teleconferencing and group communications
industry; (v) government regulations; and (vi) the Company's financial plans.
Prospective investors are cautioned that any forward-looking statements are
not assurances or guarantees of future performance and are subject to risks
and uncertainties and that actual results may differ materially from those
included within the forward-looking statements as a result of various factors.
Factors that could cause or contribute to such differences include, but are
not limited to, those described below, under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Prospectus.
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 effective date of the Acquisitions. Prior to that time
the Operating Centers each operated as separate, independent businesses. In
addition, the Company used the purchase method of accounting to record the
Acquisitions and consequently the pro forma and consolidated financial
information contained in this Prospectus may not be indicative of the
Company's future operating results and financial condition.
DIFFICULTY OF INTEGRATING THE OPERATING CENTERS. The successful and timely
integration of the Operating Centers is critical to the Company's future
financial performance. Prior to the Acquisitions, the Operating Centers used
different operating practices and procedures and management information
systems. Until the Company establishes centralized accounting and other
administration systems, it will rely on the separate systems of the Operating
Centers. The integration of the Operating Centers will require the Company,
among other things, to retain key employees, assimilate diverse corporate
cultures and manage geographically dispersed operations, each of which could
pose significant challenges to the Company and its management. The Company's
success will depend on the ability of its executive officers to establish and
integrate themselves into the Company's daily operations as well as to gain
the confidence of the employees of the Operating Centers. Prior to the
Acquisitions, the Operating Centers had a variety of sales strategies and
methods. The Company is presently in the process of deploying a nationwide
sales organization, which will be more costly and may prove to be ineffective
at increasing net revenues. There can be no assurance that the Company will be
successful in integrating any of the operations of the Operating Centers or,
if integrated, that such combined operations will demonstrate significant
operating efficiencies. The failure of the Company to integrate the Operating
Centers successfully could have a material adverse effect on the Company's
business, financial condition, results of operations and prospects which could
adversely impact the market for the Company's Common Stock. See "Business--
Operating Strategy" and "Business--Billing and Management Information
Systems."
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, 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. Such limitations could restrict the Company's
ability to integrate the operations of the Operating Centers successfully and
could limit the Company's ability to respond to competitive pressures on its
labor costs and materially adversely affect the Company's growth plans. See
"Certain Transactions--Organization of the Company."
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PRE-TAX LOSSES. The Oradell Center incurred a pretax loss in 1997 of
approximately $423,000 ($330,000 for the period from January 1, 1997 to the
date of the Acquisition and $93,000 from the date of the Acquisition to
December 31, 1997), excluding the non-recurring charge related to the fair
value of purchased in-process research and development. Three of the Operating
Centers--Montgomery, Oradell and Danbury--incurred pretax losses in 1996 of
approximately $311,000, $73,000 and $72,000, respectively. Montgomery and
Danbury incurred pretax losses in 1995 of approximately $371,000 and $28,000,
respectively. There can be no assurance that such Operating Centers will
achieve profitability in 1998 or thereafter. The failure of such Operating
Centers to achieve profitability will have a material adverse effect on the
Company's business, financial condition, results of operations and prospects.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
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. At June 30, 1998, the total indebtedness of the
Company was approximately $72.3 million, net of unamortized original issue
discount of $3.7 million. The Company has received a proposal for a senior
credit facility for a principal amount of up to $15.0 million (the "Senior
Credit Facility") and is pursuing additional proposals. There is no assurance
the Company will enter into such a Senior Credit Facility. To the extent that
the Company obtains and borrows under such Senior Credit Facility, its
indebtedness will increase.
On November 12, 1997, the Company sold $75.0 million in principal amount of
its 12 3/4% Senior Notes due 2001, Series A (the "Old Notes") to Jefferies &
Company, Inc. (the "Initial Purchaser") in a private placement (the "Unit
Offering") of the Old Notes and warrants (the "Warrants") to purchase an
aggregate of 756,645 shares of Common Stock. The Company also issued Warrants
to purchase an aggregate of 302,658 shares to the Initial Purchaser in
connection with the Unit Offering. The Old Notes were thereupon offered and
sold by the Initial Purchaser to certain qualified buyers with the Company
receiving an aggregate of $72.0 million. On March 26, 1998, holders of the Old
Notes exchanged all the Old Notes for $75.0 million in principal amount of the
Company's 12 3/4% Senior Notes due 2001, Series B (the "Exchange Notes")
pursuant to a Registration Statement on Form S-4 filed with the Securities and
Exchange Commission (the "Commission") on January 9, 1998 (the "Exchange
Offer"). The Old Notes and the Exchange Notes (collectively, the "Senior
Notes") were issued pursuant to the indenture (the "Indenture") dated as of
November 12, 1997 by and among VIALOG Corporation, the Operating Centers (as
subsidiary guarantors) and State Street Bank and Trust Company, as Trustee.
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 Indenture require, and covenants in any Senior Credit
Facility may require, the Company to meet certain financial tests, and other
restrictions contained in the Indenture 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 has
substantially increased 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, 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.
RESTRICTIONS IMPOSED BY LENDERS. The Indenture contains, and any Senior
Credit Facility may contain, a number of covenants that restrict the ability
of the Company to dispose of assets, merge or consolidate with another entity,
incur additional indebtedness, create liens, make capital expenditures or
other investments or
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acquisitions and otherwise restrict corporate activities. The ability of the
Company to comply with such provisions may be affected by events that are
beyond the Company's control. The breach of any of these covenants could
result in a default under the Indenture or any such Senior Credit Facility,
which would permit the holders of the Senior Notes and/or the lender under
such Senior Credit Facility to declare all amounts borrowed thereunder to be
due and payable, together with accrued and unpaid interest. If the Company
were unable to repay its indebtedness to the lender under a Senior Credit
Facility, such lender could likely proceed against any and all collateral
securing such indebtedness. In addition, as a result of these covenants, the
ability of the Company to respond to changing business and economic conditions
and to secure additional financing, if needed, may be significantly
restricted, and the Company may be prevented from engaging in transactions
that might otherwise be considered beneficial to the Company. Any of such
events could adversely impact the market for the Company's Senior Notes and
Common Stock. See "Substantial Leverage and Ability to Service Debt."
COMPETITION. The teleconferencing services industry is highly competitive
and subject to rapid change. The Company currently competes with the following
categories of companies: (i) IXCs, such as AT&T Corporation ("AT&T"), MCI
Communications Corporation ("MCI"), Sprint Corporation ("Sprint"), Frontier
Corporation ("Frontier") and Cable & Wireless, Inc. ("Cable & Wireless"), (ii)
independent LECs, such as GTE Corporation ("GTE") and Cincinnati Bell Inc.
("Cincinnati Bell"), and (iii) other private conference service bureaus
("PCSBs"). According to estimates from industry sources, the IXCs served
approximately 78% of the audio teleconferencing market in 1996. Under the
Telecommunications Act of 1996, the RBOCs will also be allowed to provide long
distance services upon the satisfaction of certain conditions, which the
Company believes will lead to their entry into the teleconferencing market. If
the Company is able to expand its video and data conferencing service
offerings, it will encounter additional competition, not only from existing
providers of audio teleconferencing, but also from competitors dedicated to
video and/or data conferencing.
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. As a result,
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.
Because Multipoint Control Units ("MCUs"), the equipment commonly used to
provide teleconferencing services, 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 could have a material adverse effect on the Company's
business, financial condition, results of operations and prospects and could
adversely impact the market for the Company's Common Stock.
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 such services internally. There can be no
assurance that the Company's current IXC and LEC customers will not begin to
provide the teleconferencing services currently provided by the Company and
pursue such market actively and in direct competition with the Company.
Moreover, the Company expects to derive a portion of its future revenues from
RBOCs that enter the long distance market and outsource their teleconferencing
services. There can be no assurance that the RBOCs will be able to enter the
long distance market on a timely basis, if at all; that any RBOC entering the
long distance market will offer teleconferencing services; or that any IXC,
LEC or RBOC offering such services will outsource services or choose the
Company as the provider of such outsourced teleconferencing services. The
failure of any such event to occur could have a material adverse effect on the
Company's business, financial condition, results of operations and prospects
and could adversely impact the market for the Company's Common Stock.
Two of the Company's largest outsourcing customers have recently agreed to
acquire or merge with competitors of the Company. Collectively, these
customers accounted for approximately 13% of the Company's
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1997 combined net revenues. Although one of these customers, representing
approximately 9% of the Company's 1997 combined net revenues, has verbally
informed the Company that it will honor its outsourcing contract with the
Company through at least August 1999, there can be no assurance that such
customer will continue to use the Company's services going forward. The
Company believes that the second customer, representing approximately 4% of
the Company's 1997 combined net revenues, will move its teleconferencing
business to a teleconferencing company it has recently acquired. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
TELECONFERENCING INSOURCING. Many of the Company's 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 own respective teleconferencing needs. Moreover,
technological improvements will further enhance the ability of these customers
to establish internal teleconferencing facilities. There can be no assurance
that any of the Company's customers will not establish internal
teleconferencing facilities or expand existing facilities, then cease to use
the Company's services. The loss of any one or more of such customers could
cause a significant and immediate decline in net revenues, which could have a
material adverse effect on the Company's business, financial condition,
results of operations and prospects and could adversely impact the market for
the Company's Common Stock. See "Business--Customers" and "Business--
Competition."
POTENTIAL ACQUISITIONS. One element of the Company's business strategy is to
acquire additional 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 acquired a 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 Company would have to pay in
connection with any future acquisitions. The Company currently has one binding
agreement to effect an acquisition and has ceased all discussions with other
potential candidates pending completion of this Offering. There can be no
assurance that the Company will be able to identify, acquire or manage
additional businesses profitably or successfully integrate acquired
businesses, if any, into the Company without substantial costs, delays or
other operational or financial problems. 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, results of
operations and prospects and could adversely impact the market for the
Company's Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Business--Growth Strategy" and "Recent Developments."
RECENT ENTRY INTO VIDEO AND DATA CONFERENCING MARKETS. The Company
introduced its video conferencing services in 1996, and to date only one of
the Operating Centers has invested in video conferencing MCUs or servers. The
Company's combined net revenues for video conferencing were approximately
$13,000 in 1996 and $282,000 in 1997. Only one of the Operating Centers
offered data conferencing services in 1997, and to date no revenues have been
generated from data conferencing services, as these services have only been
offered on a developmental, non-commercial basis. The Company has limited
capacity and experience to handle video and data conferencing. Furthermore,
few sales people, reservationists, operators and technical support people are
trained in video and data conferencing. There can be no assurance that the
Company will be able to obtain significant business from video and data
conferencing services or, if obtained, that the Company has the ability to
service such business. See "Business--The Company's Group Communications
Services."
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
teleconferences 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
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systems. The loss of such customers could have a material adverse effect on
the Company's business, financial condition, results of operations and
prospects. 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, results of operations and prospects and could adversely impact the
market for the Company's Common Stock. See "Business--Competition."
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. It has been management's experience that the costs of long
distance services have been decreasing over the past several years. If,
however, 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 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. In addition, if the Company experiences a shortfall in projected
volume, it may be required to pay a penalty under one or more of its
contracts. 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, results of operations and prospects
and could adversely impact the market for the Company's Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Suppliers."
YEAR 2000. The Company recognizes the need to ensure that its operations
will not be adversely impacted by Year 2000 software failures. Software
failures due to processing errors potentially arising from calculations using
the Year 2000 date are a known risk. 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. However, many of the Company's suppliers and customers may be
impacted by Year 2000 complications. The failure of the Company or its
suppliers and customers to ensure that their systems are Year 2000 compliant
could have a material adverse effect on the Company's business, financial
condition, results of operations and prospects and could adversely impact the
market for the Company's Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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 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 group communications
services. There can be no assurance that the FCC or other government agencies
will not seek in the future to regulate the Company as a common carrier and
regulate the prices, conditions or other aspects of the 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
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. 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
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Company's business, financial condition, results of operations and prospects
and could adversely impact the market for the Company's Common Stock.
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. See "Business--Regulation."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS. Upon completion of this
Offering, the Company's executive officers and directors, former stockholders
of the Acquired Companies, and certain stockholders with a long-standing
relationship with the Company or its management will own (i) 1,897,283 shares
of Common Stock, representing approximately 23% (21% if the Underwriters'
over-allotment option is exercised in full) of the outstanding shares of
Common Stock, (ii) an aggregate of 542,284 vested options to purchase shares
of Common Stock and (iii) an aggregate of 690,716 unvested options to purchase
shares of Common Stock, based upon beneficial ownership determined as of July
1, 1998. Accordingly, these individuals, as a group, will have the ability to
influence significantly and may be able to control all matters requiring
stockholder approval, including the election of the Directors and any
amendments to the Company's Articles of Organization and By-Laws, and to
control the business of the Company. This concentration of ownership may
enable such persons to cause or prevent a change in control of the Company
without the approval of the other stockholders of the Company, including
purchasers of Common Stock in this Offering. There can be no assurance that
this concentration of ownership will not have an adverse impact on the market
for the Common Stock. See "Principal and Selling Stockholders" and
"Description of Capital Stock."
CHANGE OF CONTROL. In the event of a Change of Control (as defined in the
Indenture and which includes the appointment, selection or election of John J.
Hassett, a principal stockholder of the Company, as a director or officer of
the Company), the Company may be required to repurchase all of the outstanding
Senior Notes at 101% of the principal amount, as the case may be, of the
Senior Notes plus any accrued and unpaid interest thereon, and Additional
Interest (as defined in the Indenture), if any, to the date of repurchase. The
exercise by the holders of the Senior Notes of their rights to require the
Company to offer to purchase Senior Notes upon a Change of Control could also
cause a default under other indebtedness of the Company, even if the Change of
Control itself does not, because of the financial effect of such repurchase on
the Company. There can be no assurance that in the event of a Change of
Control, the Company will have, or will have access to, sufficient funds, or
will be contractually permitted under the terms of outstanding indebtedness,
to pay the required purchase price for any Senior Notes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
POTENTIAL FLUCTUATION IN QUARTERLY RESULTS. Quarterly net revenues are
difficult to forecast because the market for the Company's services is
competitive and subject to variation. In addition, the consolidation of the
Operating Centers may result in unanticipated operational difficulties. The
Company's expenses are based, in part, on its expectations as to future net
revenues. If net revenues are below expectations, the Company may be unable or
unwilling to reduce expenses, and the failure to do so may have a material
adverse effect on the Company's business, financial condition, results of
operations and prospects. As a result, the Company believes that period-to-
period comparisons of its results of operations are not necessarily meaningful
and should not be relied upon as indications of future performance and could
adversely impact the market for the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
BROAD DISCRETION IN USE OF PROCEEDS. Of the approximately $45.6 million of
net proceeds to the Company from the sale of the shares of Common Stock
offered hereby (based upon an assumed initial public offering price of $11.00
per share), $31.0 million or 68% of such net proceeds ($38.5 million or 73% if
the Underwriters' over-allotment option is exercised in full) will be applied
by the Company for working capital and general corporate purposes, which may
include future acquisitions. The Company's management will have broad
discretion in the application of such net proceeds. There can be no assurance
that such net proceeds will be applied in a manner which will improve the
Company's business, financial condition, results of operations and prospects.
Furthermore, pending such application such net proceeds will be invested in
short-term, interest-bearing, investment grade securities or direct or
guaranteed obligations of the U.S. government which may provide a return on
investment which could be less than the return on investment to the Company if
such net
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proceeds were fully invested in the Company's business. Any failure to invest
such net proceeds in an effective manner could adversely impact the market for
the Company's Common Stock. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS. The initial public
offering price is substantially higher than the net tangible book value per
share of the Common Stock. Investors purchasing shares of Common Stock in this
Offering will therefore incur immediate and substantial net tangible book
value dilution, in the amount of $14.41 per share (based upon an assumed
initial public offering price of $11.00 per share). To the extent that
outstanding options to purchase shares of Common Stock are exercised, there
will be further dilution. See "Dilution."
NO PRIOR PUBLIC MARKET. Prior to this Offering, there has been no public
market for the Common Stock. Therefore, the initial public offering price of
the Common Stock offered hereby will be determined by negotiations between the
Company and the representatives of the Underwriters and may bear no
relationship to the price at which the Common Stock will trade after the
Offering. The market price of the Common Stock could be subject to wide
fluctuations in response to the announcement of operating results below those
of financial analysts' projections, changes in such projections, quarterly
variations in operating results, the emergence of new competitors,
announcements of technological innovations or new services by the Company or
its competitors, trends or changes in the group communications industry, and
other events or factors. In addition, the stock market has experienced extreme
price and volume fluctuations that have particularly affected the market
prices of many communications companies. This market volatility has had a
substantial effect on the market prices of securities issued by companies for
reasons unrelated to the operating performance of such companies. These broad
market fluctuations may have a material adverse effect on the market price of
the Common Stock. See "Underwriting."
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF
COMMON STOCK. Upon completion of this Offering, there will be 8,265,072 shares
of Common Stock outstanding (8,995,245 shares if the Underwriters' over-
allotment option is exercised in full) (assuming no exercise of options or
warrants after June 30, 1998), of which the 4,867,826 shares being sold in
this Offering (5,597,999 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable in the United States without
restriction under the Securities Act unless acquired by "affiliates" of the
Company (as defined in Rule 144 under the Securities Act). The remaining
3,397,246 shares of Common Stock outstanding are "restricted securities" (as
defined in Rule 144 and Rule 701 under the Securities Act) (the "Restricted
Shares") and may not be sold unless registered under the Securities Act or
sold pursuant to an exemption from registration thereunder, such as the
exemption provided by Rule 144. The Company, its officers, Directors and
certain stockholders (holding an aggregate of 3,283,123 shares of Common Stock
and options and warrants to acquire an aggregate of 1,417,003 shares of Common
Stock) have agreed not to, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other sale or disposition) of any shares of
Common Stock, or any other securities convertible into or exercisable or
exchangeable for any shares of Common Stock (other than pursuant to the 1996
Stock Plan), for a period of 180 days after the date of this Prospectus
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters. Prudential Securities Incorporated may, in its
sole discretion, at any time and without notice, release all or any portion of
the shares subject to such lock-up agreements. As of 180 days after the date
of this Prospectus, 3,394,746 of the Restricted Shares will be eligible for
sale in the public market pursuant to Rule 144 and Rule 701. The holders of
238,456 shares issued in connection with the Acquisitions and the principal
holders of other Restricted Shares, including the officers and Directors of
the Company, have certain demand registration rights with respect to such
shares, as well as certain piggyback registration rights with respect to such
shares. The holders of the Warrants issued as a part of the Unit Offering have
certain registration rights with respect to an aggregate of 1,059,303 shares
issuable upon exercise of the Warrants. In addition, the Company intends to
file one or more registration statements on Form S-8 with respect to 3,250,000
shares of Common Stock issued or issuable under its stock option plan. Shares
covered by any such registration statement will be eligible for sale in the
public market upon the effectiveness of such registration statement. The
market price of the Common Stock and the Company's ability to raise capital
through sales of equity securities may be adversely affected by the sale, or
availability for
16
<PAGE>
sale, of substantial amounts of Common Stock in the public market following
this Offering. See "Management--1996 Stock Plan," "Description of Capital
Stock--Warrants," "Description of Capital Stock--Certain Registration Rights"
and "Shares Eligible for Future Sale."
EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND ANTI-TAKEOVER
PROVISIONS. The Company's Articles of Organization, its By-Laws and certain
Massachusetts laws contain provisions that may discourage acquisition bids for
the Company and that may reduce temporary fluctuations in the trading price of
the Company's Common Stock which may be caused by accumulations of stock,
thereby depriving stockholders of certain opportunities to sell their stock at
temporarily higher prices. The Company's Articles of Organization provide for
a classified Board of Directors, and that Directors may be removed by the
stockholders only for cause. The Company's Articles of Organization also
permit the issuance of 10,000,000 shares of Preferred Stock without
stockholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
a majority of the outstanding stock of the Company. The Company has no present
plans to issue any shares of Preferred Stock. See "Description of Capital
Stock--Preferred Stock" and "Description of Capital Stock--Provisions of
Massachusetts Law and the Company's Articles of Organization and By-Laws."
ABSENCE OF DIVIDENDS. The Company intends to retain future earnings, if any,
for use in the development of its business and does not anticipate declaring
or paying any cash dividends on the Common Stock in the foreseeable future. In
addition, the Company is restricted from paying dividends except in certain
limited circumstances pursuant to the terms of the Indenture, and the Company
may be restricted from paying dividends pursuant to the terms of any Senior
Credit Facility the Company may obtain. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,600,000 shares of
Common Stock offered hereby, after deducting underwriting discounts and
commissions and estimated Offering expenses, are estimated to be approximately
$45.6 million ($53.0 million if the Underwriters' over-allotment option is
exercised in full). Approximately $14.6 million of the net proceeds will be
used for the acquisition of ABCC and related expenses and approximately $31.0
million for working capital and general corporate purposes ($38.5 million if
the Underwriters' over-allotment option is exercised in full), which may
include future acquisitions. Pending such uses, the net proceeds will be
invested in short-term, interest-bearing, investment grade securities or
direct or guaranteed obligations of the U.S. government.
The Company currently has a binding agreement to acquire ABCC. The purchase
price to be paid pursuant to such agreement, which will be paid out of the
proceeds of this Offering, is $14.0 million in cash plus (i) an additional
amount, based on ABCC's closing date balance sheet, equal to the balances of
cash plus accounts receivable (net of a bad debt reserve of 5%) less all
liabilities as of the closing date and (ii) approximately $100,000 related to
tax reimbursements. Based on ABCC's June 30, 1998 balance sheet, the amount of
such additional consideration would be approximately $252,000. In addition,
the Company expects to incur approximately $200,000 of acquisition costs. See
"Prospectus Summary--Recent Developments."
DIVIDEND POLICY
The Company intends to retain all of its earnings, if any, to finance its
business and for general corporate purposes, including possible future
acquisitions, and has no intention of declaring or paying any cash dividends
on its Common Stock for the foreseeable future. Any declaration or payment of
future dividends will be at the discretion of the Board of Directors and will
depend upon, among other factors, the Company's earnings, financial condition,
capital requirements, level of indebtedness, contractual restrictions with
respect to the payment of dividends and other considerations that the
Company's Board of Directors deems relevant. Pursuant to the terms of the
Indenture, the Company 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. The Company may be restricted from
paying dividends pursuant to the terms of any Senior Credit Facility which the
Company may obtain.
18
<PAGE>
CAPITALIZATION
The following table sets forth the cash, current maturities of long-term
obligations and capitalization of the Company at June 30, 1998 and as adjusted
to give effect to this Offering and the application of the estimated net
proceeds therefrom, including the acquisition of ABCC. See "Use of Proceeds."
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements and the Unaudited Pro Forma Consolidated Financial
Statements of the Company and the related notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents........................... $ 3,608 $ 34,838
=========== ===========
Current maturities of long-term debt (1)............ $ 370 $ 370
=========== ===========
Long-term debt:
Senior Notes due 2001 (2)......................... $ 71,341 $ 71,341
Other indebtedness (1)............................ 570 570
----------- -----------
Total long term debt............................ 71,911 71,911
----------- -----------
Stockholders' equity (deficit):
Common stock...................................... 37 83
Additional paid-in capital........................ 11,742 57,254
Accumulated deficit............................... (22,154) (22,154)
----------- -----------
Total stockholders' equity (deficit)............ (10,375) 35,183
----------- -----------
Total capitalization............................ $ 61,536 $ 107,094
=========== ===========
</TABLE>
- --------
(1) Primarily represents capitalized lease obligations with varying terms and
conditions.
(2) Net of unamortized original issue discount of $3.7 million.
19
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the net tangible book value of the Common Stock
from the initial public offering price. The deficit in net tangible book value
of the Company as of June 30, 1998 was approximately $60.2 million or
approximately $16.43 per share of Common Stock. The deficit in net tangible
book value per share represents the amount by which the Company's total
liabilities exceed the Company's net tangible assets divided by the number of
outstanding shares of Common Stock. After giving effect to the sale of the
4,600,000 shares of Common Stock offered by the Company at an assumed initial
public offering price of $11.00 per share, and after deducting underwriting
discounts and commissions and estimated Offering expenses payable by the
Company as well as the acquisition of ABCC, the Company's pro forma deficit in
net tangible book value at June 30, 1998 would have been approximately $28.2
million or approximately $3.41 per share. This represents an immediate
increase in net tangible book value of approximately $13.02 per share to
existing stockholders and an immediate dilution of approximately $14.41 per
share to new investors purchasing the shares in this Offering. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price..................... $11.00
Deficit in net tangible book value before the Offering.. $(16.43)
Increase in net tangible book value attributable to new
investors.............................................. $ 13.02
-------
Pro forma deficit in net tangible book value after the
Offering................................................. $(3.41)
------
Dilution to new investors................................. $14.41
======
</TABLE>
The following table sets forth as of June 30, 1998 the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by existing stockholders and the new investors
purchasing shares of Common Stock from the Company in this Offering (before
deducting underwriting discounts and commissions and estimated Offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER(1) PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 3,665,072 44.3% $ 4,551,000 8.3% $ 1.24
New investors................... 4,600,000 55.7% 50,600,000 91.7% 11.00
--------- ----- ----------- ----- ------
Total........................... 8,265,072 100.0% $55,151,000 100.0% $ 6.67
========= ===== =========== ===== ======
</TABLE>
- --------
(1) The number of shares disclosed for the existing stockholders includes
267,826 shares being sold by the Selling Stockholder in the Offering. The
number of shares disclosed for the new investors does not include the
267,826 shares being purchased by the new investors from the Selling
Stockholder.
20
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1996 and 1997
and for the years then ended are derived from the consolidated financial
statements of VIALOG Corporation, which financial statements have been audited
by KPMG Peat Marwick LLP, independent certified public accountants. The
selected financial data presented below for the six months ended June 30, 1997
and 1998 and as of June 30, 1998 are derived from the unaudited consolidated
financial statements of VIALOG Corporation. In the opinion of management, the
unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for such
periods. The selected financial data for the six month period ended June 30,
1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998.
In addition, the following selected unaudited pro forma financial data
presents certain data for the Company for the year ended December 31, 1997 and
the six months ended June 30, 1998 to give effect to (i) the Acquisitions and
the acquisition of ABCC on an historical basis, (ii) certain pro forma
adjustments to the historical financial statements (iii) the consummation of
the Unit Offering and (iv) the consummation of this Offering. The following
selected financial data should be read in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and the notes thereto included elsewhere
in this Prospectus. See also the Unaudited Pro Forma Consolidated Financial
Statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA CONSOLIDATED
YEAR ENDED CONSOLIDATED SIX MONTHS ENDED SIX MONTHS
DECEMBER 31, YEAR ENDED JUNE 30, ENDED
-------------------- DECEMBER 31, -------------------- JUNE 30,
1996 1997 1997(1) 1997 1998 1998(1)
--------- --------- ------------ --------- --------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues............ $ -- $ 4,816 $ 41,626 $ -- $ 23,168 $ 26,759
Cost of revenues,
excluding
depreciation(2)........ -- 2,492 20,373 -- 12,134 13,315
Selling, general and
administrative
expenses(3)............ 1,308 7,178 16,490 3,530 7,942 8,693
Depreciation expense.... -- 273 2,495 3 1,235 1,309
Amortization of goodwill
and intangible
assets(4).............. -- 306 3,178 -- 1,251 1,594
Write-off of purchased
in-process research
and development........ -- 8,000 -- -- -- --
--------- --------- --------- --------- --------- ---------
Operating income
(loss)................. (1,308) (13,433) (910) (3,533) 606 1,848
Interest expense, net... 1 (1,866) (12,744) (66) (6,154) (6,150)
--------- --------- --------- --------- --------- ---------
Loss before income
taxes.................. (1,307) (15,299) (13,654) (3,599) (5,548) (4,302)
Income tax expense
(benefit).............. (522) 522 522 -- -- --
--------- --------- --------- --------- --------- ---------
Net loss................ $ (785) $ (15,821) $ (14,176) $ (3,599) $ (5,548) $ (4,302)
========= ========= ========= ========= ========= =========
Net loss per share -
basic and diluted...... $ (0.38) $ (5.48) $ (1.78) $ (1.30) $ (1.55) $ (0.53)
========= ========= ========= ========= ========= =========
Weighted average shares
outstanding(5)......... 2,088,146 2,889,005 7,962,284 2,773,300 3,585,370 8,185,370
========= ========= ========= ========= ========= =========
OTHER FINANCIAL DATA:
EBITDA(6)............... $ (1,308) $ (4,854) $ 4,763 $ (3,530) $ 3,092 $ 4,751
Cash flows provided by
(used in)
operating activities... (178) (4,148) 5,846 (766) (2,422) (715)
Cash flows used in
investing activities... (7) (53,762) (71,723) (66) (3,206) (3,218)
Cash flows provided by
(used in)
financing activities... 522 67,140 104,874 502 (331) (1,631)
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1998
--------------- -------------------------------
PRO FORMA
AS
1996 1997 ACTUAL PRO FORMA ADJUSTED(8)
------ ------- ------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents.... $ 337 $ 9,567 $ 3,608 $ 3,658 $ 34,838
Working capital (deficit) ... (249) 7,259 2,203 (11,977) 33,581
Total assets................. 1,263 75,083 70,291 85,292 116,298
Total long-term debt,
including current
portion(7).................. -- 71,936 72,281 72,281 72,281
Stockholders' equity
(deficit)................... 287 (4,882) (10,375) (10,375) 35,183
</TABLE>
- --------
(1) Computed on the basis described in Note 4 to the Unaudited Pro Forma
Consolidated Financial Statements and does not include a non-recurring
charge of $8.0 million for purchased in-process research and development
recorded in the year ended December 31, 1997. Pro forma consolidated
results for the year ended December 31, 1997 reflects certain reductions
of approximately $1.0 million in compensation and benefits for the owners
and certain key employees and consultants of the Operating Centers to
specified amounts that the individuals agreed to accept subsequent to the
Acquisitions and royalties under agreements that were terminated.
(2) Certain of the Operating Centers and ABCC have entered into new contracts
for long distance telephone service. Had these contracts been in effect as
of January 1, 1997, cost of revenues for the year ended December 31, 1997
and the six months ended June 30, 1998 would have decreased by $1.6
million and $549,000, respectively.
(3) The pro forma consolidated results for the year ended December 31, 1997
include certain one-time charges, including (i) approximately $2.2 million
(of which approximately $2.0 million was recorded by VIALOG Corporation
and $219,000 was recorded by the Operating Centers) related to an offering
of common stock which was terminated in early 1997, (ii) a $958,000 non-
cash charge related to the modification of certain stock options and (iii)
a $312,000 charge recorded by one of the Operating Centers prior to the
Acquisition, related to the write-off of a consulting agreement and an
agreement not to compete, which were determined by such Operating Center
to have no future value. The results for the six months ended June 30,
1997 include the approximately $2.0 million one-time charge recorded by
VIALOG Corporation related to an initial public offering which was
terminated in early 1997. The results for the six months ended June 30,
1998 include a one-time charge of $508,000 for compensation and other
costs related to severance agreements for two former employees.
(4) Reflects amortization of goodwill and intangible assets recorded as a
result of the Acquisitions and the acquisition of ABCC over periods
ranging from 6 to 20 years.
(5) Pro forma weighted average shares outstanding reflect the 4,600,000 shares
to be issued in connection with this Offering as if they had been
outstanding since January 1, 1997.
(6) 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.
(7) Net of unamortized original issue discount of $4.2 million and $3.7
million at December 31, 1997 and June 30, 1998, respectively.
(8) Adjusted to give effect to the application of the estimated net proceeds
of this Offering as described under "Use of Proceeds."
22
<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 Operating Centers,
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 Prospectus. 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>
23
<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 op-
erating activities....... (241) 53 721 2,128 2,897
Cash flows used in invest-
ing 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 equiva-
lents.................... $ 20 $ 23 $ 375 $ 318
Working capital (defi-
cit)..................... (681) (805) (322) 445
Total assets.............. 591 1,378 2,037 2,293
Total long-term debt, in-
cluding current portion.. 867 1,590 1,446 1,405
Stockholders' equity (def-
icit).................... (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.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Prospectus contains forward-looking statements. The words "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "will," "could,"
"may" and similar expressions are intended to identify forward-looking
statements. These statements include information regarding future net cash
flows. Such statements reflect the Company's current views with respect to
future events and financial performance and involves certain risks and
uncertainties, including without limitation the risks described in "Risk
Factors." Should one or more of these risks or uncertainties occur, or should
underlying assumptions prove incorrect, actual results may vary materially and
adversely from those anticipated, believed, estimated or otherwise indicated.
VIALOG Corporation was founded on January 1, 1996. On November 12, 1997,
VIALOG Corporation consummated the Acquisitions, and the Operating Centers
became wholly-owned subsidiaries of VIALOG Corporation. Contemporaneously with
the closing of the Acquisitions, VIALOG Corporation closed the Unit Offering.
Simultaneously with the closing of this Offering, VIALOG Corporation will
acquire all of the outstanding capital stock of ABCC. The following discussion
should be read in conjunction with the consolidated financial statements and
related notes thereto for the years ended December 31, 1996 and 1997, the
financial statements and related notes thereto of the Operating Centers prior
to the Acquisitions for the years ended December 31, 1994, 1995 and 1996, the
financial statements and related notes thereto of ABCC for the years ended
December 31, 1996 and 1997 and "Selected Financial Data" appearing elsewhere
in this Prospectus.
INTRODUCTION
The Company's net revenues are derived primarily from fees charged to
customers for audio teleconferencing services as well as video conferencing
and enhanced and customized communication services. Cost of revenues consists
primarily of long distance telephone and network charges, salaries and
benefits for operators, and depreciation and maintenance of telephone bridging
equipment. Selling, general and administrative expenses consist primarily of
compensation and benefits to sales and marketing personnel, executive officers
and general and administrative employees, marketing expenses, occupancy costs
and professional fees.
Prior to the Acquisitions, the Operating Centers were 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 of the Operating Centers agreed to reductions in their
compensation and benefits in connection with the Acquisitions. The difference
between the historical compensation and benefits of such individuals and the
compensation and benefits they 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 Unaudited Pro Forma Consolidated Statement of Operations.
The Company, which has only conducted operations since November 12, 1997
(other than in connection with certain financing transactions, the issuance of
the Senior Notes and the Acquisitions), has integrated several of its
operations, including sales, marketing, and most human resource, benefits
administration and cash management functions, and intends to continue to
integrate certain operations and administrative functions of the Operating
Centers over a period of time. Specifically, over the next 6 to 12 months, the
Company plans to integrate the reservations, billing, purchasing, management
information systems and accounting functions. The Company estimates that the
cost to integrate these activities will be between $1.0 million and $1.5
million. This integration process is expected to 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 Operating Centers
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.
25
<PAGE>
VIALOG CORPORATION
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
VIALOG Corporation was incorporated on January 1, 1996. Prior to the
Acquisitions of the Operating Centers, VIALOG Corporation 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.
Net revenues and cost of revenues. As VIALOG Corporation did not conduct any
operations prior to November 12, 1997, there were no revenues and cost of
revenues for the six months ended June 30, 1997. Net revenues and cost of
revenues for the six months ended June 30, 1998 represent the consolidated
results of the Company, including the Operating Centers.
Two of the Company's largest outsourcing customers have recently agreed to
acquire or merge with competitors of the Company. Collectively, these
customers accounted for approximately 13% of the Company's 1997 combined net
revenues. One of these customers, representing approximately 9% of the
Company's 1997 combined net revenues, has verbally informed the Company that
it will honor its oursourcing contract with the Company through at least
August 1999. The Company believes that the second customer, representing
approximately 4% of the Company's 1997 combined net revenues, will move its
teleconferencing business during the second half of 1998 to a teleconferencing
company it has recently acquired. Although a significant reduction in or loss
of net revenues from these customers could reduce the Company's expected net
revenues and operating results in the near term, the Company believes that the
long-term impact to net revenues and results of operations will not be
significant.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $4.4 million, or 125%, from $3.5 million to
$7.9 million for the six months ended June 30, 1997 and 1998, respectively.
The increase was primarily due to the fact that selling, general and
administrative expenses for the six months ended June 30, 1997 represented
only general and administrative expenses related to the organization of VIALOG
Corporation and the consummation of business combination agreements with the
Operating Centers, while the expenses for the six months ended June 30, 1998
represent consolidated selling, general and administrative expenses of the
Company, including the Operating Centers. Selling, general and administrative
expenses for the six months ended June 30, 1997 and 1998 consisted primarily
of the following: (i) compensation, benefits and travel expenses of $779,000
and $5.0 million, respectively, (ii) certain marketing expenses, including
advertising, promotions, trade shows and consulting, of $237,000 and $1.0
million, respectively, (iii) professional services expenses of $2.4 million
and $602,000, respectively, (iv) occupancy costs of $96,000 and $360,000,
respectively, (v) materials, supplies and equipment related costs of $26,000
and $378,000, respectively, (vi) taxes and insurance costs of $0 and $254,000,
respectively, and (vii) all other costs of $19,000 and $371,000, respectively.
Included in professional services expenses for the six months ended June 30,
1997 is approximately $2.0 million related to an initial public offering which
was terminated in early 1997. Included in selling, general and administrative
expenses for the six months ended June 30, 1998 is approximately $508,000 for
compensation and legal expenses related to severance agreements for two former
employees.
Depreciation and amortization expense. Depreciation expense increased $1.2
million from $3,000 to $1.2 million for the six months ended June 30, 1997 and
1998, respectively. The increase was primarily due to the fact that VIALOG
Corporation did not conduct operations during the six months ended June 30,
1997, while depreciation expense for the six months ended June 30, 1998
represents consolidated depreciation expense of the Company, including the
Operating Centers.
Interest expense, net. Interest expense, net increased $6.1 million for the
six months ended June 30, 1998 compared to the six months ended June 30, 1997.
The increase was primarily due to (i) approximately $4.8 million of interest
expense on the $75.0 million of Senior Notes and (ii) approximately $1.5
million of non-cash interest expense related to the amortization of deferred
debt issuance costs and original issue discount on the Senior Notes, both of
which were partially offset by increased interest income of approximately
$182,000 due to increased cash balances.
26
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
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 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
VIALOG Corporation generated negative cash flows from operating activities
of $178,000, $4.1 million and $2.4 million for the years ended December 31,
1996 and 1997 and the six months ended June 30, 1998, respectively. Cash flows
used in investing activities of $7,000, $53.8 million and $3.2 million for the
years ended December 31, 1996 and 1997 and the six months ended June 30, 1998,
respectively, represent cash paid in connection with the Acquisitions of $0,
$53.3 million and $0, respectively, purchases of property and equipment of
$7,000, $454,000 and $3.1 million, respectively, and $119,000 related to
deferred acquisition costs for the six months ended June 30, 1998. Cash
provided by financing activities of $522,000 and $67.1 million for the years
ended December 31, 1996 and 1997, respectively, represents issuance of long-
term debt and common stock,
27
<PAGE>
offset by payments of previously issued debt and payments of indebtedness of
the Operating Centers. Cash used in financing activities of $331,000 for the
six months ended June 30, 1998 represents payments of indebtedness of the
Operating Centers and deferred costs relating to this Offering, offset by
proceeds from the exercise of stock options.
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 will be guaranteed by ABCC after it is acquired by VIALOG
Corporation) 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 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, proceeds from this Offering, and future
issuances of debt and/or equity securities. However, no assurances can be
given that such funds will be available when required or on terms favorable to
the Company.
In May, 1998, the Company signed a definitive merger agreement to acquire
all of the outstanding capital stock of ABCC, simultaneously with the closing
of this Offering. The acquisition will be accounted for using the purchase
method of accounting. The total purchase price is $14.0 million in cash plus
(i) an additional amount, based on ABCC's closing date balance sheet, equal to
the balances of cash plus accounts receivable (net of a bad debt reserve of
5%) less all liabilities as of the closing date and (ii) approximately
$100,000 related to tax reimbursements. Based on ABCC's June 30, 1998 balance
sheet, the amount of such additional consideration would be approximately
$252,000. In addition, the Company expects to incur approximately $200,000 of
acquisition costs.
The 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, including the proceeds from this Offering, 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
28
<PAGE>
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 had a stockholders' deficit at June 30,
1998. This indebtedness requires the Company to dedicate a significant portion
of its cash flow from operations to service its indebtedness and makes the
Company more vulnerable to unfavorable changes in general economic conditions.
The Company is aware of the issues associated with the programming code in
existing computer systems as the 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 its systems for Year 2000 compliance. The
Company has performed a preliminary review of its existing computer programs
to address the Year 2000 issue. Based on the preliminary review, the Company
believes that the Year 2000 issue will not have a significant impact on the
operations or the financial results of the Company. The internally developed
computer programs used in the operations of the Company that are expected to
be used beyond the year 1999 are Year 2000 compliant. Additionally, as part of
the integration of the Operating Centers, the Company will be implementing
common systems in both the operations and financial management areas of the
Company within the next two years. The systems implemented or upgraded will
all be Year 2000 compliant, one of the criteria of the systems integration
plan. The Company will continue to assess the impact of the Year 2000 issue as
a part of the systems integration plan. The Company is in the process of
contacting all of its software and hardware suppliers with regard to their
respective Year 2000 compliant programs.
COMBINED OPERATING CENTERS, ABCC AND VIALOG CORPORATION
The combined Operating Centers', ABCC's and VIALOG Corporation's Statements
of Operations data for the years ended December 31, 1995, 1996 and 1997 and
the six months ended June 30, 1997 and 1998 do not purport to present the
financial results or the financial condition of the combined Operating
Centers, ABCC 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 Operating Centers, ABCC 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 Operating Centers and ABCC were not under
common control or management.
RESULTS OF OPERATIONS--COMBINED OPERATING CENTERS, ABCC AND VIALOG CORPORATION
The following unaudited combined data for the years ended December 31, 1995,
1996 and 1997 and for the six months ended June 30, 1997 and 1998 of the
Operating Centers, ABCC 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, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
-------------- -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $26,717 100.0% $34,310 100.0% $41,626 100.0% $20,219 100.0% $26,759 100.0%
Cost of revenues,
excluding
depreciation........... 13,648 51.1% 16,507 48.1% 20,373 48.9% 9,515 47.1% 13,315 50.0%
</TABLE>
29
<PAGE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net revenues. All Operating Centers and ABCC reflected an increase in net
revenues for the six months ended June 30, 1998 compared to the six months
ended June 30, 1997. Net revenues increased $6.5 million, or 32.3%, from net
revenues of $20.2 million in 1997 to net revenues of $26.8 million in 1998.
Overall, the increase was primarily due to increased call volumes for audio
and video conferencing services. The major components of this increase were
(i) an increase in the Reston Center's net revenues of $2.7 million, or 43.7%,
from $6.1 million for the six months ended June 30, 1997 to $8.8 million for
the six months ended June 30, 1998, which consisted of increased sales of
teleconferencing services of approximately $1.3 million and $1.4 million to
existing and new customers, respectively, including the introduction of video
equipment sales in the first quarter of 1998, (ii) an increase in the
Cambridge Center's net revenues of $866,000, or 44.5%, which was primarily
attributable to increased audio teleconferencing services to existing
customers and new customers, (iii) an increase in the Atlanta Center's net
revenues of $930,000, or 28.8%, which was primarily due to increased revenues
from two significant customers, which represented 71.7% and 71.5% of the
Atlanta Center's net revenues for the six months ended June 30, 1997 and 1998,
respectively, and (iv) an increase in the Montgomery Center's net revenues of
$715,000, or 17.6%, which was primarily due to increased revenues for audio
teleconferencing services to existing retail and financial services customers.
Cost of revenues, excluding depreciation. Cost of revenues for the six
months ended June 30, 1998 increased $3.8 million, or 39.9%, from cost of
revenues for the six months ended June 30, 1997, and increased as a percentage
of revenue from 47.1% to 50.0% for the six months ended June 30, 1997 and
1998, respectively. The dollar increase was primarily attributable to (i) an
increase in the Reston Center's cost of revenues of $1.4 million, or 54.7%,
resulting from increased telecommunications and personnel and related costs
associated with increased call volumes, and equipment costs related to the
introduction of video equipment sales in the first quarter of 1998 (which
generate a lower gross margin than teleconferencing services), (ii) an
increase in the Atlanta Center's cost of revenues of $629,000, or 56.1%,
resulting from increased telecommunications costs associated with increased
call volumes as well as increased operating costs due to increased staffing to
support current and projected revenue growth, (iii) an increase in the
Montgomery Center's cost of revenues of $552,000, or 19.9%, resulting
primarily from increased telecommunications costs associated with increased
call volumes and (iv) an increase in the Cambridge Center's cost of revenues
of $533,000, or 56.5%, resulting from increased telecommunications costs
associated with increased call volumes as well as increased operating costs
due to increased staffing to support current and projected revenue growth. The
increase as a percentage of revenues was primarily attributable to (a) a
change at the Reston Center in the utilization of certain personnel from
providing sales support activities during the start-up phase of video
conferencing, the related cost of which was included in selling, general and
administrative expenses during the six months ended June 30, 1997, to being
involved directly in the providing of video conferencing services during the
six months ended June 30, 1998, the related cost of which was included in cost
of revenues, (b) additional labor and related expenses associated with the
integration of the Operating Centers and temporary accelerated hiring and
training due to anticipated increases in call volumes, (c) a modest net
decrease in the average price per conferencing minute for similar types of
conferencing services, which resulted in a net decrease to net revenues of
approximately $716,000 based on taking the respective call volumes for the six
months ended June 30, 1998 at the average prices during the six months ended
June 30, 1997 for similar services and (d) additional long distance charges
associated with new Federal Communications Commission fees.
Certain of the Operating Centers and ABCC have entered into new contracts
for long distance telephone service. Had these contracts been in effect as of
January 1, 1998, cost of revenues for the six months ended June 30, 1998 would
have decreased by approximately $549,000.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net revenues. All Operating Centers and ABCC reflected an increase in net
revenues during the year ended December 31, 1997 compared to the year ended
December 31, 1996. Net revenues increased $7.3 million, or 21.3%, from $34.3
million in 1996 to $41.6 million in 1997. Overall, the increase was primarily
due to
30
<PAGE>
increased call volumes for audio conferencing services. The major components
of this increase were (i) an increase in the Reston's Center's 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 the Montgomery Center's 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
new customers and (iii) an increase in the Cambridge Center'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 the Cambridge Center's net
revenues for 1996 included $707,000 of net revenues from a portion of the
Cambridge Center's business that was divested in December 1996.
Cost of revenues, excluding depreciation. Cost of revenues increased $3.9
million, or 23.4%, from $16.5 million in 1996 to $20.4 million in 1997 and
increased slightly as a percentage of net revenues from 48.1% in 1996 to 48.9%
in 1997. The dollar increase was primarily attributable to (i) an increase in
the Reston Center's cost of revenues 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 the Oradell Center's cost of revenues 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 the Montgomery Center's cost
of revenues 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 Operating Centers and ABCC reflected an increase in net
revenues during 1996. Net revenues increased by $7.6 million, or 28.4%, from
$26.7 million in 1995 to $34.3 million in 1996. Overall, the increase was
primarily due to increased call volume for audio conferencing service
experienced by all Operating Centers. The major components of this increase
were (i) an increase in the Reston Center's 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 the Atlanta Center'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 the Cambridge Center'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 new customers.
Cost of revenues, excluding depreciation. Cost of revenues increased by $2.9
million, or 21.0%, from $13.6 million in 1995 to $16.5 million in 1996 and
decreased as a percentage of net revenues from 51.1% in 1995 to 48.1% in 1996.
The dollar increase in cost of revenues was primarily attributable to (i) an
increase in the Atlanta Center's cost of revenues 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 the Reston
Center's cost of revenues 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 the Cambridge
Center's cost of revenues 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 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
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<PAGE>
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 the
provisions of SFAS 128.
In 1998, the Company adopted SFAS No. 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. The adoption of SFAS 130 did
not have a material impact on the Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 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.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for
internal use, and is effective for fiscal years beginning after December 31,
1998, with earlier application encouraged. The adoption of SOP 98-1 is not
expected to have a material effect on the Company's financial statements.
ACCESS AND CSI
The selected historical financial information presented in the tables below
for the selected Operating Centers is derived from, and should be read in
conjunction with, the respective audited financial statements and related
notes thereto of the individual Operating Centers 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 Operating Centers 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
Operating Centers on a combined basis for the period from January 1, 1997 to
November 12, 1997. The selected historical financial information for all
Operating Centers on a combined basis, ABCC 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% 2,706 167.0 %
Depreciation and
amortization expense... 269 5.2% 496 7.6% 630 6.9% 823 7.5% 80 4.9 %
------ ------ ------ ------ ------ ------ ------- ----- ------- ------
Operating income
(loss)................. $ 546 10.7% $ 507 7.8% $1,547 17.1% $ 1,207 11.0% $(1,875) (115.7)%
====== ====== ====== ====== ====== ====== ======= ===== ======= ======
</TABLE>
32
<PAGE>
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.
Cost of revenues, excluding depreciation. Cost of revenues 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 $2.7 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
$80,000 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 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
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
33
<PAGE>
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 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 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 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>
34
<PAGE>
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.
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% 3,601 421.7 %
Depreciation and amorti-
zation
expense................ 235 10.1% 292 7.6% 393 6.7% 356 6.4% 60 7.0 %
------ ----- ------ ----- ------ ----- ------ ----- ------- ------
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. See discussion regarding these two customers under "VIALOG
Corporation--Results of Operations--Three Months Ended March 31, 1998 Compared
to Three Months Ended March 31, 1997" above.
Cost of revenues, excluding depreciation. Cost of revenues 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 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 $3.6
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 expense increased from
$393,000 for the year ended December 31, 1996 to $356,000 and $60,000 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.
35
<PAGE>
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.
Cost of revenues, excluding depreciation. Cost of revenues 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 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 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 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>
36
<PAGE>
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 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.
37
<PAGE>
INDUSTRY OVERVIEW
SERVICES
The teleconferencing industry, which includes audio, video and data
conferencing, provides a range of services to facilitate multiparty
communications with participants in different locations. Through
teleconferencing services, customers conduct routine meetings, run training
sessions and share information when face-to-face meetings would be 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.
Audio teleconferencing.
Audio teleconferencing connects multiple parties on a single telephone call
through specialized telephone equipment known as a "bridge." Multipoint
Control Units ("MCUs") offer the most advanced bridge technology, although
calls involving a small number of parties can be established through a PBX or
on the network switch of an IXC. Using MCU technology, the maximum number of
participants is only limited by the number of conference "ports" available to
the teleconferencing service provider. Calls may be established manually by an
operator who places the calls to or receives calls from conference
participants, with each access line occupying a single port. 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. The Company believes that
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 Company believes that 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 cost, and increase communication with parties with whom they would
otherwise not meet, thereby yielding greater organizational productivity. The
Company believes that 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. Industry sources project compound annual
growth in audio teleconferencing services revenues of 23% between 1998 and
2003, from $723 million to $2 billion.
Video Conferencing.
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 conferencing as a meeting
tool has historically been constrained by several factors, including limited
access to video sites, expensive and proprietary equipment, limited and costly
network facilities, incompatibility of systems and poor video quality. Video
conferencing was also generally limited to small or broadcast meetings at
fixed locations, except when implemented using expensive two-way satellite
technology.
The adoption of industry standards, technological advances (which have
brought down the cost of equipment and required bandwidth) and increased
processing speed (which has improved quality) have all contributed to the
development of desktop video conferencing applications. Interactive multipoint
video conferencing 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
38
<PAGE>
the growth of the market for multipoint video conferencing. Industry sources
estimate that video conferencing services revenues will grow at a compound
rate of 27% between 1998 and 2003, from $240 million to $779 million.
Data conferencing.
Data conferencing, 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 industry standards for multimedia
conferencing and new Internet "groupware" services and software are expected
to facilitate greater adoption of data conferencing. Such standards allow data
to travel over data networks on an interactive basis so that multiple remote
computers can manipulate the same program, and enable participants to share
computer data during a conference call. 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 the Internet data conferencing programs will likely be used in
conjunction with audio teleconferencing to allow simultaneous group
discussions during editing and display of documents. In addition, several
manufacturers have introduced specialized application servers that provide
mixed media conferencing. 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 group
communications industry: (i) IXCs, such as AT&T, MCI, Sprint, Frontier and
Cable & Wireless, (ii) PCSBs, a group of over 25 companies (excluding the
Company), and (iii) independent LECs, such as GTE and Cincinnati Bell. In
addition, under the terms of the Telecommunications Act of 1996, the RBOCs may
be allowed to provide long distance services, which the Company believes may
lead to their entry into the teleconferencing market. See "Business--
Regulation."
According to industry sources, the IXCs are currently the largest providers
of teleconferencing services, constituting approximately 78% of the audio
teleconferencing services revenue 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 Company believes that the IXCs have generally
not emphasized enhanced services and customized communications solutions to
meet individual customer needs, preferring instead to implement automated
systems and technology as a substitute for traditional operator-intensive
services in order to reduce labor costs.
The second category of providers of group communications services are the
PCSBs. There are approximately 25 PCSBs, excluding the Company. PCSBs emerged
in 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
conferencing services, the Company believes that the ability to secure
necessary capital has become more critical for PCSBs. Additionally, the
Company believes that 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 teleconferencing services are the
independent LECs. Similar to the IXCs, the Company believes the LECs have
generally not included teleconferencing, enhanced services or customized
communications solutions in their core service offerings.
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,
39
<PAGE>
which drastically limited their teleconferencing potential. Under the
Telecommunications Act of 1996, the RBOCs may 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
could be enhanced by such RBOC's 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 potential new entrants will elect to
outsource teleconferencing services and focus on entering the long distance
market, based primarily on requests for proposals to provide teleconferencing
services it has received from three RBOCs to date, as well as the amount of
outsourcing of teleconferencing by certain of the LECs in the long distance
market.
40
<PAGE>
BUSINESS
GENERAL
VIALOG is a leading independent provider of teleconferencing and other group
communications services, consisting primarily of operator-attended and
operator-on-demand audio teleconferencing, as well as video and data
conferencing services. The Company believes it is the largest company focused
solely on teleconferencing and other group communications services, with six
Operating Centers, approximately 7,326 ports of teleconferencing capability
(one "port" is required for each participating telephone line), state-of-the-
art digital conferencing technology and a national sales force, which is
expected to be fully deployed by the end of 1998. The Company believes it
differentiates itself from its competitors by providing superior customer
service and an extensive range of enhanced and customized communication
solutions. The Company has capitalized on the growth in the teleconferencing
services market to build a large, stable client base ranging from Fortune 500
companies to small institutions. Customers also include certain major long
distance telecommunications providers which have outsourced their
teleconferencing services to the Company. The Company provided services to
more than 5,000 customers representing over 30,000 accounts during the twelve
months ended June 30, 1998.
Operator-attended audio teleconferencing is the cornerstone of VIALOG's
business, and the Company believes it to be the principal service which builds
customer loyalty. The Company also offers operator-on-demand audio
teleconferencing as well as enhanced services such as digital replay,
broadcast fax and follow-up mailings. VIALOG also offers customized
communications solutions, which include teleconference event planning and
coaching, as well as customized formats, which include auctions, investor
relations and automated testing programs. The Company has designed its service
delivery infrastructure to be flexible so that comprehensive, custom solutions
for each customer may be easily designed and implemented.
The industry in which the Company operates has been experiencing significant
growth. See "Industry Overview." The Company intends to capitalize on this
strong industry growth, as it deploys a coordinated national marketing,
branding and sales program. In addition to internal growth generated by strong
industry fundamentals and the Company's enhanced marketing capabilities, the
Company intends to continue to increase its wholesale, or outsourcing,
business. Management believes that the broad trend among the IXCs, LECs and
RBOCs to outsource labor-intensive activities such as teleconferencing will
lead to new outsourcing contracts, particularly as RBOCs and LECs become
approved to provide long distance service. Further, the Company intends to
augment its internal growth through selective acquisitions in the
teleconferencing industry to leverage the inherent economies of scale and
build upon the Company's position as the largest company in the industry
focused solely on teleconferencing and other group communications services.
OPERATING STRATEGY
The Company provides a full array of group communications services through
its six Operating Centers, all of which were acquired by the Company in
November 1997. The basic goals of the Company's operating strategy consist of
the following:
Focus exclusively on teleconferencing and other group communications
services. VIALOG believes that it is the largest and most geographically
diverse company focused solely on teleconferencing and other group
communications services. The Company's largest competitors are long distance
service providers for which teleconferencing represents only a small fraction
of their total revenues. The Company believes that its dedicated focus on
teleconferencing enables it to respond to the needs of its customers better
than competitors which do not focus on teleconferencing as a core business
activity.
Deliver a broad range of services. VIALOG believes that it offers the most
comprehensive selection of audio, video and data conferencing services among
the independent teleconferencing service providers, providing the Company with
significant marketing advantages. The Company believes that it can leverage
the diverse
41
<PAGE>
service capabilities and industry expertise of individual operating centers to
provide the features and pricing options to meet a wide variety of customer
needs. The Company intends to remain at the forefront of the group
communications industry by continuing to augment its existing service
offerings through the development and introduction of additional enhanced
services and customized communications solutions.
Maximize operational synergies. VIALOG is capitalizing on the benefits of
increased size, product range and diverse customer base afforded to it by the
acquisition of the six Operating Centers. Since November 1997, VIALOG has
centralized several of its operations, including sales, marketing, and most
human resource, benefits administration and cash management functions. The
combination of the Operating Centers has enabled the Company to improve
operations by (i) allowing it to handle calls involving a larger number of
participants than any of its Operating Centers had been able to handle
individually and (ii) increasing network efficiency by allocating port
capacity among the Operating Centers according to need, time of day,
personnel, type of service and other factors. The Company plans to centralize
additional support activities, including reservations, billing, purchasing,
management information systems and accounting, within the next 6 to 12 months
in order to standardize its services, improve customer service and reduce
operating expenses. Furthermore, the Company believes that its increased size
has resulted in stronger bargaining power in areas such as long distance
telecommunications, equipment, employee benefits and marketing.
Retain customers and stimulate usage. Through the implementation of new
focused selling strategies and cross-selling programs, the Company intends to
expand sales to its diverse base of customers, which numbered more than 5,000
during the twelve months ended June 30, 1998. The Company believes that
customer loyalty for its services is fostered by its emphasis on customer
service and ability to design custom solutions. In addition, VIALOG is
developing a comprehensive marketing database to monitor account behavior and,
based on changes in behavior, trigger appropriate marketing and sales
responses to increase customer satisfaction, increase customer usage and
maintain customer relationships.
GROWTH STRATEGY
The Company's objective is to build upon its position as a leading
independent provider of teleconferencing and other group communications
services. The Company intends to achieve this goal through a strategy focused
on the following:
Maintain strong internal growth. The Company intends to capitalize on the
strong growth in the teleconferencing services industry. Industry sources
project that the teleconferencing services revenues will grow at a compound
annual growth rate of 24% through 2003. The Company believes that the
acquisition of the Operating Centers created significant opportunities to
enhance internal growth by enabling it to develop a national brand identity,
pursue cross-selling opportunities, expand the Company's service offerings and
leverage the Company's increased capacity to handle larger contracts. In
addition, the Company has undertaken several marketing and sales initiatives,
including deployment of a national sales force to access new geographic areas
and national accounts, establishment of a coordinated calling effort and
implementation of database marketing programs.
Pursue outsourced services opportunities. The Company has deployed a
wholesale sales organization which intends to capitalize on what the Company
believes to be significant opportunities to provide outsourced services to
IXCs, LECs and RBOCs as these providers continue to reduce their dependence
upon labor-intensive activities. VIALOG currently has contracts to provide
outsourced services to a number of facilities-based and non-facilities-based
telecommunications service providers. As RBOCs and LECs obtain regulatory
approval to provide long distance service, the Company believes that some will
desire to enter the market quickly with complete packages of high quality
telecommunications services, including teleconferencing. As a result, some
RBOCs and LECs may seek to outsource their group communications requirements
in order to speed up their time to market. The Company believes that it is
well-positioned to compete for outsourced teleconferencing
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business from the IXCs, LECs and RBOCs, because it (i) does not compete with
IXCs, LECs or RBOCs in their core businesses, (ii) has the capacity and
resources to handle significant teleconferencing volume and (iii) has
experience in providing services on an outsourced basis.
Expand through acquisitions. The Company intends to augment its internal
growth through selective acquisitions of complementary businesses in order to
capitalize on the significant potential economies of scale and synergies
available in its business. The Company's strategy is to target acquisitions
that will allow it to increase market share, broaden geographic coverage and
augment existing service offerings with new capabilities and industry-specific
experience, while maintaining the Company's high standards for customer
service. The Company believes its experience in acquiring and integrating the
Operating Centers and knowledge of the industry will be instrumental in
successfully identifying and negotiating additional acquisitions. The Company
further believes that its position (following the completion of this Offering)
as the largest publicly-traded company focused solely on the teleconferencing
market will make it attractive to potential acquisition candidates.
THE COMPANY'S GROUP COMMUNICATIONS SERVICES
Audio teleconferencing. The Company offers a broad range of audio
teleconferencing services and related services, primarily to businesses in the
financial, retail, professional services and pharmaceutical industries, as
well as to government agencies and trade associations. The Company generates
revenues from these services by charging on a per-line, per-minute basis,
similar to standard telephone pricing practices. The Company's audio
teleconferencing services are divided into two major service categories:
operator-attended and operator-on-demand. Each category offers standard
services such as dialing out to late participants and conducting a roll call
at no additional cost as well as enhanced services at additional cost.
There are three different types of operator-attended service: Meet-Me, Dial
Out and a combination of the two. Meet-Me audio teleconferences allow
participants to join a teleconference either by dialing a toll free number
provided by the Company or by using their own local or long distance service
providers. Dial Out audio teleconferences consist of having the Company's
operators call participants and join them together in a teleconference. A
combination of the two service types is also available.
Participants may join an operator-on-demand teleconference either by dialing
a toll free number provided by the Company or by using their own local or long
distance service providers, then entering a passcode on their touchtone
keypad. For additional security and to verify attendance, participants may be
required to enter a Personal Identification Number (PIN) after they enter the
conference passcode. While Company operators are not necessary for an
operator-on-demand audio teleconference, they can be reached for assistance by
pressing "*0."
In addition to the many standard services offered by the Company, the
following enhanced services are offered for an extra charge to increase the
productivity of an audio teleconference.
. Communication line. During a teleconference, the Company can keep a
separate line open with the teleconference host to verify participant
attendance, provide updates on the number of participants which have
joined, and have other discussions relative to the teleconference that
may be inappropriate to conduct in the teleconference.
. Digital replay. The Company can digitally record a teleconference and
make it available for playback over the telephone or otherwise by parties
who were unable to attend the teleconference.
. Electronic Q&A. Participants can join a queue to ask questions or speak
with the moderator by pressing codes on their touchtone keypads.
. Participant list. The Company can send a list of participants via fax or
email, either during or at the conclusion of the teleconference.
. Participant notification. The Company can call or fax reminders to
participants in advance of the teleconference.
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. Polling/voting. Participants can respond to questions by pressing codes
on their touchtone keypads. Tabulations and results are available
immediately or at the conclusion of the teleconference.
. Recording. The Company can record the teleconference on audiocassette
tape or compact disc, and send recordings via regular, overnight or
second-day mail.
. Transcription. The teleconference can be transcribed in its entirety and
provided in written format, on a 3 1/2p diskette, via e-mail, or all
three.
Video conferencing. In 1996, the Company began to offer video conferencing
services, which enable remote sites equipped with industry standard compliant
video equipment to conduct interactive multipoint sharing of video images and
audio among three or more sites. Similar to audio teleconferencing, this
service is charged on a per-line, per-minute basis, with enhanced services
charged on a fee basis. Video conferencing requires the use of a video MCU and
telecommunications facilities of greater bandwidth than that required for a
standard audio teleconference. The Company has three MCUs dedicated to video
conferencing. Video conferencing services accounted for approximately $13,000
and $282,000 of the Company's combined net revenues in 1996 and 1997,
respectively, and approximately $362,000 of the Company's consolidated net
revenues for the six months ended June 30, 1998.
Video conferences can be assembled in two ways: Meet-Me and Dial Out. Meet-
Me video conferences are those in which participating sites dial in to the
Company's video MCU at a scheduled date and time, using an assigned telephone
number. Each site may be greeted by an operator or be connected directly,
without the operator's presence. Dial Out video conferences are those in which
a Company operator dials out to participating sites prior to a video
conference and connects them to the conference. The Company tests the
standards of all participating sites to assure quality standards.
The Company offers "continuous presence" service, which allows participating
sites to view each other simultaneously. Continuous presence has two display
options. The first divides each participant's monitor into quadrants that
display up to four selected sites throughout the entire conference. The second
is broadcast mode, in which the speaker or lecturer can view up to four other
sites, but all of the sites view only the speaker.
The Company also offers "voice activated switching" which allows the
Company's MCU to automatically select the site whose video image is broadcast
at any given point in the video conference, based on audio level. When one
person speaks, all other sites in the video conference see that site until
another site replies and replaces the picture with its own. Whoever is
currently speaking will continue to see the site whose participant spoke last.
The Company believes that the use of multipoint video conferencing services
will grow in relationship to the installed base of compatible video equipment.
The Company estimates that over 230,000 video conferencing units had been sold
by the end of 1996, and that over 262,500 units had been sold by the end of
1997.
Data conferencing. In 1997, the Company began to offer data conferencing
services to its customers on a developmental, non-commercial basis. In the
third quarter of 1998, the Company expects to launch commercial data
conferencing services. Data conferences connect multiple computer users
through a data conferencing MCU or over the Internet, enabling them to
present, discuss and/or modify documents in real-time. The Company believes
that the Internet-based data conferencing programs will likely be used in
conjunction with audio teleconferencing to enable simultaneous group
discussions during editing and display of documents.
Other teleservices. To complement its audio, video and data conferencing
services, the Company offers other teleservices, such as Interactive Voice
Solutions (an interactive voice response "IVR" service), broadcast fax and fax
on demand. Interactive Voice Solutions incorporates IVR technology and digital
replay, enabling parties to phone in and retrieve or deposit information. This
service can also be used for testing, interview screening, registering and
survey-taking. With its broadcast fax service, the Company can send faxes to
multiple recipients simultaneously. The Company's fax on demand service
includes toll free reply mailboxes and document faxing, which allow parties to
request that information be sent directly to their fax machine.
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Client education services. The Company offers client education services to
help clients run a successful teleconference. Coaching sessions are conducted
via audio teleconference or video conference, giving moderators and speakers
the ability to practice in the same environment in which the teleconference
will take place. After the teleconference, the Company can provide a detailed
evaluation of conference effectiveness and the speaker's performance.
SALES AND MARKETING
VIALOG believes it is the first independent teleconferencing company to
employ a comprehensive marketing program to establish a national brand for
teleconferencing services. The Company's retail national sales organization
offers a full range of audio teleconferencing and other group communications
services to its customers. The Company's wholesale account executives offer
these same services to facilities-based carriers and non-facilities-based
telecommunications service providers who desire to offer outsourced
teleconferencing services to their customers under their own brands.
Establishing a national brand. The Company's marketing and sales strategy
centers on establishing VIALOG as the brand identified with high value, expert
delivery of teleconferencing services. The Company is implementing a corporate
marketing program focused on customers who have the potential for high use.
This marketing program will employ targeted database marketing techniques
based on the combined customer data of the Operating Centers, emerging trends
and other market segment information.
Retail sales. The Company is implementing a national retail sales strategy
utilizing both an outside and inside sales group. This new strategy will
consolidate the Company's existing sales force and at the same time provide
new national accounts coverage and presence in additional geographic markets.
The sales force intends to leverage VIALOG's increased network capacity by
cross-selling existing accounts with new and enhanced services, expanding the
Company's penetration of key industries (for example, pharmaceutical
companies) and targeting untapped industries and accounts. An outside sales
group of approximately 35 professionals will operate from six regional
offices, and will be primarily responsible for origination of new business. An
inside sales group of approximately 25 professionals will respond to inbound
requests, assist customers in implementing VIALOG's service offerings and
support the outside sales force.
Wholesale sales. The Company has deployed a wholesale sales organization
which intends to capitalize on what the Company believes to be significant
opportunities for revenue growth by providing outsourced services to IXCs,
LECs, and RBOCs. The Company currently has contracts to provide outsourced
services to a number of facilities-based and non-facilities-based
telecommunications service providers. An important element of the Company's
marketing strategy will be to secure additional outsourcing contracts and to
expand net revenues from its existing customer base. In order to capitalize on
this market the Company has hired a vice president of wholesale sales and
three senior telecom sales professionals who have extensive experience in the
industry. The Company believes its wholesale sales initiative is justified by
an increasing trend among telecommunications companies to outsource non-core,
labor intensive services. The Company believes that this trend has been
evidenced by existing outsourcing of services, such as billing and
telemarketing and downsizing of personnel as these companies move away from
labor-intensive activities. In addition, potential opportunities exist as a
result of the Telecommunications Act of 1996 to provide services in new
markets.
CUSTOMER SERVICE
The Company believes that it has successfully obtained and retained
customers due 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.
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Reservationists assist the Company's customers in scheduling their
teleconferences. 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 moderator (usually the person
initiating the teleconference) to ensure a successful teleconference.
Supervisors are available to assist in the setup and execution of a
teleconference. The Company's staff is trained to facilitate effective
teleconferences through a combination of classroom, mentoring, teaming, and
on-the-job supervision.
CUSTOMERS
The Company provided services to over 5,000 customers during the twelve
months ended June 30, 1998. The customers ranged in size from major
multinational corporations and Fortune 500 companies to small businesses,
professional organizations, public institutions and individuals. A breakdown
of the Company's top 20 customers, including both wholesale and retail
customers, by industry is as follows: health and pharmaceutical (two),
financial services (five), retail (five), telecommunications (four),
industrial (three) and high technology (one). No single customer represented
more than 10% of the Company's combined net revenues in 1997. The top 10
customers of the Company represented approximately 23% of the Company's
combined net revenues in 1997.
BILLING AND MANAGEMENT INFORMATION SYSTEMS
The Operating Centers presently perform the entire billing and collection
process for their respective customer bases. 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 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 Operating Centers, and can be 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 Operating Center and by
customer.
Each of the Operating Centers validates its invoices against its telephone
bills to verify billing accuracy. In addition, each Operating Center generates
reports and files which provide detailed customer activity including usage and
rate profiles, payments, adjustments, accounts receivable aging, credit status
and commission summaries. All of these files will be input into a centralized
database being implemented by the Company that will provide management with
the ability to monitor customer value and to make informed marketing, sales,
financial and operational decisions.
The Company believes that the flexibility and capabilities of its billing
systems represent a significant competitive advantage by allowing the Company
to customize invoices according to a number of variables such as detail level,
frequency of billing and class of service. 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 consolidate its billing function over the next 6 to
12 months by using the most advanced of the Operating Center billing systems
as a platform for centralization. The Company believes that centralization of
the billing system will enable the Company to deliver additional customized
pricing, billing and reporting features to satisfy both customer and internal
requests. Each of the Operating Centers will continue to process invoices with
its existing system until the new centralized system has been implemented and
management has verified that the centralized system is performing at designed
proficiency. See "Risk Factors--Absence of Consolidated Operating History;
Difficulty of Integrating the Operating Centers."
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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: (i) IXCs, such as
AT&T, MCI, Sprint, Frontier and Cable & Wireless, (ii) independent LECs, such
as GTE and Cincinnati Bell, and (iii) other PCSBs. According to estimates from
industry sources, the IXCs served 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 may 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 could be enhanced by its status as the incumbent
primary provider of local services to its customers.
Management expects that there will be additional competition in video and
data conferencing from existing providers of audio teleconferencing services,
as well as new competitors dedicated to video and/or data conferencing. 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 such services internally. There can be no
assurance that the Company's current IXC and LEC customers will not begin to
provide 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, results of operations and prospects. Moreover, the Company believes
that part of the Company's growth will occur from RBOCs which may enter the
long distance market and 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.
Two of the Company's largest outsourcing customers have recently agreed to
acquire or merge with competitors of the Company. Collectively, these
customers accounted for approximately 13% of the Company's 1997 combined net
revenues. Although one of these customers, representing approximately 9% of
the Company's 1997 combined net revenues, has verbally informed the Company
that it will honor its outsourcing contract with the Company through at least
August 1999, there can be no assurance that such customer will continue to use
the Company's services going forward. The Company believes that the second
customer, representing approximately 4% of the Company's 1997 combined net
revenues, will move its teleconferencing business to a teleconferencing
company it has recently acquired. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 own respective teleconferencing needs. If the manufacturers of
PBXs develop improved, cost-effective PBX capabilities for handling
teleconferences with the quality of existing MCUs used in the
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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, results of operations and prospects. 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, results of operations and prospects.
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 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, results of
operations and prospects.
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 Operating Centers have purchased telecommunications services
from a number of vendors, including AT&T, Sprint, MCI and Cable & Wireless.
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 Operating
Centers, the Company's experience subsequent to the Acquisitions is that it
has been 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 Operating Centers expire. In light of what the Company
believes to be increased competition among long distance service providers,
the Company has been entering into shorter-term contracts for long distance
services in order to obtain the benefit of anticipated reduced costs over
time. 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, results of operations and
prospects.
Bridging Hardware and Software Support Systems. The Company uses MCU
equipment produced by four outside manufacturers. At present, the MCU
equipment being utilized is not functionally identical, but is compatible with
substantially all network standards. Approximately 45% of the Operating
Centers' port capacity was 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. In February 1998, the
Company entered into a two year non-exclusive volume purchase agreement with
MultiLink which provides for graduated MCU price discounts based on the number
of ports purchased by VIALOG during the term of the agreement. The Company may
negotiate similar volume contracts with other manufacturers in the future. In
addition, one of the Operating Centers has MCU design and manufacturing
resources that are utilized to build equipment for
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internal use. The Company intends to develop its internal MCU capabilities
further to provide advanced feature functionality to address specific client
applications, remote operations (network or client based) and improved
integration of the MCU into existing management information systems.
FACILITIES
The Company's corporate headquarters are currently located in approximately
11,900 square feet of office space in Andover, Massachusetts under a lease
expiring in June 2004.
The Operating Centers are located in leased locations in Virginia, Georgia,
Alabama, Massachusetts, New Jersey and Connecticut. The Company believes all
of its locations are fully utilized except for its approximately 41,000 square
foot facility in Reston, Virginia and its approximately 12,000 square foot
facility in Oradell, New Jersey, each of which is approximately 80% utilized.
The Company occupies the Operating Centers and other facilities under leases
which provide for a total of approximately 88,500 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 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.
EMPLOYEES
As of June 30, 1998, the Company had 427 employees, 236 of whom 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 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 group communications
services. There can be no assurance that the FCC or other government agencies
will not seek in the future to regulate the Company as a common carrier and
regulate the prices, conditions or other aspects of the 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.
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 seek to provide teleconferencing and other group communications
services, but will outsource such services. Because the Company's outsourcing
strategy in part 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 availability of unbundled network elements, the
offering of local services for resale, compliance with access and
interconnection requirements for competitive LECs, and the establishment of a
separate operating subsidiary with separate financing, management, employees,
and books and records. There can be no
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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 a
significant number of 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, results of operations and
prospects.
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.
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, results of operations and prospects.
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.
LEGAL PROCEEDINGS
Other than as described below, there are no material pending legal
proceedings to which the Company is a party or to which any of its properties
are subject.
In connection with the acquisition of the assets of the Montgomery Center
from Call Points, Inc. ("Call Points"), the Company agreed to assume all
disclosed liabilities with the exception of any liabilities arising out of
Equal Employment Opportunity Commission ("EEOC") claims and litigation filed
against Call Points and Ropir Industries, Inc. ("Ropir"), the sole stockholder
and parent corporation of Call Points, by certain former and current
employees. On or about October 30, 1997, 11 employees or former employees of
Call Points filed claims in federal district court (Northern District of
Alabama) against Call Points, Ropir and certain other parties named therein.
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 agreed to indemnify the Company from any
liability relating to such claims and placed $250,000 of the proceeds from the
sale of the assets of Call Points in escrow with a third party to secure such
indemnification obligations. In light of such indemnification, the Company
does not believe that such claims, if successful, would have a material
adverse effect on the Company.
A former employee of Conference Source International, Inc. ("CSI"), the
Atlanta Center, has claimed in writing that he may be entitled to up to five
percent of the stock of CSI, based on an unsigned paper outlining possible
employment terms. Based on the $18.7 million consideration paid to CSI's
stockholders upon the consummation of the Acquisition of CSI by VIALOG
Corporation, the value of a five percent equity interest in CSI would be
approximately $934,000. CSI's position is that the only agreements with such
employee were set forth in two successive executed employment agreements, each
of which had a specific provision that such agreement was inclusive as to the
terms of employment. The Company and the former stockholders of CSI believe
that such claim is without merit.
50
<PAGE>
MANAGEMENT
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
---- --- --------
<S> <C> <C>
Glenn D. Bolduc(1)...... 45 Chief Executive Officer, President, Treasurer and Director,
President--Oradell (NJ) Center and Montgomery (AL) Center
John J. Dion............ 39 Vice President--Finance
Robert F. Moore......... 44 Vice President--Marketing and Business Development
Gary G. Vilardi......... 43 Vice President--Sales
John R. Williams........ 37 Vice President--Operations
Michael D. Shepherd..... 34 Vice President--Wholesale Sales
C. Raymond Marvin....... 60 Vice President
Joanna M. 38 Director
Jacobson(1)(2).........
David L. Lougee(1)(2)... 58 Director
Richard E. Hamermesh.... 50 Director
Patti R. Bisbano........ 54 Director and President--Danbury (CT) Center
Edward M. Philip(3)..... 33 Director
William P. Pucci........ 52 President--Reston (VA) Center
Judy B. Crawford(4)..... 45 President--Atlanta (GA) Center
Courtney P. Snyder...... 49 President--Cambridge (MA) Center
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Mr. Philip will become a Director of the Company upon completion of this
Offering.
(4) Ms. Crawford resigned as President of the Atlanta Center effective July
31, 1998. The Company intends to hire a general manager to manage the
Atlanta Center.
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. He has also served as President of the Oradell Center since June 24,
1998 and as President of the Montgomery Center since July 1, 1998. From July
1989 to September 1996, Mr. Bolduc served as Chief Financial Officer of
MultiLink, 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. On February 23, 1998, Mr. Dion was also appointed Vice President-Finance
of each of the Operating Centers. From October 1995 to October 1996, Mr. Dion
provided financial consultative services to a medical device manufacturer and
publishing company. 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 ("SNET"), 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
51
<PAGE>
the last eight years. From October 1995 to December 1996 Mr. Vilardi was Vice
President--Sales with 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 served as General Manager of the Sprint Conference
Line, Sprint's audio teleconferencing service bureau business, from July 1995
to October 1997. Mr. Williams held positions in product development,
marketing, and strategic planning in the Sprint Long Distance Division from
November 1989 to July 1995. 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 and MCI.
C. RAYMOND MARVIN has served as a Vice President of the Company since
December 31, 1997. He founded Telephone Business Meetings, Inc. ("Access"),
the Reston Center, in 1987 and served as President and Chief Executive Officer
of Access from its inception to December 31, 1997 and as a director of the
Reston Center 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
Technologies, Inc., a public company in the medical devices and drug delivery
business. Mirick, O'Connell, DeMallie & Lougee, LLP serves as outside general
counsel to the Company.
RICHARD G. HAMERMESH became a Director of the Company on June 19, 1998. Dr.
Hamermesh is a founder and Managing Partner of The Center for Executive
Development ("CED"), an executive education consulting firm in Cambridge,
Massachusetts. Prior to founding CED in 1988, he was a member of the faculty
of the Harvard Business School from 1976 to 1988. Dr. Hamermesh has provided
management consulting services in the areas of strategic planning,
organization design, and strategic change and has been an active consultant to
the executive development programs of numerous corporations. Dr. Hamermesh
currently serves on the Board of Directors of two public companies -- BE
Aerospace, Inc. and Applied Extrusion Technologies, Inc.
PATTI R. BISBANO has served as President of the Danbury Center since
November 12, 1997. She co-founded Communication Development Corporation
("CDC") in April 1990 and served as President, Treasurer and as a director of
CDC from its inception to November 12, 1997. Ms. Bisbano became a Director of
the Company on November 12, 1997.
EDWARD M. PHILIP will become a Director of the Company upon completion of
this Offering. He has served as Chief Financial Officer and Secretary of
Lycos, Inc. since December 1995 and Chief Operating Officer since December
1996. From July 1991 to December 1995, Mr. Philip was employed by The Walt
Disney Company where he served in various finance positions, most recently as
Vice President and Assistant Treasurer. Mr. Philip is also a director of VDI
Media, Inc.
52
<PAGE>
WILLIAM P. PUCCI has served as President of the Reston Center 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 has served as President of the Atlanta Center since
November 12, 1997. She co-founded Conference Source International, Inc.
("CSI") in February 1992 and served as President, Chief Executive Officer and
as a director of the Atlanta Center from its inception to November 12, 1997.
Ms. Crawford resigned as President of the Atlanta Center effective July 31,
1998. The Company intends to hire a general manager to manage the Atlanta
Center.
COURTNEY P. SNYDER has served as President of the Cambridge Center since
November 12, 1997. He founded Kendall Square Teleconferencing ("TCC") in 1987
and served as President, Chief Executive Officer and as a director of TCC from
its inception until the Acquisition of TCC by VIALOG Corporation.
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. Ms. Jacobson and Ms. Bisbano serve in the class whose terms expire
in 1999, Mr. Bolduc and Mr. Lougee serve in the class whose terms expire in
2000, and Dr. Hamermesh, elected as a Director on June 19, 1998, and Mr.
Philip, whose appointment as Director commences upon the completion of this
Offering, serve in the class whose terms expire in 2001. 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.
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 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.
Mr. Bolduc also serves as the Chief Executive Officer, President, Treasurer
and a Director of the Company. Mr. Lougee also serves as a Director of the
Company and is a partner of Mirick, O'Connell, DeMallie & Lougee, llp, the
Company's legal counsel. 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
53
<PAGE>
by John J. Dion. On November 12, 1997, Mr. Dion and Mr. Hassett resigned as
Directors, and Mr. Lougee, Ms. Bisbano, Ms. Jacobson and David L. Lipsky were
appointed Directors. Mr. Lipsky's term as a Director expired June 19, 1998,
the date of VIALOG's shareholder meeting in lieu of annual meeting. Dr.
Hamermesh was elected to succeed Mr. Lipsky as a Director on June 19, 1998.
There are no compensation committee interlocks.
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").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- ------------------------
AWARDS PAYOUTS
------------- ----------
SECURITIES
UNDERLYING ALL
OTHER ANNUAL RESTRICTED OPTIONS/ OTHER
SALARY BONUS COMPENSATION STOCKAWARD(S) SARS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($) ($)(1) (#) ($)
- --------------------------- ------- ------- ------------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Glenn D. Bolduc......... 33,000 270,000(2) (3) 0 75,000 0
President and CEO
C. Raymond Marvin....... 242,000 121,000 (3) 0 0 0
Vice President
Courtney P. Snyder...... 145,000 0 (3) 0 75,000 9,460(4)
President--Cambridge
Center
Judy B. Crawford(5)..... 118,000 0 20,000(6) 0 0 505(7)
President--Atlanta
Center
Patti R. Bisbano........ 76,000 40,000 (3) 0 62,500 0
President--Danbury
Center
</TABLE>
- --------
(1) 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
Courtney P. Snyder...................... 48,780 280,485
Judy B. Crawford........................ 0 0
Patti R. Bisbano........................ 52,174 300,000
</TABLE>
The Company has no current plans to pay dividends on the above-referenced
restricted shares.
(2) 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 the Unit Offering. 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 Unit Offering.
(3) The aggregate amount of the Named Executive Officer's Compensation
reportable under this category falls below the reporting threshold of the
lesser of $50,000 or 10% of the total annual salary and bonus reported for
the Named Executive Officers.
54
<PAGE>
(4) TCC paid an aggregate of $9,460 in premiums on a whole life insurance
policy on the life of Mr. Snyder, the proceeds of which are payable to a
beneficiary designated by Mr. Snyder. The policy's cash surrender value,
which was $27,114 as of March 30, 1998, is payable to Mr. Snyder.
(5) Ms. Crawford resigned as President of the Atlanta Center effective July
31, 1998.
(6) Consists of an aggregate auto allowance of approximately $17,000 and
aggregate country club dues of approximately $3,000.
(7) CSI paid an aggregate of $505 in premiums on a term life insurance policy
on the life of Ms. Crawford, the proceeds of which are payable to a
beneficiary designated by Ms. Crawford.
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 EXPIRES
---- --------------------------- -------- ------------------------------
<S> <C> <C> <C>
Glenn D. Bolduc(1)...... President and CEO--VIALOG $250,000 Terminable upon 30 days notice
C. Raymond Marvin(2).... Vice President--VIALOG $242,000 November 1999
Courtney P. Snyder(3)... President--Cambridge Center $160,000 November 2000
Judy B. Crawford(4)..... President--Atlanta Center $255,000 November 1998
Patti R. Bisbano(5)..... President--Danbury Center $140,000 November 2000
</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 Unit
Offering. 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 Unit Offering. The Company may
immediately terminate Mr. Bolduc's employment agreement for "cause" as
defined in the agreement. The Company and Mr. Bolduc each have the right
to terminate Mr. Bolduc's employment without cause upon 30 days' prior
written notice. If Mr. Bolduc's employment is terminated without cause by
the Company, the employment agreement 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. Snyder's employment agreement provides that if Mr. Snyder's employment
is terminated by the Cambridge Center 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. The Cambridge
Center 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.
(4) Ms. Crawford's employment agreement provides that if Ms. Crawford's
employment is terminated by the Atlanta Center 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. The Atlanta Center 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. Ms. Crawford has resigned as President of the Atlanta Center
effective July 31, 1998. The Company intends to hire a general manager to
manage the Atlanta Center.
(5) Ms. Bisbano's employment agreement provides that if Ms. Bisbano's
employment is terminated by the Danbury Center 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. Ms. Bisbano is entitled to a monthly
automobile allowance of $400.
55
<PAGE>
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. At June 30, 1998, there were
668,904 additional shares available for grant under the Plan.
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 LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(3)
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED (#) YEAR ($/SHARE)(1) DATE 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) 0 0
Courtney P. Snyder...... 75,000 14.7(5) 5.75 (2) 271,211 687,301
Judy B. Crawford........ 0 0 0 (2) 0 0
Patti R. Bisbano........ 62,500 12.3 5.75 (2) 226,009 572,751
</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. In addition, the Company periodically obtained independent
valuations of the Company's Common Stock.
(2) If a Named Executive Officer ceases to be employed by the Company, further
vesting of the Named Executive Officer's options ceases and all vested
options expire 90 days after the date such Named Executive Officer ceases
to be employed by the Company. In any event, all options granted to Named
Executive Officers terminate 10 years from the 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 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
56
<PAGE>
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.
(6) This option vests over a three year period vesting as to 5,212 shares on
December 31, 1997 and as to 5,208 shares on the last day of each quarter
thereafter until the option has vested in full.
The following table sets forth the value of all unexercised options held by
the Named Executive Officers at the end of 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT FISCAL
OPTIONS AT FY-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
Courtney P. Snyder.......... 5,700 69,300 0 0
Judy B. Crawford............ 0 0 0 0
Patti R. Bisbano............ 5,212 57,288 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 $5.75 per share value
which represented the fair market value of the Common Stock on December
31, 1997 as determined by the Company's Board of Directors, less the
aggregate exercise price of the options.
57
<PAGE>
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 PCSBs, and (ii) by purchase, the assets
of one PCSB, and each PCSB became a wholly-owned subsidiary of VIALOG
Corporation. 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, approximately $925,000 in cash related to
tax reimbursements and approximately $500,000 of Acquisition costs. The
consideration paid was determined through arm's length negotiations among
VIALOG Corporation and the stockholders of each PCSB, and was based upon a
multiple of each PCSB's historical net revenue as well as each PCSB'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 PCSBs.
<TABLE>
<CAPTION>
NAME CASH CONSIDERATION SHARES
---- ------------------ -------
<S> <C> <C>
Telephone Business
Meetings, Inc.
("Access")............... $19,000,000(1) --
Conference Source
International, Inc.
("CSI").................. 18,675,000(2) --
Call Points, Inc. ("Call
Points")................. 8,000,000(3) 21,000
Kendall Square
Teleconferencing, Inc.
("TCC").................. 3,645,000 166,156
American Conferencing
Company, Inc.
("Americo").............. 1,260,000 267,826(4)
Communication Development
Corporation ("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.
(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.
(4) See "Other Transactions."
From June 30, 1997 through the consummation of the Acquisitions, certain of
the PCSBs made S corporation distributions of $1,687,000. In addition, during
the course of operations, certain of the PCSBs 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 PCSBs 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 Acquisitions, 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. At March 31, 1998, the remaining aggregate
amount of such indebtedness and capital leases was $1.0 million.
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The following is a discussion of the material information regarding the
PCSBs 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. If 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. Stockholders' equity of Access was approximately $2.1 million on
the date of the Acquisition. 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. 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 through the consummation of the
Acquisition, Access made S corporation tax distributions of $652,000. 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. Stockholders' equity of CSI was
approximately $260,000 on the date of the Acquisition. 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 as of the date of the
Acquisition. 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 through the consummation of the Acquisition, CSI made S
corporation profit and tax distributions of $880,000. 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. Ms.
Crawford resigned as President of the Atlanta Center effective July 31, 1998.
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. The net value of the assets acquired from Call
Points was approximately $2.4 million on the date of the Acquisition. 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.
Stockholders' equity of TCC was approximately $629,000 on the date of the
Acquisition. 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 Acquisition 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
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on the third anniversary of the Acquisition. 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 certain of TCC's
capital leases, which had remaining lease payments of approximately $324,000
as of the date of the Acquisition. 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 through the consummation of the
Acquisition, TCC made S corporation tax distributions of $156,000. 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. Stockholders'
deficit of Americo was approximately $273,000 on the date of the Acquisition.
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 Acquisition as determined by the VIALOG
Corporation Board of Directors. 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. On June 24,
1998, Mr. Lipsky's employment was terminated and his options were cancelled.
See "--Other Transactions."
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 104,348 shares of Common Stock
and approximately $2.4 million in cash in exchange for their shares of CDC.
Stockholders' equity of CDC was approximately $418,000 on the date of the
Acquisition. 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 Acquisition 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
Acquisition. 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. Ms. Suda's
resignation from CDC was accepted effective May 29, 1998. Ms. Suda will be
paid under her employment agreement through November 12, 1998. Unvested
options previously granted to Ms. Suda for 6,250 shares of Common Stock were
granted to Ms. Bisbano on May 22, 1998. Such options are exercisable at $7.00
per share, the fair market value on the date of grant as determined by the
Board of Directors.
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The Company agreed with all of the PCSBs, except Call Points, that until
November 1999 there would be no (i) change in the location of an Operating
Center's facilities, (ii) physical merging of any Operating Center'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 Operating Center'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.
OTHER TRANSACTIONS
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, prior to the
acquisition of MultiLink by PictureTel Corporation in 1997. In 1995, 1996 and
1997, aggregate purchases of MCUs and ancillary services from MultiLink by the
Operating Centers were approximately $889,000, $811,000 and $878,000,
respectively. Currently, Mr. Bolduc owns less than 1% of the outstanding
shares of capital stock 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 for legal services provided to VIALOG during 1997 and a part of 1996.
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 Senior
Notes remain outstanding or any obligation of the Company or the Operating
Centers (as 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. Between December 1997 and February 1998, John J. Hassett
provided consulting services to the Company for a monthly fee of $10,000.
The Company terminated the employment of David L. Lipsky, former President
of the Oradell Center, in June 1998. On July 22, 1998, the Company and Mr.
Lipsky signed an agreement resolving a dispute regarding his employment and
position at the Oradell Center. The Company agreed to pay Mr. Lipsky a sum of
$309,000, less required witholdings and deductions, in satisfaction of amounts
due under his employment agreement and to include Mr. Lipsky as a selling
stockholder in this Offering with respect to the 267,826 shares of Common
Stock owned by Mr. Lipsky. In exchange, Mr. Lipsky agreed, among other things,
to cancel all of his vested and unvested stock options, release the Company
from all claims, refrain from acquiring any voting securities of the Company
for ten years, and acknowledge the termination of his employment as President
of the Oradell Center and his term as a Director of the Company.
COMPANY POLICY
The Company has implemented a policy whereby neither the Company nor any
subsidiary (which includes the Operating Centers) 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 By-Laws 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.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of July 1, 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 and
persons who have consented to be named as Directors (the "Named Directors"),
(iii) each Named Executive Officer, and (iv) all executive officers, Directors
and Named 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 July 1,
1998, the Company had outstanding 3,665,072 shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SHARES SHARES BEING PERCENT OF CLASS PERCENT OF CLASS
NAME BENEFICIALLY OWNED(1) OFFERED BEFORE OFFERING AFTER OFFERING(2)
---- --------------------- ------------ ---------------- -----------------
<S> <C> <C> <C> <C>
John J. Hassett......... 937,762 (3) 25.6 11.3
J. Michael Powell....... 327,800 (4) 8.9 4.0
Jefferies & Company,
Inc.................... 303,717 (5) 7.7 3.7
David L. Lipsky......... 267,826 (6) 267,826 7.3 0
Reynolds E. Moulton..... 187,500 5.1 2.3
Glenn D. Bolduc......... 215,000 (7) 5.6 2.6
David L. Lougee......... 70,340 (8) 1.9 *
Patti R. Bisbano........ 74,052 (9) 2.1 *
Courtney P. Snyder...... 67,080(10) 1.8 *
Judy B. Crawford........ 18,300(11) * *
Joanna M. Jacobson...... 7,000(12) * *
C. Raymond Marvin....... 6,000(13) * *
Richard G. Hamermesh.... 4,008(14) * *
Edward M. Philip........ 4,008(15) * *
All executive officers,
Directors and Named
Directors as a group
(15 persons)........... 638,238 15.8 7.7
</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.
(2) Calculation excludes the 730,173 shares of Common Stock that may be
issued if the Underwriters' over-allotment option is exercised in full.
(3) 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.
(4) Includes 267,800 shares held by Mr. Powell individually and 60,000 shares
held by Mr. Powell as Trustee.
(5) Includes 302,658 shares with respect to which Warrants issued to
Jefferies & Company, Inc. in connection with the Unit Offering may be
exercised and 1,059 shares with respect to which Warrants acquired by
Jefferies & Company, Inc. in its capacity as a market-maker may be
exercised.
(6) Includes 267,826 shares issued to Mr. Lipsky in connection with the
Acquisition.
(7) Includes 25,000 shares held by Mr. Bolduc, 160,000 shares with respect to
which options held by Mr. Bolduc may be exercised as of September 1, 1998
and 30,000 shares held by Grace K. Bolduc, the spouse of Mr. Bolduc, as
Trustee for their three minor children.
(8) Includes 65,000 shares held by Mr. Lougee and 5,340 shares with respect
to which options held by Mr. Lougee may be exercised as of September 1,
1998.
(9) Includes 52,174 shares issued to Ms. Bisbano in connection with the
Acquisition and 27,878 shares with respect to which options granted to
Ms. Bisbano may be exercised as of September 1, 1998.
(10) Includes 48,780 shares issued to Mr. Snyder in connection with the
Acquisition and 18,300 shares with respect to which options granted to
Mr. Snyder may be exercised as of September 1, 1998.
(11) Includes 18,300 shares with respect to which options granted to Ms.
Crawford on January 1, 1998 may be exercised as of September 1, 1998.
(12) Includes 7,000 shares with respect to which options held by Ms. Jacobson
may be exercised as of September 1, 1998.
(13) Includes an estimated 6,000 shares with respect to which options granted
to Mr. Marvin will vest upon the closing of the ABCC acquisition.
(14) Includes 4,008 shares with respect to which options held by Dr. Hamermesh
may be exercised as of September 1, 1998.
(15) Includes 4,008 shares with respect to which options to be granted to Mr.
Philip upon the completion of this Offering may be exercised as of
September 1, 1998.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock as of June 30, 1998 consisted of
30,000,000 shares of Common Stock and 10,000,000 shares of preferred stock,
$.01 par value (the "Preferred Stock"). As of June 30, 1998, the Company had
outstanding 3,665,072 shares of Common Stock and no shares of Preferred Stock.
The Company has reserved 3,250,000 shares of Common Stock for issuance
pursuant to the Plan. See "Management--1996 Stock Plan." After giving effect
to the issuance of the shares of Common Stock offered hereby, the Company will
have outstanding 8,265,072 shares of Common Stock (8,995,245 if the
Underwriters' over-allotment option is exercised in full) and no shares of
Preferred Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders of the Company.
When a quorum is present at a meeting, the holders of a majority of the Common
Stock present or represented and voting on a matter will decide any matter to
be voted on by the stockholders except where a larger vote is required by law.
Any election by stockholders shall be determined by a plurality of the votes
cast by stockholders entitled to vote at the election. Subject to the rights
of any then outstanding shares of Preferred Stock, holders of Common Stock are
entitled to receive dividends when and as declared in the discretion of the
Board of Directors out of funds legally available therefor. Dividends are non-
cumulative. Holders of Common Stock are entitled to share ratably in the net
assets of the Company upon liquidation after payment or provision for all
liabilities of the Company and any preferential liquidation rights of any
Preferred Stock then outstanding. The holders of Common Stock have no
preemptive rights to purchase any securities of the Company. Shares of Common
Stock are not subject to any redemption provisions and are not convertible
into any other securities of the Company. All outstanding shares of Common
Stock are, and the shares of Common Stock issued pursuant to this Prospectus
will, upon payment therefor, be fully paid and non-assessable. The rights,
preferences and privileges of holders of Common Stock are subject to and may
be adversely affected by, the rights of holders of Preferred Stock which the
Company may designate and issue in the future. As of June 30, 1998, there were
3,665,072 outstanding shares of Common Stock held by an aggregate of 89
Stockholders and an aggregate of 1,806,404 shares of Common Stock underlying
vested and non-vested outstanding stock options. Prior to the Offering, there
was no established public trading market for the Common Stock.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more classes or series. Subject to the provisions of the
Company's Articles of Organization and limitations prescribed by law, the
Board of Directors is expressly authorized to adopt resolutions to issue
shares of Preferred Stock, to fix or change the number of shares of Preferred
Stock to be included in any series and to provide for or change the voting
powers, designations, preferences and relative, participating, optional or
other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative),
dividend rates, terms of redemption (including sinking fund provisions),
redemption prices, conversation rights and liquidation preferences of the
shares constituting any series of the Preferred Stock, in each case without
any further action or vote by the stockholders. The Company has no current
plans to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of the Company's
management. The issuance of shares of the Preferred Stock pursuant to the
Board of Directors' authority described above may adversely affect the rights
of the holders of Common Stock. For example, Preferred Stock issued by the
Company may rank prior to the Common Stock as to dividend rights, liquidation
preferences or both, may have full or limited voting rights and may be
convertible into shares of Common Stock. Accordingly, the issuance of shares
of Preferred Stock may discourage bids for the Common Stock or may otherwise
adversely affect the market price of the Common Stock.
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WARRANTS
On February 24, 1997, the Company issued 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 the initial public
offering of the Company's Common Stock or one year from their date of
issuance, together with warrants to purchase an aggregate of 111,118 shares of
Common Stock at an exercise price of $4.50 per share. The notes were paid in
November 1997. The warrants expire on February 28, 1999 and contain
antidilution provisions. As of the date of this Prospectus, such warrants
entitle the holders thereof to purchase an aggregate of 42,260 additional
shares of Common Stock as a result of adjustments required by the antidilution
provisions of the warrants. The antidilution provisions of the warrants will
not be triggered by the issuance of Common Stock in this Offering.
On November 12, 1997, the Company issued warrants ("Warrants") and the Old
Notes in the Unit Offering. Each Warrant, when exercised, entitles the holder
thereof to receive 10.0886 shares of Common Stock of the Company (each, a
"Warrant Share") at an exercise price of $.01 per share (the "Exercise
Price"). A total of 75,000 Warrants, representing 756,645 Warrant Shares, were
issued in connection with the Old Notes. In addition, the Company issued
warrants to purchase 302,658 shares of Common Stock at an exercise price of
$.01 per share to the Initial Purchaser. The Exercise Price and the number of
Warrant Shares issuable on exercise of a Warrant are both subject to
adjustment in certain cases. See "Adjustments" below. The Warrants are
exercisable at any time. Unless exercised, the Warrants will automatically
expire on November 12, 2001. Following is a description of the terms of the
Warrants:
Adjustments. The number of Warrant Shares purchasable upon the exercise of
the Warrants and the Exercise Price are each subject to adjustment in certain
events including stock dividends, reclassifications and distributions.
Furthermore, if the Company issues Common Stock (or securities convertible
into Common Stock) at or below the market price, 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. The antidilution provisions of the
Warrants will not be triggered by the issuance of Common Stock in this
Offering. 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 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.
Registration Rights. The Company has granted demand and piggy back
registration rights to holders of the Warrants pursuant to a Securityholders'
and Registration Rights Agreement (the "Securityholders' Agreement"). From
time to time after 180 days following the completion by the Company of this
Offering, holders of Warrant shares owning, individually or in the aggregate,
not less than 25% of the Warrant shares held in the aggregate by all holders
of the Warrant shares may make a written request for registration under the
Securities Act of their warrant shares. Subject to certain conditions, within
120 days of the receipt of such written request for such a demand
registration, the Company shall file with the Commission and use its best
efforts to cause to become effective under the Securities Act a registration
statement with respect to such securities. This summary of the
Securityholders' Agreement does not purport to be complete and is qualified in
its entirety by reference to the terms and provisions of the Securityholders'
Agreement.
General. The holders of the warrants issued by the Company have no right to
vote on matters submitted to the stockholders of the Company and have no right
to receive cash dividends. The holders of these warrants are not entitled to
share in the assets of the Company in the event of the liquidation,
dissolution or winding up of the Company's affairs.
PROVISIONS OF MASSACHUSETTS LAW AND THE COMPANY'S ARTICLES OF ORGANIZATION AND
BY-LAWS
Certain Anti-takeover Provisions. After the closing of this Offering, the
Company will be subject to the provisions of Chapter 110F of the Massachusetts
General Laws, an anti-takeover law. In general, this statute
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<PAGE>
prohibits a Massachusetts corporation with more than 200 stockholders of
record from engaging in a "business combination" with "interested
stockholders" for a period of three years after the date of the transaction in
which the person becomes an interested stockholder, unless (i) prior to such
date, the board of directors approves either the business combination or the
transaction which results in the stockholder becoming an interested
stockholder, (ii) the interested stockholder acquires 90% of the outstanding
voting stock of the corporation (excluding shares held by certain affiliates
of the corporation) at the time the stockholder becomes an interested
stockholder, or (iii) the business combination is approved by both the board
of directors and holders of two-thirds of the outstanding voting stock of the
corporation (excluding shares held by the interested stockholder). A "business
combination" includes a merger, consolidation, certain stock or asset sales,
and certain other specified transactions involving the corporation or any
direct or indirect majority-owned subsidiary of the corporation resulting in a
financial benefit to the interested stockholder. Generally, an "interested
stockholder" is (i) a person who, alone or together with affiliates and
associates, owns five percent or more of the corporation's voting stock, (ii)
an affiliate or associate of the corporation who at any time within the three
year period preceding the date of the transaction owned five percent or more
of the corporation's voting stock, or (iii) the affiliates and associates of
any such affiliate or associate of the corporation. A person is not an
"interested stockholder" if its ownership of shares in excess of the five
percent limitation is the result of action taken solely by the Company,
provided, however, that such a person will become an "interested stockholder"
if the person thereafter acquires additional shares of voting stock, except as
a result of further corporate action not caused, directly or indirectly, by
such person. The Company may at any time elect not to be governed by Chapter
110F by amending its Articles of Organization and By-Laws by a vote of a
majority of the stockholders entitled to vote, but such an amendment would not
be effective for 12 months and would not apply to a business combination with
any person who became an interested stockholder prior to the adoption of the
amendment.
In addition, Massachusetts General Laws Chapter 110D, entitled "Regulation
of Control Share Acquisitions," provides, in general, that any stockholder of
a Massachusetts corporation with more than 200 stockholders of record who
acquires voting stock of such corporation in a "control share acquisition" may
not vote the shares so acquired (or shares acquired within 90 days before or
after the "control share acquisition") unless a majority of the other
stockholders of such corporation entitled to vote so authorize. In general, a
"control share acquisition" includes the acquisition by any person of
beneficial ownership of shares which, when added to all other shares of such
corporation beneficially owned by such person, would entitle such person to
vote (i) between 20% and 33 1/3%, (ii) between 33 1/3% and 50%, or (iii) more
than 50% of the outstanding voting stock of such corporation. A "control share
acquisition" generally does not include, among other transactions, the
acquisition of shares directly from the issuing corporation. The Company has
amended its By-Laws to opt out of the provisions of Chapter 110D.
Massachusetts General Laws Chapter 156B, Section 50A, requires that publicly
held Massachusetts corporations that have not "opted out" of Section 50A have
a classified board of directors consisting of three classes as nearly equal in
size as possible. Section 50A also provides that directors who are so
classified shall be subject to removal by the stockholders only for cause. The
Company's Articles of Organization reflect the requirements of Section 50A.
The Company's Articles of Organization authorize the issuance of 10,000,000
shares of undesignated Preferred Stock, the terms of which may be fixed from
time to time by the Board of Directors without further stockholder approval.
The Company's By-Laws provide that after the Company has a class of voting
stock registered under the Exchange Act, a special meeting of stockholders may
be called by the President, the Board of Directors or by the holders of 35% or
more of the outstanding voting stock of the Company. Certain other provisions
of the Company's By-Laws, its Articles of Organization and Massachusetts law
may also make more difficult or discourage a proxy contest or the acquisition
of control by a holder of a substantial block of the Company's Common Stock or
the removal of the incumbent Board of Directors and could also have the effect
of discouraging a third party from making a tender offer or otherwise
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its stockholders. In addition, because such
65
<PAGE>
provisions also have the effect of discouraging accumulations of large blocks
of Common Stock by purchasers whose objective is to have such Common Stock
repurchased by the Company at a premium, such provisions could tend to reduce
the temporary fluctuations in the market price of the Company's Common Stock
that are caused by such accumulations. Accordingly, stockholders could be
deprived of certain opportunities to sell their Common Stock at a temporarily
higher market price.
Reference is made to the full text of the foregoing statutes, the Company's
Articles of Organization and its By-Laws for their entire terms. The partial
summary contained in this Prospectus is not intended to be complete. See "Risk
Factors--Effect of Certain Charter and By-Law Provisions and Anti-Takeover
Provisions."
Elimination of Monetary Liability for Officers and Directors. The Company's
Articles of Organization also incorporate certain provisions permitted under
the Massachusetts General Laws relating to the liability of directors. The
provisions eliminate to the maximum extent permitted by Chapter 156B of the
Massachusetts General Laws a director's personal liability to the Company for
monetary damages arising out of a breach of the director's fiduciary duty as a
director of the Company, except in circumstances involving certain wrongful
acts, such as the breach of a director's duty of loyalty or acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law or authorization of distributions in violation of the
Articles of Organization or in violation of Chapter 156B or of loans to
officers or directors of the Company or any transaction from which the
director derived an improper personal benefit. These provisions do not prevent
recourse against directors through equitable remedies such as injunctive
relief.
Indemnification of Officers and Directors. The Company's By-Laws contain
provisions to indemnify each of the directors and officers of the Company (as
well as the former directors and officers) to the fullest extent permitted by
Massachusetts law against any and all claims and liabilities to which he or
she may be or become subject by reason of his or her being or having been an
officer or director of the Company, or by reason of his or her alleged acts or
omissions as an officer or director of the Company, except in relation to such
matters as to which such officer or director shall have been guilty of willful
malfeasance, bad faith, gross negligence or reckless disregard of his or her
duties in the conduct of his or her office. The By-Laws further provide that
the Company shall indemnify and reimburse each such officer and director
against and for any and all legal and other expenses reasonably incurred by
him or her in connection with any such claims and liabilities, actual or
threatened, whether or not, at or prior to the time when so indemnified, held
harmless and reimbursed, he or she had ceased being an officer or director of
the Company, except in relation to such matters as to which such officer or
director shall have been guilty of willful malfeasance, bad faith, gross
negligence or reckless disregard of his or her duties in the conduct of his or
her office; provided that the Company prior to such final adjudication may
compromise and settle any such claims and liabilities and pay such expenses,
if such settlement or payment or both appears, in the judgment of a majority
of the Board of Directors, to be for the best interest of the Company,
evidenced by a resolution to that effect after receipt by the Company of a
written opinion of counsel for the Company that such officer or director has
not been guilty of willful malfeasance, bad faith, gross negligence or
reckless disregard of his or her duties in the conduct of his office in
connection with the matters involved in such compromise, settlement and
payment.
REGISTRATION RIGHTS
In addition to the registration rights granted to the holders of the
Warrants, the Company entered into a registration rights agreement with the
principal stockholders of VIALOG Corporation (the "VIALOG Stockholders") and
the principal stockholders of each of the Operating Centers who received
shares of Common Stock in connection with their respective Acquisitions (the
"Operating Center Stockholders"). The registration rights agreement granted
demand and piggy-back registration rights with respect to their shares and
provided for a "lock-up" of their shares following the effective date of a
registration statement of the Company filed under the Securities Act.
The VIALOG Stockholders and the Operating Center Stockholders may demand, on
two occasions only, that the Company will register their shares of Common
Stock under the Securities Act by written request
66
<PAGE>
delivered at least one year after the effective date of the Acquisitions. Any
such demand must be made by the holders of not less than 20% in interest of
the persons having such registration rights. The Company is obligated to keep
such registration effective for a period of four months. The Company may
defer, not more than once during any twelve-month period, the filing of such
registration statement for up to 180 days, if it is determined in good faith
by the Company's Board of Directors that such registration would be
detrimental to the Company or its stockholders. The Company may include in any
such filing securities of the Company for its own account, or other securities
of the Company which are held by officers or directors of the Company or held
by other persons who, by virtue of agreements with the Company are entitled to
include their securities in any such registration.
If the Company determines to register any of its shares, other than under a
filing relating to transactions such as mergers, consolidations,
reclassifications, asset sales or similar transactions described in Rule 145
promulgated under the Securities Act or on a form which does not permit
secondary sales or does not include substantially the same information as
would be required to be included in a registration statement, then the VIALOG
Stockholders and the Operating Center Stockholders may request that shares of
their Common Stock be included in such registration. If the registration is an
underwritten offering, the lead underwriter may limit the number of shares
requested to be registered pursuant to such piggy-back rights to 25% of the
securities covered by such underwritten offering. Any shares offered by
officers and directors will be the first to be excluded from such offering.
The Company is obligated to use its best efforts to file all reports
necessary to qualify for registration of its securities on Form S-3 or a
comparable or successor form. After qualifying for such use, the Company is
obligated upon request to register the stock of any qualifying VIALOG
Stockholder on Form S-3, unless (i) the aggregate offering price is less than
$1 million or (ii) the Company has effected a registration on Form S-3 in the
last twelve months. Additionally, the Company may defer such registration for
a period of 120 days if the Company has plans to make, within 90 days, a
registered public offering or is engaged in any prior activity which, if
determined in good faith by the Company's Board of Directors, would be
adversely affected by the requested registration.
Certain VIALOG stockholders owning an aggregate of 3,283,123 shares of
Common Stock and options and warrants to acquire an aggregate of 1,417,003
shares of Common Stock have agreed to enter into a 180-day "lock-up" following
the effective date of this Offering. Directors of the Company have agreed to
enter into similar agreements. Such agreement may prohibit the sale, transfer
or disposition of the shares of registrable Common Stock held by VIALOG
Stockholders or Operating Center Stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is State
Street Bank and Trust Company, Boston, Massachusetts.
67
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, there will be 8,265,072 shares of Common
Stock outstanding (8,995,245 shares if the Underwriters' over-allotment option
is exercised in full, in each case assuming no exercise of options or warrants
after June 30, 1998), of which the 4,867,826 shares being sold in this
Offering (5,597,999 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable in the United States without
restriction under the Securities Act of 1933, as amended (the "Securities
Act") unless acquired by "affiliates" of the Company (as defined in Rule 144
under the Securities Act). The remaining 3,397,246 shares of Common Stock
outstanding are "restricted securities" (as defined in Rule 144 and Rule 701
under the Securities Act) (the "Restricted Shares") and may not be sold unless
registered under the Securities Act or sold pursuant to an exemption from
registration, such as the exemption provided by Rule 144.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from either the Company or any affiliate of the Company, the acquirer or
subsequent holder thereof may sell, within any three-month period commencing
90 days after the date of this Prospectus, a number of shares that does not
exceed the greater of one percent of the then outstanding shares of the Common
Stock (approximately 82,650 shares immediately after this Offering), or the
average weekly trading volume of the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding the date on which notice of
the proposed sale is filed with the Commission. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. If two years
have elapsed since the later of the date of the acquisition of restricted
shares of Common Stock from the Company or any affiliate of the Company, a
person who is not deemed to have been an affiliate of the Company at any time
for 90 days preceding a sale would be entitled to sell such shares under Rule
144 without regard to the volume limitations, manner of sale provisions or
notice requirements. In meeting the one-year and two-year holding periods
described above, a holder of restricted shares may in some circumstances
include the holding period of a prior owner. The one-year and two-year holding
periods described above do not begin until the full purchase price or other
consideration is paid by the person acquiring the restricted shares from the
Company or an affiliate of the Company.
The Company, its officers, Directors and certain stockholders holding an
aggregate of 3,283,123 shares of Common Stock and options and warrants to
acquire an aggregate of 1,417,003 shares of Common Stock have agreed not to,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of any shares of Common Stock of the
Company, or any securities convertible into, or exercisable or exchangeable
for, any shares of Common Stock (other than pursuant to the 1996 Stock Plan),
for a period of 180 days from the completion of this Offering, without the
prior written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, other than stock issued by the Company in connection with
acquisitions and the exercise of currently outstanding stock options and
except for bona fide gifts or transfers effected by such stockholders other
than on any securities exchange or in the over-the-counter market to donees or
transferees that agree to execute and be bound by such agreements. Prudential
Securities Incorporated may, in its sole discretion, at any time and without
notice, release all or any portion of the shares subject to such lock-up
agreements.
Prior to this Offering, there has been no public market for the Common
Stock. Trading of the Common Stock on the Nasdaq National Market is expected
to commence immediately following completion of this Offering. No prediction
can be made as to the effect, if any, that future sales of Common Stock or the
availability of Common Stock for future sale, will have on the market price
prevailing from time to time. Sales of substantial amounts of Common Stock
(including Common Stock issued upon the exercise of options or warrants), or
the perception that such sales could occur, could adversely affect prevailing
market prices of the Common Stock. See "Risk Factors--No Prior Public Market;
Possible Volatility of Stock Price" and "--Potential Adverse Effect of Shares
Eligible for Future Sale on Price of Common Stock."
68
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Jefferies & Company, Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions contained in the underwriting agreement (the
"Underwriting Agreement"), to purchase from the Company and the Selling
Stockholder the number of shares of Common Stock set forth below opposite
their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated..................................
Jefferies & Company, Inc. ..........................................
---------
Total............................................................... 4,867,826
=========
</TABLE>
The Company and the Selling Stockholder are obligated to sell, and the
Underwriters are obligated to purchase, all the shares of Common Stock offered
hereby if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Stockholder that they propose to offer the Common Stock
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession
of $ per share; and that such dealers may reallow a concession of $ per
share to certain other dealers. After the Offering, the initial public
offering price and the concessions may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 730,173 additional shares
of Common Stock at the initial public offering price, less underwriting
discounts and commissions, as set forth on the cover page of this Prospectus.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to 4,867,826.
The Company, its officers, Directors and certain stockholders holding an
aggregate of 3,283,123 shares of Common Stock and options and warrants to
acquire an aggregate of 1,417,003 shares of Common Stock have agreed not to,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of any shares of Common Stock of the
Company, or any securities convertible into, or exercisable or exchangeable
for, any shares of Common Stock (other than pursuant to the 1996 Stock Plan),
for a period of 180 days from the completion of this Offering without the
prior written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, other than stock issued by the Company in connection with
acquisitions and the exercise of currently outstanding stock options and
except for bona fide gifts or transfers effected by such stockholders other
than on any securities exchange or in the over-the-counter market to donees or
transferees that agree to execute and be bound by such agreements. Prudential
Securities Incorporated may, in its sole discretion, at any time and without
notice, release all or any portion of the shares subject to such lock-up
agreements.
VIALOG Corporation, the Operating Centers, and the Selling Stockholder have
agreed to indemnify the several Underwriters and contribute to losses arising
out of certain liabilities, including liabilities under the Securities Act.
69
<PAGE>
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined through negotiations between the Company and the
Representatives of the Underwriters. Among the factors to be considered in
making such determination will be the prevailing market conditions, the
results of operations of the Company in recent periods relevant to its
prospects and the prospects for its industry in general, the management of the
Company and the market prices of securities for companies in businesses
similar to that of the Company.
The Representatives have informed the Company and the Selling Stockholder
that the Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
In connection with the Offering, certain Underwriters (and selling group
members, if any) and their respective affiliates may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Stock. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M under the Securities Exchange Act of
1934, pursuant to which such persons may bid for or purchase Common Stock for
the purpose of stabilizing its market price. The Underwriters may also create
a short position for the account of the Underwriters by selling more Common
Stock in connection with the Offering than they are committed to purchase from
the Company and the Selling Stockholder and in such case may purchase Common
Stock in the open market following completion of the Offering to cover all or
a portion of such short position. The Underwriters may also cover all or a
portion of such position, up to 730,173 shares of Common Stock, by exercising
the Underwriters' over-allotment option referred to previously. In addition,
Prudential Securities Incorporated, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby it
may reclaim from an Underwriter (or any dealer participating in the Offering)
for the account of the other Underwriters, the selling concession with respect
to Common Stock that is distributed in the Offering but subsequently purchased
for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph are
required, and, if they are undertaken, they may be discontinued at any time.
In connection with the Unit Offering, Jefferies & Company, Inc. received a
right of first refusal to act as co-managing underwriter or placement agent
for the Company if the Company issues debt or equity securities in either a
private placement in excess of $5,000,000 or a public sale of securities. Such
right of first refusal expires on August 19, 2000.
Each of the Representatives uses (and certain of the Underwriters may use)
the teleconferencing and other services of VIALOG from time to time.
70
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of Common
Stock offered hereby will be passed upon for the Company by Mirick, O'Connell,
DeMallie & Lougee, llp, Worcester, Massachusetts. David L. Lougee, a partner
in such firm, is a director of the Company. Partners and associates of Mirick,
O'Connell, DeMallie & Lougee, llp own an aggregate of 69,000 shares of the
Company's Common Stock and hold options to acquire an additional 12,000
shares, 5,340 of which may be exercised as of September 1, 1998. Certain legal
matters related to this Offering will be passed upon for the Underwriters by
Cadwalader, Wickersham & Taft, New York, New York.
EXPERTS
The historical financial statements as indicated in the index on pages F-1
and F-2 of this Prospectus have been included herein and in the Registration
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere in this Prospectus, and upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (which term shall encompass any amendment thereto) under the Securities
Act for the registration of the shares of the Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
certain items of which are contained in the financial statement schedules and
exhibits to the Registration Statement as permitted by the rules and
regulations of the Commission. For further information, reference is made to
the Registration Statement, including the financial statement schedules and
exhibits filed as a part thereof. Statements made in this Prospectus
concerning the contents of any document referred to herein are not necessarily
complete. With respect to each such document filed with the Commission as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved and each such statement shall
be deemed qualified in its entirety by such reference. The Company is subject
to the informational requirements of the Securities Exchange Act of 1934 and
in accordance therewith, files reports and other information with the
Commission. Such reports and other information filed by the Company with the
Commission, as well as the Registration Statement and the exhibits thereto
filed by the Company with the Commission, may be inspected and copied at the
public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional
offices of the Commission: Seven World Trade Center, Suite 1300, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois, 60661-2511. Copies of such materials can be obtained by mail from
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition the
Commission maintains a site on the World Wide Web that contains reports, proxy
and information statements and other information filed electronically by the
Company with the Commission which can be accessed over the Internet at
http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent certified public
accountants and will make available quarterly reports containing unaudited
summary financial information for each of the first three quarters of each
fiscal year.
VIALOG Group Communications is a service mark of the Company. ProShare is a
registered trademark of Intel Corporation. NetMeeting is a registered
trademark of Microsoft Corporation. All other trademarks or trade names
referred to in this Prospectus are the property of their respective owners.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation.................................................... F-3
Pro Forma Consolidated Balance Sheet at June 30, 1998.................... F-4
Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1997....................................................... F-5
Pro Forma Consolidated Statement of Operations for the Six Months Ended
June 30, 1998........................................................... F-6
Notes to Unaudited Pro Forma Consolidated Financial Statements........... F-7
HISTORICAL FINANCIAL STATEMENTS
VIALOG Corporation
Report of Management................................................... F-9
Independent Auditors' Report........................................... F-10
Consolidated Balance Sheets............................................ F-11
Consolidated Statements of Operations.................................. F-12
Consolidated Statements of Stockholders' Equity (Deficit).............. F-13
Consolidated Statements of Cash Flows.................................. F-14
Notes to Consolidated Financial Statements............................. F-15
Telephone Business Meetings, Inc. ("Access")--The Reston Center
Independent Auditors' Report........................................... F-31
Balance Sheets......................................................... F-32
Statements of Operations............................................... F-33
Statements of Stockholders' Equity..................................... F-34
Statements of Cash Flows............................................... F-35
Notes to Financial Statements.......................................... F-36
Conference Source International, Inc. ("CSI")--The Atlanta Center
Independent Auditors' Report........................................... F-42
Balance Sheets......................................................... F-43
Statements of Operations............................................... F-44
Statements of Stockholders' Equity..................................... F-45
Statements of Cash Flows............................................... F-46
Notes to Financial Statements.......................................... F-47
Call Points, Inc. ("Call Points")--The Montgomery Center
Independent Auditors' Report........................................... F-52
Balance Sheets......................................................... F-53
Statements of Operations............................................... F-54
Statements of Stockholders' Equity..................................... F-55
Statements of Cash Flows............................................... F-56
Notes to Financial Statements.......................................... F-57
Kendall Square Teleconferencing, Inc. ("TCC")--The Cambridge Center
Independent Auditors' Report........................................... F-63
Balance Sheets......................................................... F-64
Statements of Operations............................................... F-65
Statements of Stockholders' Equity..................................... F-66
Statements of Cash Flows............................................... F-67
Notes to Financial Statements.......................................... F-68
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
American Conferencing Company, Inc. and Resource Objectives, Inc.
("Americo")--The Oradell Center
Independent Auditors' Report........................................... F-74
Combined Balance Sheets................................................ F-75
Combined Statements of Operations...................................... F-76
Combined Statements of Stockholders' Equity (Deficit).................. F-77
Combined Statements of Cash Flows...................................... F-78
Notes to Combined Financial Statements................................. F-79
Communication Development Corporation ("CDC")--The Danbury Center
Independent Auditors' Report........................................... F-85
Balance Sheets......................................................... F-86
Statements of Operations............................................... F-87
Statements of Stockholders' Equity..................................... F-88
Statements of Cash Flows............................................... F-89
Notes to Financial Statements.......................................... F-90
A Business Conference-Call, Inc. ("ABCC")
Independent Auditors' Report........................................... F-94
Balance Sheets......................................................... F-95
Statements of Income and Retained Earnings............................. F-96
Statements of Cash Flows............................................... F-97
Notes to Financial Statements.......................................... F-98
</TABLE>
F-2
<PAGE>
VIALOG CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma consolidated financial statements give
effect to (i) the acquisitions by VIALOG Corporation on November 12, 1997 of
all of the stock of (a) Telephone Business Meetings, Inc. ("Access"), (b)
Conference Source International, Inc. ("CSI"), (c) Kendall Square
Teleconferencing, Inc. ("TCC"), (d) American Conferencing Company, Inc.
("Americo"), and (e) Communication Development Corporation ("CDC"), and
substantially all the net assets of Call Points, Inc. ("Call Points")
(together, the "Acquired Companies"), (ii) the closing of a private placement
of notes and warrants on November 12, 1997 (the "Unit Offering"), (iii) the
acquisition by VIALOG Corporation of all of the stock of A Business
Conference-Call, Inc. ("ABCC"), which will occur simultaneously with the
closing of this Offering and will be accounted for using the purchase method
of accounting and (iv) the consummation of this Offering. The unaudited pro
forma consolidated statements of operations give effect to the acquisitions of
the Acquired Companies and ABCC, the closing of the Unit Offering and this
Offering as if they had occurred on January 1, 1997. The unaudited pro forma
consolidated balance sheet gives effect to the acquisition of ABCC and the
consummation of this Offering as if they had occurred on June 30, 1998. These
statements are based on the historical financial statements of VIALOG
Corporation, the Acquired Companies and ABCC and the estimates and assumptions
set forth below and in the notes to the unaudited pro forma consolidated
financial statements.
The pro forma adjustments are based upon estimates, currently available
information and certain assumptions that management deems appropriate. The
unaudited pro forma consolidated financial data presented herein are not
necessarily indicative of the results the Company would have obtained had such
events occurred on January 1, 1997, as assumed, or the future results of the
Company. The unaudited pro forma consolidated financial statements should be
read in conjunction with the other financial statements and notes thereto
included elsewhere in this Prospectus.
F-3
<PAGE>
VIALOG CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
----------------------------
OFFERING AS
VIALOG CORP. ABCC ADJUSTMENTS(1) CONSOLIDATED ADJUSTMENT(1) ADJUSTED
------------ ------ -------------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents................ $ 3,608 $ 466 $ (416)(a) $ 3,658 $45,732 (c) $ 34,838
(14,552)(d)
Accounts receivable,
net.................. 6,613 656 -- 7,269 -- 7,269
Prepaid expenses...... 298 115 -- 413 -- 413
Deferred offering
costs ............... 174 -- -- 174 (174)(c) --
Other current assets.. 59 -- -- 59 -- 59
------- ------ ------- ------- ------- --------
Total current as-
sets............... 10,752 1,237 (416) 11,573 31,006 42,579
Property and equipment,
net.................... 9,396 476 -- 9,872 -- 9,872
Deferred debt issuance
costs.................. 6,377 -- -- 6,377 -- 6,377
Goodwill and intangible
assets, net............ 43,140 -- 13,701 (b) 56,841 -- 56,841
Other assets............ 626 3 -- 629 -- 629
------- ------ ------- ------- ------- --------
Total assets........ $70,291 $1,716 $13,285 $85,292 $31,006 $116,298
======= ====== ======= ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt....... $ 370 $ -- $ -- $ 370 $ -- $ 370
Accounts payable...... 2,619 250 -- 2,869 -- 2,869
Pro forma considera-
tion due ABCC stock-
holders.............. -- -- 14,552 (b) 14,552 (14,552)(d) --
Accrued expenses...... 5,560 199 -- 5,759 -- 5,759
------- ------ ------- ------- ------- --------
Total current lia-
bilities........... 8,549 449 14,552 23,550 (14,552) 8,998
Long-term debt, less
current portion........ 71,911 -- -- 71,911 -- 71,911
Other long-term liabili-
ties................... 206 -- -- 206 -- 206
Stockholders' equity
(deficit):
Common stock.......... 37 -- -- 37 46 (c) 83
Additional paid-in
capital.............. 11,742 10 (10)(b) 11,742 45,512 (c) 57,254
Retained earnings
(deficit)............ (22,154) 1,257 (841)(b) (22,154) -- (22,154)
(416)(a)
------- ------ ------- ------- ------- --------
Total stockholders'
equity (deficit)... (10,375) 1,267 (1,267) (10,375) 45,558 35,183
------- ------ ------- ------- ------- --------
Total liabilities
and stockholders'
equity (deficit)... $70,291 $1,716 $13,285 $85,292 $31,006 $116,298
======= ====== ======= ======= ======= ========
</TABLE>
- --------
(1) See Note 3 to unaudited pro forma consolidated financial statements.
F-4
<PAGE>
VIALOG CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ACQUIRED COMPANIES--PERIOD FROM
VIALOG CORP. JANUARY 1, 1997 TO NOVEMBER 12, 1997 ABCC PRO FORMA
YEAR ENDED ----------------------------------------------- YEAR ENDED -------------------------------
DECEMBER 31, CALL DECEMBER 31,
1997 ACCESS CSI POINTS TCC AMERICO CDC 1997 ADJUSTMENTS(1) CONSOLIDATED(1)
------------ ------- ------ ------ ------ ------- ------ ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues..... $ 4,816 $10,945 $5,579 $7,335 $3,554 $1,892 $1,796 $5,709 $ -- $ 41,626
Cost of revenues,
excluding depre-
ciation.......... 2,492 4,791 2,052 5,092 1,793 1,215 852 2,086 -- 20,373 (h)
Selling, general
and administra-
tive expenses.... 7,178 4,124 831 1,337 1,285 931 602 1,231 (151)(a) 16,490
(878)(b)
Depreciation ex-
pense............ 273 823 356 623 159 56 57 148 -- 2,495
Amortization of
goodwill and in-
tangibles........ 306 -- -- -- -- -- -- -- 2,872 (c) 3,178
Write-off of pur-
chased research
and development.. 8,000 -- -- -- -- -- -- -- (8,000)(d) --
--------- ------- ------ ------ ------ ------ ------ ------ -------- ---------
Operating income
(loss).......... (13,433) 1,207 2,340 283 317 (310) 285 2,244 6,157 (910)
Interest income
(expense), net... (1,866) (132) (120) 9 (39) (20) (4) 15 (10,587)(e) (12,744)
--------- ------- ------ ------ ------ ------ ------ ------ -------- ---------
Income (loss)
before income
taxes........... (15,299) 1,075 2,220 292 278 (330) 281 2,259 (4,430) (13,654)
Income taxes..... 522 -- -- -- -- (25) 107 -- (82)(f) 522
--------- ------- ------ ------ ------ ------ ------ ------ -------- ---------
Net income
(loss).......... $ (15,821) $ 1,075 $2,220 $ 292 $ 278 $ (305) $ 174 $2,259 $ (4,348) $ (14,176)
========= ======= ====== ====== ====== ====== ====== ====== ======== =========
Net loss per
share - basic
and diluted .... $ (5.48) $ (1.78) (g)
========= =========
Weighted average
shares outstand-
ing............. 2,889,005 7,962,284 (g)
========= =========
</TABLE>
- -----
(1) See Note 4 to unaudited pro forma consolidated financial statements.
F-5
<PAGE>
VIALOG CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
VIALOG ------------------------------
CORP. ABCC ADJUSTMENTS(1) CONSOLIDATED(1)
---------- ------ -------------- ---------------
<S> <C> <C> <C> <C>
Net revenues............... $ 23,168 $3,591 $ -- $ 26,759
Cost of revenues, excluding
depreciation.............. 12,134 1,181 -- 13,315 (h)
Selling, general and
administrative expenses... 7,942 751 -- 8,693
Depreciation expense....... 1,235 74 -- 1,309
Amortization of goodwill
and intangibles........... 1,251 -- 343 (c) 1,594
---------- ------ ----- ----------
Operating income......... 606 1,585 (343) 1,848
Interest income (expense),
net....................... (6,154) 4 -- (6,150)
---------- ------ ----- ----------
Net income (loss)........ $ (5,548) $1,589 $(343) $ (4,302)
========== ====== ===== ==========
Net loss per share - basic
and diluted............... $ (1.55) $ (0.53)
========== ==========
Weighted average shares
outstanding............... 3,585,370 8,185,370 (g)
========== ==========
</TABLE>
- --------
(1) See Note 4 to unaudited pro forma consolidated financial statements.
F-6
<PAGE>
VIALOG CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) VIALOG CORPORATION BACKGROUND
VIALOG Corporation was formed on January 1, 1996 to create a national
independent provider of group communications services, consisting primarily of
operator-assisted and operator-on-demand audio teleconferencing, as well as
video and data conferencing services. VIALOG Corporation conducted no
operations through November 12, 1997 and on that date consummated agreements
to acquire the six Acquired Companies simultaneously with the consummation of
the Unit Offering.
(2) ACQUISITION OF ABCC
Simultaneously with the closing of this Offering, VIALOG Corporation will
acquire all of the stock of A Business Conference-Call, Inc. ("ABCC"). The
acquisition will be accounted for using the purchase method of accounting. The
purchase price is estimated to be $14.0 million in cash plus (i) an additional
amount, based on ABCC's closing date balance sheet, equal to the balances of
cash plus accounts receivable (net of a bad debt reserve of 5%) less all
liabilities as of the closing date and (ii) approximately $100,000 related to
tax reimbursements discussed below. Based on ABCC's June 30, 1998 balance
sheet, the amount of such additional consideration would be approximately
$252,000. In addition, the Company expects to incur approximately $200,000 of
acquisition costs. Of the estimated purchase price, $851,000 has been
allocated to the identifiable assets acquired and liabilities assumed and the
balance (currently estimated at $13.7 million) has been allocated to
intangible assets. In management's opinion, the preliminary estimates
regarding allocation of the purchase price is not expected to differ
materially from the final adjustments. VIALOG Corporation and ABCC have agreed
to make an election to treat the purchase and sale of the capital stock of
ABCC as a purchase and sale of assets. VIALOG Corporation will reimburse the
stockholders of ABCC approximately $100,000, which is the difference between
the taxes incurred by such stockholders as a result of such election and the
taxes which would have been incurred by such stockholders had no such election
been made. ABCC will make distributions to its stockholders of all cash and
income on an accrual basis prior to or upon consummation of the merger.
(3) UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS
(a) Represents a capital distribution to ABCC shareholders and elimination
of historical equity balances of ABCC.
(b) The excess of the total purchase price for ABCC over the allocation of
fair value to the net assets will be recorded as intangible assets, which is
calculated based on the following assumptions:
<TABLE>
<S> <C>
Purchase consideration.............................................. $14,252
Tax reimbursements to stockholders of ABCC.......................... 100
Direct acquisition costs............................................ 200
-------
Total purchase price................................................ 14,552
Net tangible asset value of ABCC.................................... 851
-------
Intangible assets................................................... $13,701
=======
</TABLE>
Intangible assets represent primarily goodwill, which will be amortized on a
straight-line basis over its useful life, estimated to be 20 years. The
Company expects to complete a full valuation of the intangible assets
subsequent to the acquisition of ABCC. In management's opinion, the
preliminary estimates regarding allocation of the purchase price are not
expected to differ materially from the final adjustments.
(c) Records the cash proceeds of $45.6 million from the issuance of shares
of common stock, net of the underwriting discount of $3.5 million and
estimated offering costs of $1.5 million. Offering costs primarily consist of
legal fees, accounting fees, underwriters' out-of-pocket expenses and printing
expenses.
F-7
<PAGE>
VIALOG CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(d) Represents payment of purchase price to former stockholders of ABCC upon
completion of this Offering.
(4) UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS
(a) As a condition to closing the acquisitions, certain related party
royalty agreements were terminated as of the acquisition date. The adjustment
reflects the related party royalties under the agreements that were terminated
on November 12, 1997.
(b) As a condition to closing the acquisitions, certain officers, employees
and consultants agreed to accept reduced compensation and benefits subsequent
to the acquisitions. The adjustment reflects the difference between the
historical compensation and benefits of officers, employees and consultants of
the Acquired Companies and the compensation and benefits they agreed to accept
subsequent to the acquisitions.
(c) Adjustment reflects the amortization of goodwill and intangible assets,
which are amortized over periods ranging from 6 to 20 years.
(d) Adjustment reflects the elimination of the write-off of purchased in-
process research and development.
(e) Adjustment reflects the retirement of certain debt outstanding and the
consummation of the Unit Offering. Does not include an adjustment for interest
income earned on excess cash balances.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Assumed interest expense on the Senior Notes(1).......... $12,546
Assumed interest expense on capitalized lease
obligations............................................. 213
-------
Pro forma annual interest expense........................ 12,759
Less: interest expense recorded.......................... (2,172)
-------
Net Adjustment to interest expense....................... $10,587
=======
</TABLE>
- --------
(1) Includes $1.9 million of annual amortization of bond issuance costs and
$1.1 million of amortization of original issue discount.
(f) The pro forma income tax provision has been calculated as if each of the
Acquired Companies and ABCC had been included in the Company's consolidated
income tax return and, therefore, was subject to corporate income taxation.
(g) The pro forma loss per share is computed by dividing the net loss by the
weighted average number of shares outstanding. The calculation of the weighted
average number of shares outstanding assumes that the 559,330 shares of the
Company's common stock issued in connection with the acquisitions of the
Acquired Companies and the 4,600,000 shares of the Company's common stock to
be issued in connection with this Offering were outstanding for the entire
period.
(h) Certain of the Acquired Companies and ABCC have entered into new
contracts for long distance telephone service. Had these contracts been in
effect as of January 1, 1997, cost of revenues for the year ended December 31,
1997 and the six months ended June 30, 1998 would have decreased by $1.6
million and $549,000, respectively.
F-8
<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 Independent Auditors' Report appears below.
Glenn D. BolducChief Executive Officer,President and Treasurer
John J. Dion Vice President--Finance
F-9
<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, except for Notes 16 (a) and (b)
which are as of March 26, 1998,
Note 16(c) which is as of May 23, 1998
and Note 16(d) which is as of July 23, 1998.
F-10
<PAGE>
VIALOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 337 $ 9,567 $ 3,608
Accounts receivable, net of allowance
for doubtful accounts of $0, $32 and
$159, respectively.................... -- 5,686 6,613
Prepaid expenses....................... -- 156 298
Deferred offering costs................ 377 -- 174
Other current assets................... 13 101 59
------ -------- --------
Total current assets................. 727 15,510 10,752
Property and equipment, net.............. 7 7,544 9,396
Deferred debt issuance costs............. -- 7,324 6,377
Goodwill and intangible assets, net...... -- 44,391 43,140
Deferred income taxes.................... 522 -- --
Other assets............................. 7 314 626
------ -------- --------
Total assets......................... $1,263 $ 75,083 $ 70,291
====== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current portion of long-term debt...... $ -- $ 397 $ 370
Accounts payable....................... 313 2,129 2,619
Accrued expenses....................... 663 5,725 5,560
------ -------- --------
Total current liabilities............ 976 8,251 8,549
Long-term debt, less current portion..... -- 71,539 71,911
Other long-term liabilities.............. -- 175 206
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, 3,486,380 and 3,665,072
shares, respectively, issued and
outstanding........................... 28 35 37
Additional paid-in capital............. 1,044 11,689 11,742
Retained deficit....................... (785) (16,606) (22,154)
------ -------- --------
Total stockholders' equity
(deficit)........................... 287 (4,882) (10,375)
------ -------- --------
Total liabilities and stockholders'
equity (deficit).................... $1,263 $ 75,083 $ 70,291
====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ --------------------
1996 1997 1997 1998
----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues.................. $ -- $ 4,816 $ -- $ 23,168
Cost of revenues, excluding
depreciation................. -- 2,492 -- 12,134
Selling, general and
administrative expenses...... 1,308 7,178 3,530 7,942
Depreciation expense.......... -- 273 3 1,235
Amortization of goodwill and
intangibles.................. -- 306 -- 1,251
Write-off of purchased in-
process research
and development.............. -- 8,000 -- --
----------- ----------- --------- ---------
Operating income (loss)..... (1,308) (13,433) (3,533) 606
Interest income (expense),
net.......................... 1 (1,866) (66) (6,154)
----------- ----------- --------- ---------
Loss before income taxes.... (1,307) (15,299) (3,599) (5,548)
Income tax benefit (expense).. 522 (522) -- --
----------- ----------- --------- ---------
Net loss.................... $ (785) $ (15,821) $ (3,599) $ (5,548)
=========== =========== ========= =========
Net loss per share - basic and
diluted...................... $ (0.38) $ (5.48) $ (1.30) $ (1.55)
=========== =========== ========= =========
Weighted average shares
outstanding.................. 2,088,146 2,889,005 2,773,300 3,585,370
=========== =========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<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
offering dated
May 8, 1996.......... 378,000 4 101 -- 105
Outsiders by private
offering 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)
Options exercised
(unaudited)........... 176,192 2 39 -- 41
Issuance of common
stock to consultant in
lieu of payment for
services (unaudited).. 2,500 -- 14 -- 14
Net loss (unaudited)... -- -- -- (5,548) (5,548)
--------- ---- ------- -------- --------
Balance at June 30, 1998
(unaudited)............ 3,665,072 $ 37 $11,742 $(22,154) $(10,375)
========= ==== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------- ----------------
1996 1997 1997 1998
----- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $(785) $(15,821) $(3,599) $(5,548)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................... -- 273 3 1,235
Amortization of goodwill and intangibles... -- 306 -- 1,251
Amortization of debt issuance costs and
debt discount............................. -- 545 53 1,496
Provision for doubtful accounts............ -- 32 -- 131
Deferred income taxes...................... (522) 522 -- --
Write-off of deferred offering costs....... -- 377 205 --
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) -- (1,058)
Prepaid expenses and other current assets.. (13) (68) 13 (100)
Other assets............................... (7) (64) -- (199)
Accounts payable........................... 313 (351) 1,100 490
Accrued expenses........................... 663 1,716 1,459 (151)
Other long-term liabilities................ -- 3 -- 31
----- -------- ------- -------
Cash flows used in operating activities... (178) (4,148) (766) (2,422)
----- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash
acquired.................................. -- (53,308) -- --
Additions to property and equipment........ (7) (454) (24) (3,087)
Deferred acquisition costs................. -- -- (42) (119)
----- -------- ------- -------
Cash flows used in investing activities... (7) (53,762) (66) (3,206)
----- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt
and warrants.............................. -- 75,755 500 --
Payments of long-term debt of businesses
acquired.................................. -- (2,239) -- --
Payments of long-term debt................. -- (533) -- (198)
Proceeds from issuance of common stock .... 899 2 2 41
Deferred offering costs ................... (377) -- -- (174)
Deferred debt issuance costs............... -- (5,845) -- --
----- -------- ------- -------
Cash flows provided by (used in) financing
activities............................... 522 67,140 502 (331)
----- -------- ------- -------
Net increase in cash and cash equivalents... 337 9,230 (330) (5,959)
Cash and cash equivalents at beginning of
period..................................... -- 337 337 9,567
----- -------- ------- -------
Cash and cash equivalents at end of period.. $ 337 $ 9,567 $ 7 $ 3,608
===== ======== ======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest................................... $ -- $ 72 $ -- $ 4,934
===== ======== ======= =======
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 $ -- $ --
===== ======== ======= =======
Acquisition 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.
F-14
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
VIALOG Corporation was incorporated in Massachusetts on January 1, 1996 as
Interplay Corporation. In January 1997, the Company changed its name to VIALOG
Corporation. For the 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 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 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 conducted by it related to the Acquisitions and the completion of
financing transactions to fund the acquisitions.
(b) Principles of Consolidation and Interim Financial Statements
The consolidated financial statements include the accounts of VIALOG and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The financial statements of VIALOG as of June 30, 1998 and for the six
months ended June 30, 1997 and 1998 are unaudited. All adjustments and
accruals (consisting only of normal recurring adjustments) have been recorded
that, in the opinion of management, are necessary for a fair presentation.
Results of operations for the interim periods are not necessarily indicative
of the results for the full year.
(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.
F-15
<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,
------------- JUNE 30,
1996 1997 1998
----- ------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Goodwill.......................................... $ -- $41,457 $41,457
Developed technology.............................. -- 1,930 1,930
Assembled workforce............................... -- 1,310 1,310
----- ------- -------
-- 44,697 44,697
Less: accumulated amortization.................... -- (306) (1,557)
----- ------- -------
$ -- $44,391 $43,140
===== ======= =======
</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. For the six months ended June 30, 1998,
research and development costs were approximately $651,000.
(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 amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit
F-16
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 and the six-month periods ended June 30, 1997
and 1998, common stock equivalents of 249,813, 896,900, 849,826 and 1,904,365
for the years ended December 31, 1996 and 1997 and the six months ended June
30, 1997 and 1998, respectively, were excluded from the diluted loss per share
calculation as they would be antidilutive. As a result, diluted loss per share
is the same as basic loss per share, and has not been presented separately.
(m) Reporting Comprehensive Income
In 1998, VIALOG adopted the provisions of Statement of Financial Accounting
Standards No. 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. Because VIALOG historically has not
experienced transactions which would be included in comprehensive income, the
adoption of SFAS No. 130 did not have a material impact on VIALOG's
consolidated financial statements and no additional disclosures are required.
(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.
F-17
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.................................. 52,697
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.
F-18
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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, CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS
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 instruments 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 the
Company'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 PROVISION BALANCE
BEGINNING OF CHARGED TO NET DEDUCTIONS AT END OF
PERIOD OPERATIONS FROM ALLOWANCE PERIOD
------------ ---------- -------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Six Months Ended June 30,
1998 (unaudited)........ $ 32 $ 131 $ (4) $ 159
Year Ended December 31,
1997.................... $ -- $ 32 $ -- $ 32
Year Ended December 31,
1996.................... $ -- $ -- $ -- $ --
</TABLE>
F-19
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1996 1997 1998
------------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Office furniture and
equipment.............. $ 7 $ 869 $1,110
Conferencing equipment.. -- 5,163 6,917
Computer equipment...... -- 697 1,830
Equipment under capital
lease.................. -- 898 824
Leasehold improvements.. -- 190 223
----- ------- ------
7 7,817 10,904
Less: accumulated depre-
ciation and amortiza-
tion................... -- (273) (1,508)
----- ------- ------
$ 7 $ 7,544 $9,396
===== ======= ======
</TABLE>
(6) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1996 1997 1998
----- ------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
12 3/4% Senior Notes payable, due 2001, net of
unamortized discount of $0, $4,203, and $3,659
respectively.................................... $ -- $70,797 $71,341
Capitalized lease obligations.................... -- 1,044 856
Other long-term debt............................. -- 95 84
----- ------- -------
Total long-term debt........................... -- 71,936 72,281
Less current portion........................... -- 397 370
----- ------- -------
Total long-term debt, less current portion..... $ -- $71,539 $71,911
===== ======= =======
</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 early 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
F-20
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 the Company'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 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 consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------ ---------------
1996 1997 1997 1998
---- ------- ----- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income.............................. $ 1 $ 56 $ -- $ 182
Interest expense............................. -- (1,922) (66) (6,336)
---- ------- ----- --------
Interest income (expense), net............. $ 1 $(1,866) $ (66) $ (6,154)
==== ======= ===== ========
</TABLE>
F-21
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) ACCRUED EXPENSES
Accrued expenses consist primarily of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1996 1997 1998
----- ------ -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accrued interest................................... $ -- $1,310 $1,215
Accrued payroll and related costs.................. 257 1,119 1,503
Accrued acquisition and financing related costs.... 406 1,550 1,203
Accrued other...................................... -- 1,746 1,639
----- ------ ------
$ 663 $5,725 $5,560
===== ====== ======
</TABLE>
(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.
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
------------------------ -------------- ----------------
(DOLLARS 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
------- -------- -----
(DOLLARS 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>
F-22
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
------ --------
(DOLLARS
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............................................. $ 522 $ (522)
===== ========
</TABLE>
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
--------------
(DOLLARS
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 carryforwards......................... -- 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
F-23
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $1,563,000 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 under the 1996 Stock Plan 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.
(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.
F-24
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
------------------------------------------- --------------------------
RANGE OF WEIGHTED WEIGHTED AVERAGE WEIGHTED
EXERCISE NUMBER AVERAGE REMAINING NUMBER AVERAGE
PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
-------- ----------- -------------- ---------------- ----------- --------------
<S> <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 years 43,720 2.00
$4.50-
$5.75 419,849 5.63 9.0 years 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.
F-25
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
----------- ------------
(DOLLARS IN THOUSANDS)
<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.
(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 and expenses to a
firm having a member who is also a director of VIALOG.
F-26
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) From December 1997 to February 1998, one of VIALOG's stockholders
provided consulting services to the Company for a monthly fee of $10,000.
(c) TCC provides teleconferencing services to customers of a company
owned by the spouse of a shareholder of the Company.
(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 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 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, management 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. 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.
F-27
<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 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 and the six months ended June 30, 1998.
Separate financial statements and other disclosures concerning the guarantor
subsidiaries are not presented because management has determined that they are
not material to investors.
<TABLE>
<CAPTION>
VIALOG CALL
CORP. ACCESS CSI POINTS TCC AMERICO CDC ELIMINATIONS CONSOLIDATED
-------- ------- ------- ------- ------ ------- ------ ------------ ------------
<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.
F-28
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
VIALOG
CORP. ACCESS CSI CALL POINTS TCC AMERICO CDC ELIMINATIONS CONSOLIDATED
-------- ------- ------- ----------- ------ ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
INFORMATION AS OF JUNE
30, 1998 (UNAUDITED)
Total current assets.... $ 2,111 $ 2,978 $ 2,029 $2,386 $1,055 $ (588) $ 781 $ -- $10,752
Property and equipment,
net.................... 291 4,439 1,109 1,761 1,069 636 91 -- 9,396
Investment in
subsidiaries........... 57,121 -- -- -- -- -- -- (57,121) --
Goodwill and intangible
assets, net............ -- 15,457 14,769 3,744 3,842 2,891 2,437 -- 43,140
Other assets............ 6,652 159 79 -- 14 91 8 -- 7,003
-------- ------- ------- ------ ------ ------ ------ -------- -------
Total assets........... $ 66,175 $23,033 $17,986 $7,891 $5,980 $3,030 $3,317 $(57,121) $70,291
======== ======= ======= ====== ====== ====== ====== ======== =======
Current liabilities..... $ 3,325 $ 2,065 $ 595 $ 934 $ 700 $ 797 $ 133 $ -- $ 8,549
Long-term debt,
excluding current
portion................ 71,341 16 334 -- 136 84 -- -- 71,911
Other liabilities....... -- 172 -- -- 13 -- 21 -- 206
Stockholders' equity
(deficit).............. (8,491) 20,780 17,057 6,957 5,131 2,149 3,163 (57,121) (10,375)
-------- ------- ------- ------ ------ ------ ------ -------- -------
Total liabilities and
stockholders' equity
(deficit)............. $ 66,175 $23,033 $17,986 $7,891 $5,980 $3,030 $3,317 $(57,121) $70,291
======== ======= ======= ====== ====== ====== ====== ======== =======
STATEMENT OF OPERATIONS
INFORMATION FOR THE SIX
MONTHS ENDED JUNE 30,
1998 (UNAUDITED)
Net revenues............ $ -- $ 8,797 $ 4,164 $4,787 $2,809 $1,457 $1,394 $ (240) $23,168
Cost of revenues,
excluding
depreciation........... -- 4,055 1,753 3,336 1,490 924 816 (240) 12,134
Selling, general and
administrative
expenses............... 4,907 714 463 323 474 778 283 -- 7,942
Depreciation expense.... 23 615 188 214 114 57 24 -- 1,235
Amortization of goodwill
and intangibles........ -- 445 433 127 102 78 66 -- 1,251
-------- ------- ------- ------ ------ ------ ------ -------- -------
Operating income
(loss)................ (4,930) 2,968 1,327 787 629 (380) 205 -- 606
Interest income
(expense), net......... (6,095) 3 (29) -- (19) (19) 5 -- (6,154)
-------- ------- ------- ------ ------ ------ ------ -------- -------
Net income (loss)...... $(11,025) $ 2,971 $ 1,298 $ 787 $ 610 $ (399) $ 210 $ -- $(5,548)
======== ======= ======= ====== ====== ====== ====== ======== =======
CASH FLOW INFORMATION
FOR THE SIX MONTHS
ENDED JUNE 30, 1998
Cash flows provided by
(used in)
operating activities... $ (4,016) $ 873 $ 647 $ (45) $ 313 $ (61) $ (133) $ -- $(2,422)
Cash flows used in in-
vesting activities..... (363) (1,748) (336) (358) (300) (82) (19) -- (3,206)
Cash flows used in fi-
nancing activities..... (133) (18) (119) -- (51) (10) -- -- (331)
-------- ------- ------- ------ ------ ------ ------ -------- -------
Net increase in cash and
cash
equivalents............ (4,512) (893) 192 (403) (38) (153) (152) -- (5,959)
Cash and cash equiva-
lents at the
beginning of period.... 8,396 440 (49) 489 46 67 178 -- 9,567
-------- ------- ------- ------ ------ ------ ------ -------- -------
Cash and cash equiva-
lents at the end of
period................. $ 3,884 $ (453) $ 143 $ 86 $ 8 $ (86) $ 26 $ -- $ 3,608
======== ======= ======= ====== ====== ====== ====== ======== =======
</TABLE>
F-29
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(16) SUBSEQUENT EVENTS
(a) Exchange Offer
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.
On March 26, 1998, the Exchange Offer of 12 3/4% Senior Notes, Series B for
the existing 12 3/4% Senior Notes, Series A terminated, with all of the Old
Notes being surrendered for Exchange Notes.
(b) The 1996 Stock Plan
During the six months ended June 30, 1998, VIALOG granted to employees under
the 1996 Stock Plan, options to purchase 696,975 shares of common stock at
exercise prices ranging from $5.75 to $10.00 per share.
(c) ABCC Acquisition
In May, 1998, VIALOG signed a definitive merger agreement to acquire all of
the common stock of A Business Conference-Call, Inc., contingent upon
completion of certain items defined in the merger agreement. The acquisition
will be accounted for using the purchase method of accounting. The total
purchase price is $14.0 million in cash plus (i) an additional amount, based
on ABCC's closing date balance sheet, equal to the balances of cash plus
accounts receivable (net of a bad debt reserve of 5%) less all liabilities as
of the closing date and (ii) approximately $100,000 related to tax
reimbursements. Based on the June 30, 1998 balance sheet, the amount of such
additional consideration would be approximately $252,000. In addition, the
Company expects to incur approximately $200,000 of acquisition costs. The two
stockholders of ABCC will each enter into one-year employment contracts and
receive incentive stock options for the purchase of 37,500 shares of common
stock at an exercise price equal to the fair value of the common stock at the
effective date of the merger. The options will vest as to 3,125 shares on the
effective date of the merger and an additional 3,125 shares on each October 1,
January 1, April 1, and July 1 thereafter until fully vested.
(d) Officer Termination
The Company terminated the employment of David L. Lipsky, former President
of Americo, in June 1998. On July 22, 1998, the Company and Mr. Lipsky signed
an agreement resolving a dispute regarding his employment and position at
Americo. The Company agreed to pay Mr. Lipsky a sum of $309,000, less required
witholdings and deductions, in satisfaction of amounts due under his
employment agreement and to include Mr. Lipsky as a selling stockholder in
this Offering with respect to the 267,826 shares of common stock owned by Mr.
Lipsky. In exchange, Mr. Lipsky agreed, among other things, to cancel all of
his vested and unvested stock options, release the Company from all claims,
refrain from acquiring any voting securities of the Company for ten years, and
acknowledge the termination of his employment as President of Americo and his
term as a Director of the Company. Approximately $413,000 has been expensed in
the six months ended June 30, 1998 related to the payment of $309,000 and
associated legal fees.
F-30
<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
F-31
<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.
F-32
<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
amortization 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.
F-33
<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% in-
terest (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.
F-34
<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 operat-
ing activities:
Net income............. $ 445 $ 191 $ 212 $1,373 $1,075
Adjustments to recon-
cile net income to net
cash
provided by operating
activities:
Depreciation and amor-
tization.............. 269 121 375 630 823
Deferred income tax-
es.................... 24 -- (62) -- --
Compensation expense
for issuance of com-
mon stock............. -- -- -- 148 402
Changes in operating
assets and liabili-
ties:
Trade accounts re-
ceivable, net........ (71) (170) (108) (301) (589)
Prepaid expenses and
other current as-
sets................. (58) 62 (5) (53) 146
Accounts payable and
accrued expenses..... (17) 90 22 227 711
Income taxes pay-
able................. -- -- -- (10) --
Deferred rent......... -- -- 93 34 --
Other non current li-
abilities............ -- -- -- -- 364
----- ------ ------- ------ ------
Net cash provided by
operating activi-
ties................ 592 294 527 2,048 2,932
----- ------ ------- ------ ------
Cash flows from invest-
ing 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 in-
vesting activities.. (557) (163) (1,269) (795) (1,704)
----- ------ ------- ------ ------
Cash flows from financ-
ing 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 un-
der capital lease ob-
ligations............. -- -- (12) (28) --
Cash portion of consid-
eration paid to former
stockholder........... -- -- (300) -- --
Distributions to stock-
holders............... (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 equiva-
lents at beginning of
period................ 173 230 1,884 390 804
----- ------ ------- ------ ------
Cash and cash equiva-
lents at end of peri-
od.................... $ 230 $1,884 $ 390 $ 804 $ 483
===== ====== ======= ====== ======
Supplemental disclosures
of cash flow informa-
tion:
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 obliga-
tions................. $ -- $ -- $ 120 $ -- $ --
===== ====== ======= ====== ======
Issuance of note pay-
able in partial con-
sideration to
former stockholder.... $ -- $ -- $ 599 $ -- $ --
===== ====== ======= ====== ======
</TABLE>
See accompanying notes to financial statements.
F-35
<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
F-36
<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>
F-37
<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
F-38
<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.
F-39
<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%.
F-40
<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>
F-41
<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
F-42
<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; is-
sued 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.
F-43
<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 adminis-
trative 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 out-
standing .................. 1,000 1,000 1,000 1,000
====== ======= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-44
<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.
F-45
<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 activi-
ties:
Loss on sale of property and equip-
ment................................. -- -- -- 5
Depreciation and amortization......... 235 292 393 356
Changes in operating assets and lia-
bilities:
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 ex-
penses.............................. 55 (31) (19) 275
----- ----- ------- -------
Net cash provided by operating ac-
tivities........................... 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 obliga-
tions under capital leases............ -- -- 142 --
Principal repayment of obligations un-
der capital leases.................... (126) (148) (290) (338)
Distributions to stockholder........... -- -- (1,558) (2,636)
----- ----- ------- -------
Net cash provided by (used in) fi-
nancing 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 pe-
riod................................... $ 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.
F-46
<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.
F-47
<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>
F-48
<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.
F-49
<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.
F-50
<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% 48% 47% 58%
Customer B.............. 14% 24% 21% 25% 26% 26%
</TABLE>
F-51
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors Call Points, Inc.:
We have audited the accompanying balance sheets of Call Points, Inc. ("Call
Points") 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. These financial statements are the
responsibility of Call Points' 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 Call Points, 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,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Call
Points will continue as a going concern. As discussed in Note 10 to the
financial statements, Call Points' recurring losses and working capital
deficiency raise substantial doubt about the entity's ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 10. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Birmingham, Alabama
January 17, 1997 except for note 11 which is as of November 12, 1997
F-52
<PAGE>
CALL POINTS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 149 $ 31 $ 481
Trade accounts receivable, less allowance for
doubtful accounts of $73, $85 and $68 at De-
cember 31, 1995, December 31, 1996 and Sep-
tember 30, 1997 respectively (notes 4 and
8).......................................... 787 1,080 1,244
Due from related parties..................... 22 1 --
Prepaid expenses............................. 4 3 3
------- ------- -------
Total current assets....................... 962 1,115 1,728
------- ------- -------
Property and equipment, net (notes 2, 3 and
4)............................................ 2,256 1,919 1,659
Other assets................................... 4 2 --
------- ------- -------
Total assets............................... $ 3,222 $ 3,036 $ 3,387
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable to
related parties
(notes 4 and 7)............................. $ 439 $ 574 $ 861
Current installments of obligations under
capital lease-related party
(note 3).................................... -- 43 --
Accounts payable............................. 359 394 363
Accrued expenses (note 5).................... 273 315 595
Due to related parties (note 7).............. 140 169 --
------- ------- -------
Total current liabilities.................. 1,211 1,495 1,819
------- ------- -------
Notes payable to related parties, excluding
current installments
(notes 4 and 7)............................... 784 625 338
------- ------- -------
Total liabilities.......................... 1,995 2,120 2,157
------- ------- -------
Stockholders' equity:
Common stock--Class A, $1 par value. Autho-
rized 8,000 shares;
issued and outstanding 1,000 shares......... 1 1 1
Common stock--Class B, $1 par value. Autho-
rized 12,000 shares;
issued and outstanding 1,400 shares......... 1 1 1
Additional paid-in capital................... 3,132 3,132 3,132
Accumulated deficit.......................... (1,907) (2,218) (1,904)
------- ------- -------
Total stockholders' equity................. 1,227 916 1,230
------- ------- -------
Commitments and contingencies (notes 9, 10, 11
and 12)
Total liabilities and stockholders' equi-
ty........................................ $ 3,222 $ 3,036 $ 3,387
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
CALL POINTS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues (note 8).......... $ 8,537 $ 6,852 $ 7,509 $ 5,606 $ 6,230
Cost of revenues, excluding de-
preciation.................... 5,642 4,784 5,272 3,920 4,273
Selling, general and adminis-
trative expenses.............. 1,692 1,522 1,803 1,330 1,114
Depreciation expense........... 841 845 696 519 536
------- -------- -------- -------- --------
Income (loss) from opera-
tions....................... 362 (299) (262) (163) 307
Other income (expense):
Other income (expense), net.. 3 (7) -- -- --
Interest income/(expense),
net......................... (64) (65) (49) (48) 7
------- -------- -------- -------- --------
Income (loss) before income
tax expense................. 301 (371) (311) (211) 314
Income taxes (note 6).......... -- -- -- -- --
------- -------- -------- -------- --------
Net income (loss)............ $ 301 $ (371) $ (311) $ (211) $ 314
======= ======== ======== ======== ========
Net income (loss) per share -
basic and diluted .......... $125.42 $(154.58) $(129.58) $ (87.92) $ 130.83
======= ======== ======== ======== ========
Weighted average shares out-
standing ................... 2,400 2,400 2,400 2,400 2,400
======= ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
CALL POINTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------- ADDITIONAL TOTAL
NUMBER PAR PAID-IN ACCUMULATED STOCKHOLDERS'
OF SHARES VALUE CAPITAL DEFICIT EQUITY
--------- ----- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1993.................... 2,400 $ 2 $3,132 $(1,837) $1,297
Net income............. -- -- -- 301 301
----- ---- ------ ------- ------
Balance at December 31,
1994.................... 2,400 2 3,132 (1,536) 1,598
Net loss............... -- -- -- (371) (371)
----- ---- ------ ------- ------
Balance at December 31,
1995.................... 2,400 2 3,132 (1,907) 1,227
Net loss............... -- -- -- (311) (311)
----- ---- ------ ------- ------
Balance at December 31,
1996.................... 2,400 2 3,132 (2,218) 916
Net income (unau-
dited)................ -- -- -- 314 314
----- ---- ------ ------- ------
Balance at September 30,
1997 (unaudited)........ 2,400 $ 2 $3,132 $(1,904) $1,230
===== ==== ====== ======= ======
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE>
CALL POINTS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- --------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................... $ 301 $ (371) $ (311) $ (211) $ 314
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization...... 841 845 696 519 536
Changes in operating assets and
liabilities:
Trade accounts receivable, net.... (199) 183 (293) (212) (164)
Due from related parties.......... 16 14 21 -- 1
Prepaid expenses.................. -- 1 1 1 --
Other assets...................... 1 -- -- 31 2
Accounts payable.................. (146) 22 35 121 (31)
Accrued expenses.................. 71 (130) 42 13 280
Due to related parties............ (65) 277 29 -- (169)
------- ------- ------- ------ ------
Net cash provided by operating
activities...................... 820 841 220 262 769
------- ------- ------- ------ ------
Cash flows from investing
activities:
Additions to property and
equipment......................... (148) (105) (50) (39) (276)
------- ------- ------- ------ ------
Cash flows from financing
activities:
Principal payments on notes payable
to related party.................. (651) (669) (249) (249) --
Principal payments under capital
lease obligations--related party.. -- -- (39) (18) (43)
Principal repayment of long-term
debt.............................. (44) (8) -- -- --
------- ------- ------- ------ ------
Net cash used in financing
activities...................... (695) (677) (288) (267) (43)
------- ------- ------- ------ ------
Net increase (decrease) in cash and
cash equivalents................... (23) 59 (118) (44) 450
Cash and cash equivalents at
beginning of period................ 113 90 149 149 31
------- ------- ------- ------ ------
Cash and cash equivalents at end of
period............................. $ 90 $ 149 $ 31 $ 105 $ 481
======= ======= ======= ====== ======
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest.......................... $ 263 $ 65 $ 48 $ 48 $ --
======= ======= ======= ====== ======
Supplemental schedule of noncash
investing and financing activities:
During 1996, the Company issued
notes payable to a related party
to refinance two existing notes
payable and to acquire new
equipment as follows:
Notes payable--related party
(refinanced)..................... $ 455
Acquisition of equipment.......... 225
-------
Notes payable--related party..... $ 680
=======
During 1995, the Company issued
notes payable to a related party
to finance the acquisition of new
equipment and to finance operating
expenses due to the related party
as follows:
Acquisition of equipment
financed......................... $ 250
Financing of amounts due to
related parties.................. 409
-------
Notes payable--related party..... $ 659
=======
</TABLE>
During 1994, the Company offset a note payable--related party in the amount
of $135 against amounts due from a related party. Also during 1994, the
Company acquired equipment from a related party in exchange for notes payable
in the amount of $601.
See accompanying notes to financial statements.
F-56
<PAGE>
CALL POINTS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Call Points, Inc. ("Call Points") was incorporated in Delaware on December
29, 1988. Call Points operated as a division of one of its stockholders prior
to incorporation and is located at the stockholder's principal place of
business in Montgomery, Alabama. Call Points is a provider of international
group communications services to a wide range of organizations.
(b) Interim Financial Statements
The financial statements of Call Points as of September 30, 1997 and for the
nine months ended September 30, 1996 and 1997 are unaudited. All adjustments
and accruals (consisting only of normal recurring adjustments) have been
recorded that, in the opinion of management, are necessary for a fair
presentation. Results of operations for the interim periods are not
necessarily indicative of the results for the full year.
(c) Use of Estimates
Management of Call Points 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 money market deposits.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation of machinery and
equipment and furniture and fixtures is provided on the straight-line basis
over the estimated useful lives of the respective assets. The estimated useful
lives are as follows: three to eight years for furniture and fixtures; five to
ten years for machinery and equipment.
(f) 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 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.
(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
Call Points maintains a technical support and engineering department that,
in part, develops customized features and products for group communications.
In accordance with SFAS No. 2, Accounting for Research and
F-57
<PAGE>
CALL POINTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Development Costs, Call Points charges to expense (included in cost of
revenues) that portion of this department's costs which are related to
research and development activities. Call Points' research and development
expenses for the years ended December 31, 1994, 1995 and 1996 were $217,000,
$199,000 and $236,000, respectively. Call Points' research and development
expenses for the nine months ended September 30, 1996 and 1997 were $177,000
and $161,000, respectively.
(i) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Call Points 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 Call
Points' financial position, results of operations, or liquidity.
(j) Reclassifications
Certain items in the 1994 and 1995 financial statements have been
reclassified to conform with classifications used in the 1996 financial
statements.
(k) Earnings Per Share
Call Points 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 nine months ended
September 31, 1996 and 1997 (unaudited), 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 consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures........................... $ 382 $ 419 $ 512
Machinery and equipment.......................... 4,348 4,668 4,851
------ ------ ------
4,730 5,087 5,363
Less: accumulated depreciation................. 2,474 3,168 3,704
------ ------ ------
Property and equipment, net...................... $2,256 $1,919 $1,659
====== ====== ======
</TABLE>
(3) OBLIGATIONS UNDER CAPITAL LEASE--RELATED PARTY
Call Points was obligated to a related party under a capital lease that
expired during 1997. Leased equipment with a cost basis of $83,000 and
accumulated depreciation of $6,000 is included in property and equipment at
December 31, 1996. The present value of future minimum lease payments at
December 31, 1996 and September 30, 1997 is $43,000 and $0, respectively, and
is included in current liabilities.
F-58
<PAGE>
CALL POINTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable to stockholder; due in monthly
installments of $15,000, including interest at 8%
through December 25, 2000 (note 7)................ $ -- $ 659 $ 659
Notes payable to affiliate; due in monthly
installments of $25,000, including interest at 8%
through July 15, 1998 (note 7).................... 666 540 540
Note payable to stockholder; due in monthly
installments of $9,678, including interest at 8%
through July 15, 1998............................. 270 -- --
Note payable to stockholder; due in monthly
installments of $7,834, including interest at 8%
through January 1, 1999........................... 250 -- --
Notes payable to stockholders; noninterest bearing
and due in monthly installments of $37,500 through
January 1996; royalty payments accounted for as
interest were 10.4% of average indebtedness in
1995; secured by certain equipment and accounts
receivable........................................ 37 -- --
------ ------ ------
Total notes payable to related parties........... 1,223 1,199 1,199
Less current installments........................ 439 574 861
------ ------ ------
Notes payable to related parties, excluding
current installments............................ $ 784 $ 625 $ 338
====== ====== ======
</TABLE>
The aggregate maturities of notes payable to related parties are as follows
(in thousands):
<TABLE>
<S> <C>
October 1, to December 31, 1997................................. $ 574
1998............................................................ 304
1999............................................................ 160
2000............................................................ 161
------
$1,199
======
</TABLE>
(5) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------SEPTEMBER 30,
1995 1996 1997
------ -------------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued long distance fees...................... $ 208 $ 252 $ 354
Accrued fees and other expenses................. 65 63 145
Uninvoiced equipment purchases.................. -- -- 96
------ ----- -----
$ 273 $ 315 $ 595
====== ===== =====
</TABLE>
F-59
<PAGE>
CALL POINTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) INCOME TAXES
The components of income tax expense for the years ended December 31, 1994,
1995 and 1996, were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- ----
<S> <C> <C> <C>
Current:
Tax on income before carryforwards................... $ 240 $ -- $--
Tax benefit of loss carryforwards.................... (240) -- --
Deferred:
Deferred tax expense (exclusive of the effects of
other component listed below)....................... 113 (133) (112)
Increase (decrease) in valuation allowance for de-
ferred tax assets................................... (113) 133 112
----- ----- ----
$ -- $ -- $--
===== ===== ====
</TABLE>
Call Points had no income tax expense or benefit for the years ended
December 31, 1994, 1995 and 1996, which differs from the expected income tax
(benefit) expense computed by applying the federal statutory rate of 34% to
income (loss) before taxes as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate........ $ 102 $(126) $(106)
Meals and entertainment............................... 2 1 1
State income tax, net of federal benefit.............. 9 (8) (7)
Change in valuation allowance for deferred taxes
allocated to income tax expense...................... (113) 133 112
----- ----- -----
$ -- $ -- $ --
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
----- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to the allowance for
doubtful accounts.......................................... $ 24 $ 34
Intangible assets, principally due to differences in
amortization............................................... 11 --
Equipment spare parts, principally due to differences in
obsolescence reserves...................................... -- 4
Minimum tax credit carryforward............................. 12 12
Accrued expenses, principally due to vacation............... 4 4
Net operating loss carryforward............................. 858 939
----- ----
Total gross deferred tax assets........................... 909 993
Valuation allowance......................................... (736) (848)
----- ----
Net deferred tax assets................................... 173 145
Deferred tax liabilities:
Equipment, principally due to differences in depreciation... 171 143
Prepaid expenses............................................ 1 1
Other....................................................... 1 1
----- ----
Total deferred tax liabilities............................ 173 145
----- ----
Net deferred tax asset.................................... $ -- $--
===== ====
</TABLE>
F-60
<PAGE>
CALL POINTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996, Call Points has net operating loss carryforwards of
approximately $2.5 million. These carryforwards begin to expire in 2004. Upon
a change in ownership as defined in Section 382 of the Internal Revenue Code,
the ability to utilize these net operating losses may be limited (see note
11). Call Points also has alternative minimum tax credit carryforwards of
$12,000 which are available to reduce future regular income taxes, if any,
over an indefinite period.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. SFAS
109 requires that a valuation allowance be recorded against tax assets which
are not likely to be realized. Specifically, Call Points' carryforwards expire
at specific future dates and utilization of certain carryforwards is limited
to specific amounts each year. However, due to the uncertain nature of their
ultimate realization based upon past performance and expiration dates, Call
Points has established a full valuation allowance against these carryforward
benefits and is recognizing the benefits only as reassessment demonstrates
they are realizable.
(7) RELATED PARTY TRANSACTIONS
Call Points negotiated a restructuring agreement among its stockholders on
March 14, 1991. The significant terms of the agreement included: the
acquisition of teleconferencing bridges from certain stockholders for $2.3
million, in exchange for noninterest bearing notes payable due over a period
of five years; options for certain stockholders to purchase Class B common
stock of other stockholders for $900,000; monthly royalty payments based on
billed minutes through January 2006; forgiveness of certain notes payable to
stockholders totaling $522,000; a noncompete agreement; and a license
agreement. Royalty payments accounted for as interest expense were $61,000,
$27,000, and $0 for the years ended December 31, 1994, 1995 and 1996,
respectively. During 1995 and 1996, certain note payments were not made to
related parties. Although the principal amount of the notes was not changed,
the related parties waived $12,000 and $41,000 of interest payments during
1995 and 1996, respectively.
Call Points incurred expenses for services provided by its stockholders
affiliates are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
1994 1995 1996 1996 1997
------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Automotive usage................. $ 8 $ 4 $ 3 $ 2 $ 4
Computer rental.................. 19 19 18 12 6
Long-distance usage.............. 79 92 81 61 62
Management services.............. 64 67 94 70 66
Office space rental.............. 69 68 68 51 44
Miscellaneous.................... -- 1 -- -- 1
Teleconferencing bridge expense.. 286 207 137 103 49
</TABLE>
Teleconferencing bridge expenses include charges for access, maintenance and
equipment rental.
Call Points acquired equipment from its stockholders for which it issued
notes payable to them in the amount of $250,000 in 1995 and $225,000 in 1996.
F-61
<PAGE>
CALL POINTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(8) SIGNIFICANT CUSTOMERS
For the years ended December 31, 1995 and 1996, one customer accounted for
approximately 10% and 17% of net revenues, respectively. For the nine months
ended September 30, 1996 and 1997, the same customer accounted for
approximately 14% and 20% of net revenues, respectively.
(9) LEGAL PROCEEDINGS
Call Points is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on Call
Points' financial position, results of operations or liquidity.
In April 1997, Call Points settled one of the claims discussed above, which
required Call Points to make payment to the plaintiff of $30,000, which Call
Points paid in April 1997 and which is reflected in income from operations for
the nine months ended September 30, 1997. In July 1997, Call Points settled
another of the claims discussed above, which required Call Points to make
payment to the plaintiff of $28,000, which Call Points paid in July 1997 and
which is reflected in income from operations for the nine months ended
September 30, 1997.
(10) GOING CONCERN UNCERTAINTIES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate continuation of
Call Points as a going concern. During 1994, Call Points did not retain a
significant portion of sales to one customer which represented approximately
15% of revenues. While management has been aggressively pursuing additional
customers, Call Points was unable to replace the revenue volume it lost in
1994 and therefore realized net losses of $371,000 in 1995 and $311,000 in
1996. At December 31, 1996, Call Points' current liabilities exceeded current
assets by $380,000. The recurring losses and working capital deficiency create
an uncertainty about Call Points' ability to continue as a going concern. Call
Points has continued to aggressively market its services and has established a
Quality Assurance department in an effort to improve and maintain customer
satisfaction. Management believes these factors will continue to contribute
towards achieving and maintaining a consistent level of profitability.
(11) SUBSEQUENT EVENTS
On November 12, 1997, VIALOG Corporation ("VIALOG") acquired all of the
assets and certain liabilities of Call Points for cash and shares of common
stock of VIALOG. In conjunction with the acquisition, VIALOG obtained two-year
non-competition agreements from the principal stockholder and a key employee
of Call Points. Call Points also became a joint and several guarantor of
VIALOG's $75.0 million Senior Notes.
F-62
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Kendall Square Teleconferencing, Inc.:
We have audited the accompanying balance sheets of Kendall Square
Teleconferencing, Inc. ("TCC") 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. These financial
statements are the responsibility of TCC'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 Kendall Square
Teleconferencing, 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, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 18, 1997 except for note 10 which is as of November 12, 1997
F-63
<PAGE>
KENDALL SQUARE TELECONFERENCING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------
1995 1996 1997
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 3)
Current assets:
Cash and cash equivalents...................... $ 61 $ 104 $ --
Trade accounts receivable, less allowance for
doubtful accounts of $30, $60 and $85 at De-
cember 31, 1995, December 31, 1996 and Septem-
ber 30, 1997, respectively.................... 283 471 782
Due from related party (note 8)................ 16 61 70
Note receivable, stockholder................... 11 -- --
Other current assets........................... -- 28 3
------ ------ ------
Total current assets......................... 371 664 855
------ ------ ------
Property and equipment, net (notes 2, 3 and 4)... 643 733 902
Other assets..................................... 5 10 12
Deferred income taxes (note 6)................... 26 -- --
------ ------ ------
Total assets................................. $1,045 $1,407 $1,769
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note
3)............................................ $ 43 $ 28 $ 59
Current installments of obligations under capi-
tal leases (note 4)........................... 33 65 103
Accounts payable (note 8)...................... 279 438 343
Accrued expenses (note 5)...................... 33 127 232
Income taxes payable (note 6).................. 74 -- --
Distributions payable.......................... -- 45 130
Other current liabilities...................... -- 11 3
------ ------ ------
Total current liabilities.................... 462 714 870
------ ------ ------
Long-term debt, excluding current installments
(note 3)........................................ 55 26 7
Obligations under capital leases, excluding cur-
rent installments
(note 4)........................................ 105 157 221
Other liabilities................................ 21 -- --
Deferred income taxes (note 6)................... 47 -- --
------ ------ ------
Total liabilities............................ 690 897 1,098
------ ------ ------
Stockholders' equity:
Common stock, no par value. Authorized 15,000
shares;
issued and outstanding 1,000 shares at Decem-
ber 31, 1995; 1,740 at December 31, 1996 and
September 30, 1997............................ 62 68 68
Treasury stock, 428 common shares at cost...... (15) (15) (15)
Note receivable, stockholder................... -- (6) (6)
Retained earnings.............................. 308 463 624
------ ------ ------
Total stockholders' equity................... 355 510 671
------ ------ ------
Commitments and contingencies (notes 4, 8 and 10)
Total liabilities and stockholders' equity... $1,045 $1,407 $1,769
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-64
<PAGE>
KENDALL SQUARE TELECONFERENCING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues (note 8 and 9).... $ 1,515 $ 2,329 $ 3,396 $ 2,501 $ 3,003
Cost of revenues, excluding de-
preciation.................... 800 1,062 1,680 1,242 1,517
Selling, general and adminis-
trative expenses.............. 510 889 1,329 969 1,010
Depreciation expense........... 16 67 133 109 138
------- ------- ------- -------- ---------
Income from operations..... 189 311 254 181 338
Other income (expense):
Interest expense, net........ (6) (23) (42) (31) (31)
Other income................. 19 33 -- -- --
------- ------- ------- -------- ---------
Income before income tax
expense................... 202 321 212 150 307
Income tax expense (note 6).... 82 129 -- -- --
------- ------- ------- -------- ---------
Net income................. $ 120 $ 192 $ 212 $ 150 $ 307
======= ======= ======= ======== =========
Net income per share - ba-
sic and diluted .......... $120.00 $192.00 $121.84 $ 86.21 $ 176.44
======= ======= ======= ======== =========
Weighted average shares
outstanding .............. 1,000 1,000 1,740 1,740 1,740
======= ======= ======= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-65
<PAGE>
KENDALL SQUARE TELECONFERENCING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK NOTE TOTAL
------------- ----------------- RECEIVABLE RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCKHOLDER EARNINGS EQUITY
------ ------ ------- ------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... 1,000 $ 35 -- $ -- $-- $ 16 $ 51
Shares repurchased by
the Company.......... -- -- (428) (15) -- (20) (35)
Issuance of stock
options.............. -- 27 -- -- -- -- 27
Net income............ -- -- -- -- -- 120 120
------ ---- ------- ------- ---- ----- -----
Balance at December 31,
1994................... 1,000 62 (428) (15) -- 116 163
Net income............ -- -- -- -- -- 192 192
------ ---- ------- ------- ---- ----- -----
Balance at December 31,
1995................... 1,000 62 (428) (15) -- 308 355
Exercise of stock
options.............. 740 6 -- -- (6) -- --
Distributions:
Declared............ -- -- -- -- -- (45) (45)
Asset Distribution.. -- -- -- -- -- (12) (12)
Net income............ -- -- -- -- -- 212 212
------ ---- ------- ------- ---- ----- -----
Balance at December 31,
1996................... 1,740 68 (428) (15) (6) 463 510
Net income
(unaudited).......... -- -- -- -- -- 307 307
Distributions:
Cash (unaudited).... -- -- -- -- -- (16) (16)
Declared
(unaudited)........ -- -- -- -- -- (130) (130)
------ ---- ------- ------- ---- ----- -----
Balance at September 30,
1997 (unaudited)....... 1 ,740 $ 68 (428) $ (15) $ (6) $ 624 $ 671
====== ==== ======= ======= ==== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-66
<PAGE>
KENDALL SQUARE TELECONFERENCING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ------------------
1994 1995 1996 1996 1997
---- ----- ----- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $120 $ 192 $ 212 $ 150 $ 307
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 16 67 133 109 138
Deferred income taxes................ 34 32 (21) (21) --
Compensation expense arising from
stock options granted............... 27 -- -- -- --
Gain on disposal of assets........... (19) (33) -- -- --
Forgiveness of note receivable,
stockholder......................... -- -- 11 -- --
Changes in operating assets and
liabilities:
Trade accounts receivable, net...... (98) (133) (222) (170) (311)
Due from related party.............. -- -- (45) (20) (9)
Other current assets................ 15 -- (28) (6) 25
Other assets........................ (52) 46 (5) (4) (2)
Accounts payable.................... (28) 41 114 (99) (95)
Income taxes payable................ 23 (27) (74) (74) --
Accrued expenses.................... 24 5 94 159 105
Other current liabilities........... -- -- 11 8 (8)
Other liabilities................... -- 21 (21) -- --
---- ----- ----- -------- --------
Net cash provided by operating
activities........................ 62 211 159 32 150
---- ----- ----- -------- --------
Cash flows from investing activities:
Additions to property and equipment... (39) (231) (156) (153) (144)
Proceeds from sale of equipment....... 19 -- -- -- --
---- ----- ----- -------- --------
Net cash used in investing
activities........................ (20) (231) (156) (153) (144)
---- ----- ----- -------- --------
Cash flows from financing activities:
Proceeds from notes payable........... 20 121 -- -- 45
Principal payments on notes payable... (59) (53) (44) (29) (33)
Principal payments of capital lease
obligations.......................... -- -- (51) (34) (61)
Proceeds from capital lease
obligations.......................... -- -- 135 135 --
Repayment of stockholder loan......... (10) -- -- -- --
Payments to acquire treasury stock.... (35) -- -- -- --
Distributions to stockholders......... -- -- -- -- (61)
---- ----- ----- -------- --------
Net cash provided by (used in)
financing activities.............. (84) 68 40 72 (110)
---- ----- ----- -------- --------
Net increase (decrease) in cash and
cash equivalents....................... (42) 48 43 (49) (104)
Cash and cash equivalents at beginning
of period............................. 55 13 61 61 104
---- ----- ----- -------- --------
Cash and cash equivalents at end of
period................................ $ 13 $ 61 $ 104 $ 12 $ --
==== ===== ===== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest............................. $ 6 $ 19 $ 46 $ 34 $ 31
==== ===== ===== ======== ========
Taxes................................ $ 38 $ 92 $ 18 $ -- $ 13
==== ===== ===== ======== ========
Supplemental schedule of noncash
investing and financing activities:
Equipment acquired through capital
lease obligation..................... $-- $ 148 $ -- $ -- $ 163
==== ===== ===== ======== ========
Equipment acquired through accounts
payable to a related party (note 8).. $-- $ 216 $ 67 $ -- $ --
==== ===== ===== ======== ========
Distribution of assets to
stockholders......................... $-- $ -- $ 12 $ -- $ --
==== ===== ===== ======== ========
Distributions declared................ $-- $ -- $ 45 $ -- $ 130
==== ===== ===== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE>
KENDALL SQUARE TELECONFERENCING, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Kendall Square Teleconferencing, Inc. ("TCC") provides group communications
services to a variety of customers, primarily located in the United States.
The Company was incorporated in 1987 and has its operations center located in
Cambridge, Massachusetts. Prior to November 29, 1996, TCC operated under the
name Teleconversant Ltd.
On December 2, 1996, certain assets of TCC related to a contract for
services provided by TCC were distributed to certain of the stockholders of
TCC. These assets were incidental to the basic operations of TCC. The assets
distributed consisted of property and equipment, accounts receivable, accounts
payable and a customer contract with a net carrying value of $12,000 at
December 31, 1996. Revenues associated with the customer contract were
$642,000, $727,000, $565,000 and $707,000 for the years ended December 31,
1994, 1995 and the period January 1, to September 30, 1996 and January 1 to
December 2, 1996, respectively.
(b) Interim Financial Statements
The financial statements of TCC as of September 30, 1997 and for the nine
months ended September 30, 1996 and 1997 are unaudited. All adjustments and
accruals (consisting only of normal recurring adjustments) have been recorded
that, in the opinion of management, are necessary for a fair presentation.
Results of operations for the interim periods are not necessarily indicative
of the results for the full year.
(c) Revenue Recognition
Revenue for conference calls is recognized upon completion of the call.
Revenue for services is recognized upon performance of the service.
(d) Cash and Cash Equivalents
TCC considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.
(e) Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases is
stated at the present value of minimum lease payments. Depreciation of
property and equipment is provided on the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
are as follows: seven to ten years for furniture and fixtures; five to seven
years for office equipment; seven years for conferencing equipment; and three
years for purchased computer software. Equipment held under capital leases is
amortized straight line over the shorter of the lease life or the estimated
useful life of the assets, generally seven years.
(f) Income Taxes
Effective January 1, 1996, TCC elected by consent of its stockholders to be
taxed under the provisions of Subchapter S of the Internal Revenue Code. Under
those provisions, TCC does not pay corporate income taxes on its taxable
income. Instead, the stockholders are liable for individual income taxes on
TCC's taxable income. Prior to that election, income taxes were accounted for
under the asset and liability method. Deferred tax assets and liabilities were
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and
F-68
<PAGE>
KENDALL SQUARE TELECONFERENCING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
tax credit carryforwards. Deferred tax assets and liabilities were 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 was
recognized in income in the period that includes the enactment date.
(g) Use of Estimates
Management of TCC 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.
(h) Research and Development
TCC 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, TCC charges to
expense (included in cost of revenues) that portion of this department's costs
which are related to research and development activities. TCC's research and
development expenses for the years ended December 31, 1994, 1995 and 1996 were
$51,000, $51,000 and $75,000, respectively. TCC's research and development
expenses for the nine months ended September 30, 1996 and 1997 were $56,000
and $90,000, respectively.
(i) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
TCC 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
TCC's financial position, results of operations, or liquidity.
(j) Stock Option Plan
Prior to January 1, 1996, TCC accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price.
During 1996, TCC adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and later years as if the fair-value-based method defined in SFAS No. 123
had been applied. TCC has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123. There were no stock option grants during 1995 and 1996 and for the nine
month period ended September 30, 1997, therefore, no pro forma disclosures
have been provided for these periods.
(k) Earnings Per Share
TCC 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 nine months ended September 31,
1996 and 1997 (unaudited), 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.
F-69
<PAGE>
KENDALL SQUARE TELECONFERENCING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures......................... $ 3 $ 16 $ 32
Office equipment............................... 37 64 142
Conferencing equipment......................... 651 738 890
Purchased computer software.................... -- 96 153
------ ------ ------
691 914 1,217
Less: accumulated depreciation and amortiza-
tion.......................................... 48 181 315
------ ------ ------
Property and equipment, net.................. $ 643 $733 $ 902
====== ====== ======
</TABLE>
(3) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 30,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable to bank, due on demand at prime
plus 1% (9.5% at September 30, 1997); secured
by all assets and personal guarantees of
certain stockholders......................... $ -- $ -- $ 35
Note payable to bank, due in monthly
installments of $1,389 plus interest at 10%
through December, 1996; secured by certain
equipment. Balance was repaid during 1996.... 5 -- --
Note payable to bank; due in monthly
installments of $2,740 including interest at
11% through January 1999; secured by certain
equipment and personal guarantees of certain
stockholders. Additional principal repayments
were made without penalty during 1996........ 82 54 31
Note payable to bank; due in monthly
installments of $699, including interest at
11% through May, 1997; secured by certain
equipment. Balance was repaid during 1996.... 11 -- --
------ ------ -----
Total long-term debt........................ 98 54 66
Less: current installments.................. 43 28 59
------ ------ -----
Long-term debt, excluding current install-
ments...................................... $ 55 $ 26 $ 7
====== ====== =====
</TABLE>
The aggregate maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
October 1 to December 31, 1997......................................... $41
1998................................................................... 23
1999................................................................... 2
---
$66
===
</TABLE>
F-70
<PAGE>
KENDALL SQUARE TELECONFERENCING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) LEASES
TCC is obligated for equipment under various capital leases that expire at
various dates during the next four years. At December 31, 1995 and 1996, and
September 30, 1997 the gross amount of equipment and related accumulated
amortization recorded under capital leases were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Equipment........................................ $ 142 $ 357 $520
Less: accumulated amortization................... 7 68 145
------ ------ ----
$ 135 $ 289 $375
====== ====== ====
</TABLE>
Amortization of assets held under capital leases is included in depreciation
expense.
TCC also leases two facilities under operating leases expiring at various
dates through March, 2001. TCC's total rent expense was $29,000, $47,000 and
$108,000 for the years ended December 31, 1994, 1995 and 1996, respectively,
and $65,000 and $103,000 for the nine months ended September 30, 1996 and
1997, respectively. Future minimum payments under operating and capital leases
(which are guaranteed by certain stockholders) are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
(UNAUDITED)
<S> <C> <C>
October 1, to December 31, 1997.......................... $ 47 $ 29
1998..................................................... 188 147
1999..................................................... 176 126
2000..................................................... 176 69
2001..................................................... 44 30
---- ----
Total future minimum lease payments.................... $631 $401
====
Less: imputed interest................................... 77
----
Present value of minimum capital lease payments........ 324
Less: current installments of obligations under capital
leases................................................ 103
----
Obligations under capital leases excluding current
installments.......................................... $221
====
</TABLE>
(5) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued wages and related........................ $ 3 $ 53 $ 53
Accrued telephone charges and related............ 30 74 179
----- ------ ----
$33 $127 $232
===== ====== ====
</TABLE>
F-71
<PAGE>
KENDALL SQUARE TELECONFERENCING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) INCOME TAXES
Income tax expense consists of the following for the years ended December
31:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current.................................................... $ 48 $ 97
Deferred................................................... 34 32
------ -------
$ 82 $ 129
====== =======
</TABLE>
There is no income tax expense recorded for the year ended December 31, 1996
as a result of TCC's election to be taxed under the provisions of Subchapter
S. Income tax expense 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>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Income tax expense at statutory rate...................... $ 69 $ 109
State income tax, net of federal tax benefit.............. 12 19
Nondeductible expenses and other differences.............. 1 1
------ -------
$ 82 $ 129
====== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1995 are
presented below:
<TABLE>
<CAPTION>
1995
--------------
(IN THOUSANDS)
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts and accrued expenses..... $15
Stock compensation....................................... 11
---
Total gross deferred tax asset......................... 26
---
Deferred tax liabilities:
Property and equipment................................... 47
---
Total gross deferred tax liability..................... 47
---
Net deferred tax liability............................. $21
===
</TABLE>
(7) STOCK OPTIONS
In January 1994, the Board of Directors granted options to five individuals
to purchase an aggregate of 740 shares of common stock at an exercise price of
$8.77 per share. The options vested immediately and expire three years from
the date of grant. On January 2, 1996, all 740 options were exercised in
exchange for $6,490 in notes receivable from stockholders.
(8) RELATED PARTY TRANSACTIONS
TCC provides conferencing services to customers of Conferencing Services
International Inc. ("CSII"), a company owned by the spouse of a stockholder.
Total revenue from CSII was $80,000, $86,000 and $175,000 for the years ended
December 31, 1994, 1995 and 1996, respectively, and $75,000 and $183,000 for
the nine
F-72
<PAGE>
KENDALL SQUARE TELECONFERENCING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
month periods ended September 30, 1996 and 1997, respectively. Total accounts
receivable from CSII were $16,000 and $61,000 and $70,000 at December 31, 1995
and 1996 and September 30, 1997, respectively.
TCC has certain accounts payable to a supplier. Several stockholders are
also stockholders of the supplier company. The amounts outstanding are
$209,000, $89,000 and $110,000 at December 31, 1995 and 1996 and September 30,
1997, respectively, and are included in accounts payable.
TCC pays consulting fees to several of its stockholders. Total consulting
fees were $37,000, $45,000 and $14,000 for the years ended December 31, 1994,
1995 and 1996, respectively. There were no consulting fees for the nine month
periods ending September 30, 1996 and 1997.
(9) SIGNIFICANT CUSTOMERS
For the years ended December 31, 1994, 1995 and 1996 and for the nine months
ended September 30, 1996 and 1997, no customer accounted for more than 10% of
TCC's net revenues. At December 31, 1996 and September 30, 1997, one customer,
CSII, the related party discussed in note 8, accounted for 11% and 7% of the
total accounts receivable balance, respectively.
(10) SUBSEQUENT EVENTS
On November 12, 1997, VIALOG Corporation ("VIALOG") acquired all of the
outstanding stock of TCC for cash and Common Stock of VIALOG and TCC became a
wholly owned subsidiary of VIALOG. The acquisition of TCC will be accounted
for by the purchase method. Accordingly, all of the identified tangible and
intangible assets and liabilities will be recorded at their current fair
market value and the excess of the purchase price over the fair value of the
net assets acquired will be recorded as intangible assets, which will be
amortized over periods up to 20 years.
In conjunction with this merger, the tax status of TCC was converted from an
S corporation to a C corporation, whereby TCC will now be liable for income
taxes.
In November 1997, all of the long-term debt described in note 3 was repaid
in full, plus accrued interest. On November 12, 1997, TCC became a joint and
several guarantor of VIALOG's $75.0 million Senior Notes.
F-73
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Boards of Directors American Conferencing Company, Inc. and Resource
Objectives, Inc.:
We have audited the accompanying combined balance sheets of American
Conferencing Company, Inc. and Resource Objectives, Inc. (collectively
"Americo") as of December 31, 1995 and 1996, and the related combined
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 1996. These
combined financial statements are the responsibility of Americo's management.
Our responsibility is to express an opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of American
Conferencing Company, Inc. and Resource Objectives, Inc. as of December 31,
1995 and 1996, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 20, 1997 except for Note 10 which is as of November 12, 1997
F-74
<PAGE>
AMERICAN CONFERENCING COMPANY, INC.
AND RESOURCE OBJECTIVES, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (note 3)
Current assets:
Cash........................................... $ 17 $ 39 $ 9
Trade accounts receivable, net (note 8)........ 217 213 235
Inventory...................................... 30 4 3
Deferred income taxes (note 6)................. -- 15 15
Prepaid expenses and other current assets...... 5 5 44
------ ------ -----
Total current assets......................... 269 276 306
------ ------ -----
Property and equipment, net (note 2)............. 122 111 556
Other assets..................................... 14 17 78
------ ------ -----
Total assets................................. $ 405 $ 404 $ 940
====== ====== =====
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit agreement (note 3).............. $ 35 $ 35 $ 45
Current installments of long-term debt (note
11)........................................... -- -- 38
Current installments of obligations under capi-
tal leases ................................... 15 7 23
Accounts payable............................... 100 64 535
Accrued expenses (notes 4 and 5)............... 57 196 311
Income taxes payable........................... 17 14 --
Due to stockholder (note 5).................... 14 18 46
------ ------ -----
Total current liabilities.................... 238 334 998
------ ------ -----
Long-term debt, excluding current installments
(note 11)....................................... -- -- 104
Obligations under capital leases, excluding cur-
rent installments .............................. 16 -- 80
Other liabilities................................ 4 -- --
Deferred income taxes (note 6)................... 13 14 --
------ ------ -----
Total liabilities............................ 271 348 1,182
Stockholders' equity (deficit):
American Conferencing Company Inc.--common
stock, at stated value
Authorized 1,000 shares; issued and outstanding
50 shares..................................... 1 1 1
Resource Objectives, Inc.--common stock, at
stated value. Authorized 1,000 shares; issued
and outstanding 100 shares in 1995 and 1996... -- -- --
Resource Objectives, Inc.--treasury stock, 50
shares in 1995 and 1996....................... (35) (35) --
Retained earnings (deficit).................... 168 90 (243)
------ ------ -----
Total stockholders' equity (deficit)......... 134 56 (242)
------ ------ -----
Commitments and contingencies (notes 7 and 10)
Total liabilities and stockholders' equity... $ 405 $ 404 $ 940
====== ====== =====
</TABLE>
See accompanying notes to combined financial statements.
F-75
<PAGE>
AMERICAN CONFERENCING COMPANY, INC.
AND RESOURCE OBJECTIVES, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------
1994 1995 1996 1996 1997
------- ------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues (note 8)............. $ 772 $ 1,227 $ 1,679 $ 1,210 $ 1,581
Cost of revenues, excluding depre-
ciation.......................... 308 593 818 601 1,003
Selling, general, and administra-
tive expenses.................... 345 514 889 593 840
Depreciation expense.............. 27 32 36 30 48
------- ------- -------- ------- ---------
Income (loss) from operations... 92 88 (64) (14) (310)
Interest expense, net............. 6 6 9 10 13
------- ------- -------- ------- ---------
Income (loss) before income tax
expense (benefit)................. 86 82 (73) (24) (323)
Income tax expense (benefit) (note
6)............................... 16 22 (14) -- (25)
------- ------- -------- ------- ---------
Net income (loss)............... $ 70 $ 60 $ (59) $ (24) $ (298)
======= ======= ======== ======= =========
Net income (loss) per share -
basic and diluted.............. $ 1,400 $ 1,200 $ (1,180) $ (480) $ (14,900)
======= ======= ======== ======= =========
Weighted average shares out-
standing ...................... 50 50 50 50 20
======= ======= ======== ======= =========
</TABLE>
See accompanying notes to combined financial statements.
F-76
<PAGE>
AMERICAN CONFERENCING COMPANY, INC.
AND RESOURCE OBJECTIVES, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AMERICAN
CONFERENCING
COMPANY, INC. RESOURCE OBJECTIVES, INC.
COMMON STOCK COMMON STOCK
------------- ------------------------------
NUMBER NUMBER TOTAL
OF STATED OF STATED TREASURY RETAINED STOCKHOLDERS'
SHARES VALUE SHARES VALUE STOCK EARNINGS (DEFICIT) EQUITY (DEFICIT)
------ ------ -------- -------- --------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993...................... 50 $ 1 100 $ -- $ (35) $ 38 $ 4
Net income............... -- -- -- -- -- 70 70
--- ---- -------- -------- -------- ----- -----
Balance at December 31,
1994...................... 50 1 100 -- (35) 108 74
Net income............... -- -- -- -- -- 60 60
--- ---- -------- -------- -------- ----- -----
Balance at December 31,
1995...................... 50 1 100 -- (35) 168 134
Net loss................. -- -- -- -- -- (59) (59)
Dividends................ -- -- -- -- -- (19) (19)
--- ---- -------- -------- -------- ----- -----
Balance at December 31,
1996...................... 50 1 100 -- (35) 90 56
Net loss (unaudited)..... -- -- -- -- -- (298) (298)
Merger and recapitaliza-
tion (note 1a) (unau-
dited).................. 20 -- (100) -- 35 (35) --
--- ---- -------- -------- -------- ----- -----
Balance at September 30,
1997 (unaudited).............70 $ 1 -- $ -- $ -- $(243) $(242)
=== ==== ======== ======== ======== ===== =====
</TABLE>
See accompanying notes to combined financial statements.
F-77
<PAGE>
AMERICAN CONFERENCING COMPANY, INC.
AND RESOURCE OBJECTIVES, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ------------------
1994 1995 1996 1996 1997
----- ----- ----- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $ 70 $ 60 $ (59) $ (24) $ (298)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization....... 27 32 36 30 48
Deferred income taxes............... 9 -- (14) -- (14)
Changes in operating assets and lia-
bilities:
Trade accounts receivable, net..... (80) (35) 4 28 (22)
Inventory.......................... (11) (17) 26 23 1
Prepaid expenses and other current
assets............................ 2 -- -- -- (39)
Other assets....................... (6) (2) (3) (18) (61)
Accounts payable................... 18 (21) (36) (70) 131
Accrued expenses................... (26) 38 139 21 115
Income taxes payable............... -- 16 (3) (17) (14)
Due to stockholder................. 30 (48) 4 35 28
Other liabilities.................. 10 (6) (4) 11 --
----- ----- ----- -------- --------
Net cash provided by (used in) op-
erating activities............... 43 17 90 19 (125)
----- ----- ----- -------- --------
Cash flows from investing activities:
Additions to property and equipment.. (47) (17) (25) (21) (47)
----- ----- ----- -------- --------
Cash flows from financing activities:
Proceeds from revolving line of cred-
it.................................. -- 35 -- 10 10
Proceeds from issuance of long-term
debt................................ -- -- -- -- 150
Principal payments on long-term
debt................................ -- -- -- -- (8)
Principal payments under capital
lease obligations................... (1) (18) (24) -- (10)
Dividends............................ -- (19) (16) --
----- ----- ----- -------- --------
Net cash provided by (used in) fi-
nancing activities............... (1) 17 (43) (6) 142
----- ----- ----- -------- --------
Net increase (decrease) in cash....... (5) 17 22 (8) (30)
Cash at beginning of period........... 5 -- 17 17 39
----- ----- ----- -------- --------
Cash at end of period................. $ -- $ 17 $ 39 $ 9 $ 9
===== ===== ===== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest............................ $ 6 $ 6 $ 9 $ 6 $ 16
===== ===== ===== ======== ========
Income taxes........................ $ 17 $ 6 $ 3 $ -- $ 1
===== ===== ===== ======== ========
Supplemental schedule of non cash
investing and financing activities:
Equipment acquired through capital
lease obligation.................... $ -- $ -- $ -- $ -- $ 106
===== ===== ===== ======== ========
Equipment acquired through accounts
payable............................. $ -- $ -- $ -- $ -- $ 340
===== ===== ===== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-78
<PAGE>
AMERICAN CONFERENCING COMPANY, INC.
AND RESOURCE OBJECTIVES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
American Conferencing Company, Inc. ("Americo") is a provider of group
communications services to a variety of customers primarily located in the
United States. Americo was incorporated in April 1987 and is headquartered in
Oradell, New Jersey.
Resource Objectives, Inc. ("ROI") is a reseller of teleconferencing
equipment and a provider of consulting services. ROI was incorporated in
September 1983 and is headquartered in Oradell, New Jersey. Effective in
January 1997, ROI was merged with and into Americo with the surviving entity
being Americo.
(b) Interim Financial Statements
The financial statements of Americo as of September 30, 1997 and for the
nine months ended September 30, 1996 and 1997 are unaudited. All adjustments
and accruals (consisting only of normal recurring adjustments) have been
recorded that, in the opinion of management, are necessarily for a fair
presentation. Results of operations for the interim periods are not
necessarily indicative of the results for the full year.
(c) Principles of Combination
Through 1996, the financial statements of Americo and ROI were combined, as
the 100% stockholder of ROI owned 50% of the stock of Americo, and ROI owned
the remaining 50% of Americo stock. Affiliated company accounts and
transactions are eliminated in combination.
(d) Use of Estimates
Management of Americo and ROI have 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 combined
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(e) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is provided on the straight-line method over the estimated useful
lives of the respective assets. The estimated useful lives are as follows: ten
years for machinery and equipment; seven years for furniture and fixtures; and
five to seven years for office equipment. Capitalized lease equipment is
amortized over the lives of the leases, generally seven years.
(g) 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 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.
F-79
<PAGE>
AMERICAN CONFERENCING COMPANY, INC.
AND RESOURCE OBJECTIVES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(h) Revenue Recognition
Revenue for conference calls is recognized upon completion of the call.
Revenue for services is recognized upon performance of the service. Sales of
teleconferencing equipment are recognized upon shipment.
(i) Research and Development
Americo 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, Americo
charges to expense (included in cost of revenues) that portion of this
department's costs which are related to research and development activities.
Americo's research and development expenses for the years ended December 31,
1994, 1995 and 1996 were $24,000, $62,000 and $85,000, respectively. Americo's
research and development expenses for the nine months ended September 30,
1996, and 1997 were $62,000 and $63,000, respectively.
(j) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Americo and ROI adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
in 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 an impact on the combined
statements of financial position, results of operations, or liquidity.
(k) Treasury Stock
Treasury stock purchases are recorded at cost.
(l) Earnings Per Share
Americo 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 nine months ended September 31,
1996 and 1997 (unaudited), 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,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment........................ $ 125 $ 125 $545
Furniture and fixtures......................... 3 7 50
Office equipment............................... 142 163 193
------ ------ ----
270 295 788
Less: accumulated depreciation and amortiza-
tion.......................................... 148 184 232
------ ------ ----
Property and equipment, net.................... $ 122 $ 111 $556
====== ====== ====
</TABLE>
(3) LINE OF CREDIT
Americo has a line of credit agreement with a commercial bank which permits
Americo to borrow up to $50,000. Amounts borrowed under the line were $35,000,
$35,000 and $45,000 at December 31, 1995, December
F-80
<PAGE>
AMERICAN CONFERENCING COMPANY, INC.
AND RESOURCE OBJECTIVES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
31, 1996 and September 30, 1997, respectively. Amounts borrowed under the line
bear interest at the bank's base lending rate plus 1.25% (10% at September 30,
1997). Substantially all assets of Americo are pledged as security for amounts
borrowed under the line of credit agreement. In addition, the line of credit
is guaranteed by the sole stockholder.
(4) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll, commissions and related tax-
es........................................... $ 15 $ 22 $ 27
Accrued payroll-stockholder................... 15 65 139
Accrued fees and other expenses............... 27 1 4
Profit Sharing Plan accrual................... -- 52 74
Money Purchase Plan accrual................... -- 56 67
----- ------ ----
$ 57 $ 196 $311
===== ====== ====
</TABLE>
(5) RELATED PARTY TRANSACTIONS
(a) Due to Stockholder
Amounts due to stockholder consist of short-term demand notes at December
31, 1995, December 31, 1996 and September 30, 1997. In addition, included in
accrued expenses at December 31, 1995, December 31, 1996 and September 30,
1997 is accrued payroll of $15,000, $65,000 and $139,000, respectively, due to
this stockholder.
(b) Lease Transactions
ROI leases certain equipment to Americo. Total rent expense under these
leases for the years ended December 31, 1994, 1995 and 1996 was $40,000,
$105,000, and $105,000, respectively, and $83,000 and $9,000 for the nine
months ended September 30, 1996 and 1997, respectively. All rent expense under
these leases has been eliminated in the accompanying combined statements of
operations.
F-81
<PAGE>
AMERICAN CONFERENCING COMPANY, INC.
AND RESOURCE OBJECTIVES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(6) INCOME TAXES
The components of income tax expense (benefit) attributable to income (loss)
before income tax expense (benefit) consists of the following for years ended:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal............................................ $ 5 $ 2 $ 7
State.............................................. 2 7 9
----- ----- ----
$ 7 $ 9 $ 16
===== ===== ====
1995:
Federal............................................ $ 15 $ -- $ 15
State.............................................. 7 -- 7
----- ----- ----
$ 22 $ -- $ 22
===== ===== ====
1996:
Federal............................................ $ -- (8) $ (8)
State.............................................. -- (6) (6)
----- ----- ----
$ -- $ (14) $(14)
===== ===== ====
</TABLE>
Income tax expense (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>
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)................. $ 29 $ 28 $(25)
State income taxes, net of federal tax benefit............ 4 5 (4)
Tax rate differential..................................... (16) (15) 14
Nondeductible expenses and other differences.............. (1) 4 1
---- ---- ----
$ 16 $ 22 $(14)
==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31 are presented
below:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accrued expenses.......................................... $ -- $ 15
------- ------
Total gross deferred tax asset.......................... -- 15
------- ------
Deferred tax liabilities:
Property and equipment.................................... 13 14
------- ------
Total gross deferred tax liability...................... 13 14
------- ------
Net deferred tax liability (asset)...................... $ 13 $ (1)
======= ======
</TABLE>
In assessing the realizability of deferred tax assets, Americo considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Due to the fact that Americo has sufficient
taxable income in carryback periods, and Americo projects future taxable
income over the periods in which the deferred tax assets are deductible, the
ultimate realization of deferred tax assets recognized appears more likely
than not.
F-82
<PAGE>
AMERICAN CONFERENCING COMPANY, INC.
AND RESOURCE OBJECTIVES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS
Americo has entered into noncancelable operating leases covering certain
office space and equipment. Rent expense amounted to $22,000, $67,000 and
$76,000 for the years ended December 31, 1994, 1995 and 1996, respectively and
$38,000 and $86,000 for the nine month periods ended September 30, 1996 and
1997, respectively. In June 1997, Americo entered into a 10-year lease
agreement for Americo's headquarters in Oradell, New Jersey. The lease
commenced in September 1997. Future minimum payments under noncancelable lease
agreements are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASE
--------------
(IN THOUSANDS)
<S> <C>
October 1, to December 31, 1997.............. $ 33
1998......................................... 192
1999......................................... 197
2000......................................... 197
2001......................................... 197
Thereafter................................... 1,373
-------
Total minimum lease payments............. $ 2,189
=======
</TABLE>
(8) SIGNIFICANT CUSTOMERS
For the year ended December 31, 1996, and the nine months ended September
30, 1997, one customer accounted for approximately 17% and 15% of net
revenues, respectively and approximately 14% and 25% of accounts receivable,
respectively.
(9) EMPLOYEE BENEFIT PLANS
During 1996, Americo adopted a Money Purchase Plan and a Profit Sharing
Plan. The plans cover substantially all employees who generally work 1,000
hours or more per year and have attained the age of 21. Americo will make a
contribution to the Money Purchase Plan for 10% of each eligible participant's
compensation. Contributions into the Profit Sharing Plan are discretionary.
Money Purchase Plan contributions charged to operations for the year ended
December 31, 1996 and nine months ended September 30, 1997, were $48,000 and
$67,000, respectively. Profit Sharing Plan contributions charged to operations
for the year ended December 31, 1996 and nine months ended September 30, 1997
were $71,000 and $74,000, respectively.
(10) SUBSEQUENT EVENTS
On November 12, 1997, VIALOG Corporation ("VIALOG") acquired all of the
outstanding stock of Americo for cash and shares of common stock of VIALOG and
Americo became a wholly owned subsidiary of VIALOG. The acquisition of Americo
will be accounted for by the purchase method. Accordingly, all of the
identified tangible and intangible assets and liabilities will be recorded at
their current fair market value and the excess of the purchase price over the
fair value of the net assets acquired will be recorded as intangible assets,
which will be amortized up to 20 years.
F-83
<PAGE>
AMERICAN CONFERENCING COMPANY, INC.
AND RESOURCE OBJECTIVES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, Americo entered into a term loan in the amount of $150,000, of
which $38,000 is classified as current, with a bank in order to finance the
relocation of its operating facilities. The loan has an interest rate of 10%
and is payable over four years in equal monthly installments of $3,804,
including interest. Substantially all assets of Americo are pledged as
security for the amount borrowed under the loan. This note was repaid in full
in November 1997. In November 1997, the line of credit described in note 3 was
paid down in full. On November 12, 1997 Americo became a joint and several
guarantor of VIALOG's $75.0 million Senior Notes.
F-84
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors Communication Development Corporation:
We have audited the accompanying balance sheets of Communication Development
Corporation ("CDC") 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. These financial
statements are the responsibility of CDC'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 Communication Development
Corporation 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, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 17, 1997 except for Note 8 which is as of November 12, 1997
F-85
<PAGE>
COMMUNICATION DEVELOPMENT CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
1995 1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 3)
Current assets:
Cash and cash equivalents......................... $ 18 $ 90 $ 55
Trade accounts receivable, less allowance for
doubtful accounts of $2 at December 31, 1995 and
1996 and $10 at September 30, 1997 (note 7)...... 237 186 396
Income taxes receivable........................... 6 1 --
Prepaid expenses and other current assets......... 8 9 28
----- ------ -----
Total current assets............................ 269 286 479
----- ------ -----
Property and equipment, net (note 2)................ 212 128 100
Other assets........................................ 1 1 4
----- ------ -----
Total assets.................................... $ 482 $ 415 $ 583
===== ====== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit (note 3).......... $ 37 $ -- $ --
Current installments of long-term debt (note 3)... 35 33 24
Accounts payable.................................. 82 74 72
Accrued expenses (note 5)......................... 9 102 37
Income taxes payable.............................. -- -- 94
Deferred income taxes (note 6).................... 35 7 7
----- ------ -----
Total current liabilities....................... 198 216 234
----- ------ -----
Long-term debt, excluding current installments (note
3)................................................. 72 42 25
Deferred income taxes (note 6)...................... 30 19 19
----- ------ -----
Total liabilities............................... 300 277 278
----- ------ -----
Stockholders' equity:
Common stock, no par value. Authorized, issued and
outstanding 5,000 shares at December 31, 1995 and
1996............................................. 2 2 2
Retained earnings................................. 180 136 303
----- ------ -----
Total stockholders' equity...................... 182 138 305
----- ------ -----
Commitments and contingencies (notes 4 and 8)
Total liabilities and stockholders' equity...... $ 482 $ 415 $ 583
===== ====== =====
</TABLE>
See accompanying notes to financial statements.
F-86
<PAGE>
COMMUNICATION DEVELOPMENT CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues (note 7)................. $1,121 $1,131 $1,480 $ 1,080 $ 1,486
Cost of revenues, excluding deprecia-
tion................................. 632 670 800 544 717
Selling, general and administrative
expenses............................. 337 377 655 411 442
Depreciation expense.................. 77 95 86 71 49
------ ------ ------ -------- --------
Income (loss) from operations....... 75 (11) (61) 54 278
Interest expense, net................. 7 17 11 7 4
------ ------ ------ -------- --------
Income (loss) before income tax ex-
pense (benefit).................... 68 (28) (72) 47 274
Income tax expense (benefit) (note
6)................................... 29 (11) (28) 18 107
------ ------ ------ -------- --------
Net income (loss)................... $ 39 $ (17) $ (44) $ 29 $ 167
====== ====== ====== ======== ========
Net income (loss) per share - basic
and diluted ....................... $ 7.80 $(3.40) $(8.80) $ 5.80 $ 33.40
====== ====== ====== ======== ========
Weighted average shares outstanding
................................... 5,000 5,000 5,000 5,000 5,000
====== ====== ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-87
<PAGE>
COMMUNICATION DEVELOPMENT CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------- TOTAL
NUMBER RETAINED STOCKHOLDERS'
OF SHARES VALUE EARNINGS EQUITY
--------- ----- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993........... 5,000 $ 2 $158 $160
Net income........................... -- -- 39 39
----- ---- ---- ----
Balance at December 31, 1994........... 5,000 2 197 199
Net loss............................. -- -- (17) (17)
----- ---- ---- ----
Balance at December 31, 1995........... 5,000 2 180 182
Net loss............................. -- -- (44) (44)
----- ---- ---- ----
Balance at December 31, 1996........... 5,000 2 136 138
Net income (unaudited)............... -- -- 167 167
----- ---- ---- ----
Balance at September 30, 1997 (unau-
dited)................................ 5,000 $ 2 $303 $305
===== ==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-88
<PAGE>
COMMUNICATION DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- -------------------
1994 1995 1996 1996 1997
----- ---- ---- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $ 39 $(17) $(44) $ 29 $ 167
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization........ 77 95 86 71 49
Deferred income taxes................ 1 (11) (39) 17 --
Changes in operating assets and
liabilities:
Trade accounts receivable, net..... (27) (73) 51 29 (210)
Income taxes receivable............ -- -- 5 -- 1
Prepaid expenses and other current
assets............................ (4) (1) (1) 2 (19)
Other asset........................ -- -- -- (2) (3)
Accounts payable................... 41 21 (8) (7) (2)
Accrued expenses................... 9 (3) 93 (2) (65)
Income taxes payable............... 23 (3) -- -- 94
----- ---- ---- -------- ---------
Net cash provided by operating
activities...................... 159 8 143 137 12
----- ---- ---- -------- ---------
Cash flows from investing activity:
Additions to property and equipment... (183) (4) (2) (13) (21)
----- ---- ---- -------- ---------
Cash flows from financing activities:
Proceeds from borrowings under line of
credit............................... -- 37 -- -- --
Repayments of borrowings under line of
credit............................... (38) -- (37) (37) --
Proceeds from long-term debt.......... 100 -- -- -- --
Principal repayments of long-term
debt................................. (31) (36) (32) (26) (26)
----- ---- ---- -------- ---------
Net cash provided by (used in)
financing activities............ 31 1 (69) (63) (26)
----- ---- ---- -------- ---------
Net increase (decrease) in cash and
cash equivalents...................... 7 5 72 61 (35)
Cash and cash equivalents at beginning
of period............................. 6 13 18 18 90
----- ---- ---- -------- ---------
Cash and cash equivalents at end of
period................................ $ 13 $ 18 $ 90 $ 79 $ 55
===== ==== ==== ======== =========
Supplemental cash flow information:
Cash paid during the year for:
Interest............................. $ 7 $ 17 $ 11 $ 8 $ 4
===== ==== ==== ======== =========
Taxes................................ $ 9 $ 3 $-- $ -- $ 16
===== ==== ==== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-89
<PAGE>
COMMUNICATION DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Communication Development Corporation ("CDC") provides audio group
communications services to a variety of customers, primarily located in the
United States. CDC was incorporated in 1991 and has its operations center in
Danbury, Connecticut.
(b) Interim Financial Statements
The financial statements of CDC as of September 30, 1997 and for the nine
months ended September 30, 1996 and 1997 are unaudited. All adjustments and
accruals (consisting only of normal recurring adjustments) have been recorded
that, in the opinion of management, are necessary for a fair presentation.
Results of operations for the interim periods are not necessarily indicative
of the results for the full year.
(c) Use of Estimates
Management of CDC 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 the 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 include cash on hand and money market deposits.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided on the straight-line basis over the estimated useful lives of the
respective assets, generally five years. Leasehold improvements are amortized
over the shorter of the lease term or three years.
(f) 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 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.
(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
CDC 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, CDC charges to
expense (included in cost of revenues) that portion of this department's costs
which are related to research and development activities. CDC's research and
development expenses for the years ended December 31, 1994, 1995 and 1996 were
$51,000, $49,000 and $56,000, respectively. CDC's research and development
expenses for the nine months ended September 30, 1996 and 1997 were $42 and
$76, respectively.
F-90
<PAGE>
COMMUNICATION DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(i) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
CDC adopted the provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and 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 CDC's financial position,
results of operations, or liquidity.
(j) Earnings Per Share
CDC 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 nine months ended September 31,
1996 and 1997 (unaudited), 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,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Teleconferencing equipment..................... $ 427 $ 427 $427
Office equipment............................... 41 43 64
Leasehold improvements......................... 10 10 10
------ ------ ----
478 480 501
Less: accumulated depreciation and amortiza-
tion.......................................... 266 352 401
------ ------ ----
Property and equipment, net.................. $ 212 $ 128 $100
====== ====== ====
</TABLE>
(3) DEBT
(a) Line of Credit
CDC has a line of credit with a bank which provides for borrowings of up to
$125,000. Borrowings under this arrangement bear interest at 1% above the
bank's base lending rate (8.5%, 9.25% and 9.5% at December 31, 1995 and 1996
and September 30, 1997, respectively). The loan agreement is renewable
annually in January, is collateralized by accounts receivable, and is
guaranteed by the stockholders. Amounts borrowed under the line of credit were
$37,000, $0 and $0 at December 31, 1995 and 1996 and September 30, 1997,
respectively.
(b) Long-term Debt
Long-term debt at December 31, 1995 and 1996 and September 30, 1997 consists
of bank term notes which are payable in equal monthly installments of
principal plus interest at 1% above the bank's base lending rate through
December 1999. The notes are collateralized by substantially all the assets of
CDC and are guaranteed by the stockholders. Amounts outstanding are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Bank term notes................................. $ 107 $ 75 $49
Less: current installments...................... 35 33 24
------ ----- ---
Long-term debt excluding current installments... $ 72 $ 42 $25
====== ===== ===
</TABLE>
F-91
<PAGE>
COMMUNICATION DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
October 1 to December 31, 1997.......................... $ 7
1998.................................................... 20
1999.................................................... 22
---
$49
===
</TABLE>
(4) COMMITMENTS
CDC rents its office facility under a noncancelable operating lease expiring
in February 1998. Rental expense under this lease for the years ending
December 31, 1994, 1995 and 1996 was $31,000, $57,000 and $65,000,
respectively and $53,000 and $55,000 for the nine months ending September 30,
1996 and 1997, respectively. Future minimum lease payments under this lease
are as follows (in thousands):
<TABLE>
<S> <C>
October 1 to December 31, 1997.......................... $18
1998.................................................... 12
---
Total minimum lease payments.......................... $30
===
</TABLE>
(5) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued officer bonus............................ $ -- $ 90 $ --
Accrued long distance charges.................... -- -- --
Accrued payroll and related taxes................ 8 6 30
Other accrued expenses........................... 1 6 7
------ ------ -----
$ 9 $ 102 $ 37
====== ====== =====
</TABLE>
(6) INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
1994:
Federal............................................ $ 21 $ 1 $ 22
State.............................................. 7 -- 7
----- ----- ----
$ 28 $ 1 $ 29
===== ===== ====
1995:
Federal............................................ $ -- $ (8) $ (8)
State.............................................. -- (3) (3)
----- ----- ----
$ -- $ (11) $(11)
===== ===== ====
1996:
Federal............................................ $ 8 $ (29) $(21)
State.............................................. 3 (10) (7)
----- ----- ----
$ 11 $ (39) $(28)
===== ===== ====
</TABLE>
F-92
<PAGE>
COMMUNICATION DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense (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>
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense (benefit).................. $23 $ (9) $(24)
State and local income taxes, net of federal tax benefit... 5 (2) (5)
Nondeductible items and other differences.................. 1 -- 1
--- ---- ----
$29 $(11) $(28)
=== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31 are presented
below:
<TABLE>
<CAPTION>
1995 1996
---- -----
(IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss............................................. $29 $ --
--- -----
Total gross deferred tax assets.............................. 29 --
--- -----
Deferred tax liabilities:
Property and equipment......................................... 30 19
Accrued expenses............................................... 64 7
--- -----
Total gross deferred tax liabilities......................... 94 26
--- -----
Net deferred tax liability....................................... $65 $ 26
=== =====
</TABLE>
(7) SIGNIFICANT CUSTOMERS
The same five customers accounted for the following percentages of net
revenues and accounts receivable:
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF NET REVENUES ACCOUNTS RECEIVABLE
----------------------------------- -----------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
------------------- -------------- -------------- SEPTEMBER 30,
1994 1995 1996 1996 1997 1995 1996 1997
----- ----- ----- ------ ------ ------ ------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Customer A...... 25% 63% 35% 41% 35% 33% 17% 21%
Customer B...... -- 11% -- 10% -- 30% 25% --
Customer C...... 11% 10% 11% 12% 10% -- -- 10%
Customer D...... -- -- -- -- -- -- 14% --
Customer E...... -- -- -- -- 13% -- -- 16%
</TABLE>
(8) SUBSEQUENT EVENTS
On November 12, 1997, VIALOG Corporation ("VIALOG") acquired all of the
outstanding stock of CDC for cash and shares of common stock of VIALOG and CDC
became a wholly owned subsidiary of VIALOG. The acquisition of CDC will be
accounted for by the purchase method. Accordingly, all of the identified
tangible and intangible assets and liabilities will be recorded at their
current fair market value and the excess of the purchase price over the fair
value of the net assets acquired will be recorded as intangible assets, which
will be amortized up to 20 years.
In November 1997, the remaining balances of the long-term debt described in
note 3 (b) was repaid in full, plus accrued interest. On November 12, 1997,
CDC became a joint and several guarantor of VIALOG's $75.0 million Senior
Notes.
F-93
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors A Business Conference-Call, Inc.:
We have audited the accompanying balance sheets of A Business Conference-
Call, Inc. ("ABCC") as of December 31, 1997 and 1996, and the related
statements of income, retained earnings, and cash flows for the years then
ended. These financial statements are the responsibility of ABCC'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 A Business Conference-
Call, Inc. as of December 31, 1997 and 1996 and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
February 20, 1998, except for
Note 8 which is as of
May 23, 1998
F-94
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 26 $ 71 $ 466
Trade accounts receivable, less allowance for
doubtful accounts of $7, $15 and $29, respective-
ly................................................ 424 577 656
Prepaid expenses and other current assets.......... 308 75 115
------ ------ ------
Total current assets............................. 758 723 1,237
------ ------ ------
Property and equipment, net (notes 1 and 2).......... 638 538 476
Other assets......................................... 5 6 3
------ ------ ------
Total assets..................................... $1,401 $1,267 $1,716
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 23 $ 55 $ 250
Accrued compensation and benefits.................. 108 231 199
Accrued expenses................................... 13 3 --
------ ------ ------
Total current liabilities........................ 144 289 449
------ ------ ------
Stockholders' equity:
Common stock, $0.01 par value; authorized 100,000
shares; issued and outstanding 1,000 shares....... -- -- --
Additional paid-in capital......................... 10 10 10
Retained earnings.................................. 1,247 968 1,257
------ ------ ------
Total stockholders' equity....................... 1,257 978 1,267
------ ------ ------
Commitments and contingencies (notes 4, 6 and 7).....
Total liabilities and stockholders' equity....... $1,401 $1,267 $1,716
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-95
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ -------------------
1996 1997 1997 1998
----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues..................... $ 5,305 $ 5,709 $ 2,843 $ 3,591
Cost of revenues, excluding de-
preciation...................... 1,935 2,086 996 1,181
Selling, general, and administra-
tive expenses................... 1,120 1,231 544 751
Depreciation expense............. 143 148 72 74
----------- ----------- --------- ---------
Income from operations.......... 2,107 2,244 1,231 1,585
Interest income, net............. 14 8 4 4
Other, net....................... (17) 7 1 --
----------- ----------- --------- ---------
Net income...................... 2,104 2,259 1,236 1,589
----------- ----------- --------- ---------
Retained earnings at beginning of
period.......................... 1,303 1,247 1,247 968
Less stockholder distributions... 2,160 2,538 1,245 1,300
----------- ----------- --------- ---------
Retained earnings at end of peri-
od.............................. $ 1,247 $ 968 $ 1,238 $ 1,257
=========== =========== ========= =========
Net income per share - basic and
diluted ........................ $ 2,104.00 $ 2,259.00 $1,236.00 $1,589.00
=========== =========== ========= =========
Weighted average shares outstand-
ing ............................ 1,000 1,000 1,000 1,000
=========== =========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-96
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE
DECEMBER 31, 30,
-------------- --------------
1996 1997 1997 1998
------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $2,104 $2,259 $1,236 $1,589
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................ 143 148 72 74
Loss on disposal of equipment................ 17 -- -- --
Changes in operating assets and liabilities:
Trade accounts receivable, net.............. 93 (153) (123) (79)
Prepaid expenses............................ (191) 233 238 (37)
Accounts payable and accrued expenses....... (149) 145 205 160
------ ------ ------ ------
Net cash provided by operating activities.. 2,017 2,632 1,628 1,707
------ ------ ------ ------
Cash flows from investing activities:
Payments for purchases of property and
equipment................................... (245) (49) (45) (12)
Proceeds from sale of property and equip-
ment........................................ 15 -- -- --
Increase in other assets..................... (2) (1) -- --
------ ------ ------ ------
Net cash used in investing activities...... (232) (50) (45) (12)
------ ------ ------ ------
Cash flows from financing activities:
Distributions to stockholders................. (2,160) (2,537) (1,245) (1,300)
------ ------ ------ ------
Net cash used in financing activities...... (2,160) (2,537) (1,245) (1,300)
------ ------ ------ ------
Net increase (decrease) in cash and cash
equivalents................................... (375) 45 338 395
Cash and cash equivalents at beginning of peri-
od............................................ 401 26 26 71
------ ------ ------ ------
Cash and cash equivalents at end of period..... $ 26 $ 71 $ 364 $ 466
====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-97
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
A Business Conference-Call, Inc. ("ABCC") is a provider of group
communications to a variety of customers located primarily in the United
States. ABCC was incorporated in 1988 and is headquartered in Chaska,
Minnesota.
(b) Interim Financial Statements
The financial statements of ABCC as of June 30, 1998 and for the six months
ended June 30, 1997 and 1998 are unaudited. All adjustments and accruals
(consisting only of normal recurring adjustments) have been recorded that, in
the opinion of management, are necessary for a fair presentation. Results of
operations for the interim periods are not necessarily indicative of the
results for the full year.
(c) Use of Estimates
Management of ABCC 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 include deposits and short-term investments with
original maturities of three months or less.
(e) Property and Equipment
Property and equipment is stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the respective assets.
Estimated useful lives are as follows: five to seven years for office
furniture and equipment; seven years for conferencing equipment; three years
for computer software; and five years for vehicles.
(f) Income Taxes
ABCC has elected by consent of its stockholders to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under those
provisions, ABCC does not pay corporate income taxes on its taxable income.
Instead, the stockholders are liable for individual income taxes on ABCC's
taxable income. Accordingly, these financial statements do not contain a
provision for income taxes.
(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) Fair Value of Financial Instruments
All financial instruments are carried at amounts that approximate estimated
fair value.
(i) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
ABCC 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 1997.
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 the statement did not have a material impact on
ABCC's financial position, results of operations, or liquidity.
F-98
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(j) Earnings Per Share
ABCC 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, 1996 and 1997, and for the six months ended June 30, 1997 and
1998 (unaudited), 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,
----------- JUNE 30,
1996 1997 1998
---- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Office furniture and equipment...................... $179 $ 182 $ 194
Conferencing equipment.............................. 779 811 811
Software............................................ 7 21 21
Vehicles............................................ 34 34 34
---- ------ ------
999 1,048 1,060
Less accumulated depreciation and amortization...... 361 510 584
---- ------ ------
Property and equipment, net......................... $638 $ 538 $ 476
==== ====== ======
</TABLE>
(3) RELATED PARTY TRANSACTIONS
In 1996, the president of ABCC, who is also a related stockholder, purchased
a vehicle from the Company. ABCC received $15,000 in proceeds related to the
sale of the vehicle.
(4) 401(K) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan which is available to employees
meeting certain service requirements. The plan qualifies under section 401(k)
of the Internal Revenue Code (the Code) and allows eligible employees to
contribute up to 5% of their compensation, up to limits established by the
Code. The Company is entitled to make discretionary contributions to the plan.
ABCC's expense related to the plan was $126,366 and $138,803 for the years
ending December 31, 1996 and 1997, respectively. ABCC's expense related to the
plan was $60,000 and $72,000 for the six-month periods ended June 30, 1997 and
1998, respectively.
(5) CONCENTRATION OF SOURCE OF SUPPLY
The Company purchases a significant portion of its long distance telephone
service from a single long distance service provider. Although there are a
limited number of such providers, management believes that other providers
could provide similar services on comparable terms.
(6) STOCK PURCHASE AGREEMENT
The Company has an agreement with its two stockholders which requires the
Company to acquire the stockholders' shares upon the event of death, permanent
disability, or termination of employment. This agreement can be funded by life
insurance policies on each stockholder. The Company and the stockholders also
have an agreement whereby the remaining stockholders have the first option to
purchase the Company's stock upon the occurrence of any of the above events.
The purchase price is determined annually by a formula defined in the
agreement.
F-99
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES
(a) Purchase Agreement
In February 1998, the Company entered into an agreement with a long distance
telephone service provider. Under the terms of the agreement, ABCC is
committed to minimum monthly purchases of $25,000 for a term of two years.
(b) Leases
The Company leases office space under a noncancelable operating lease. The
lease provides for monthly rental payments including real estate taxes and
other operating costs. In addition, the Company leases certain equipment and
vehicles under various operating leases. Total rent expense amounted to
approximately $73,000 and $95,000 for the years ended December 31, 1996 and
1997, respectively. Future minimum lease payments under noncancelable
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1998..................................................................... $61
1999..................................................................... 57
2000..................................................................... 20
</TABLE>
(8) MERGER
In May 1998, ABCC entered into an agreement and plan of reorganization with
VIALOG Corporation and ABC Acquisition Corporation, a wholly-owned subsidiary
of VIALOG Corporation, whereby VIALOG Corporation's subsidiary will merge with
and into ABCC, contingent upon completion of certain items defined in the
merger agreement, with ABCC surviving as a wholly-owned subsidiary of VIALOG
Corporation.
F-100
<PAGE>
[PHOTO DESCRIPTION: SEVERAL PERSONS SEATED
AROUND A TELEVISION]
[PHOTO DESCRIPTION: MAN IN COAT TALKING ON CELLULAR PHONE; CAR
IN BACKGROUND]
[PHOTO DESCRIPTION: PERSON SEATED BESIDE IGLOO]
HELPING YOU MEET ALL YOUR GLOBAL COMMUNICATIONS NEEDS.
[PHOTO DESCRIPTION: MAN TALKING ON CELLULAR PHONE; BUILDING IN
BACKGROUND]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDER OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN
THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON
STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECU-
RITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Financial Data.................................................. 21
Access and CSI Selected Financial Data................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Industry Overview........................................................ 38
Business................................................................. 41
Management............................................................... 51
Certain Relationships and Related Transactions........................... 58
Principal and Selling Stockholders....................................... 62
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 68
Underwriting............................................................. 69
Legal Matters............................................................ 71
Experts.................................................................. 71
Available Information.................................................... 71
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,867,826 Shares
LOGO
Common Stock
-------------
PROSPECTUS
-------------
PRUDENTIAL SECURITIES INCORPORATED
JEFFERIES & COMPANY, INC.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than the underwriting
compensation expected to be incurred) in connection with the Offering
described in this Registration Statement. All of such amounts (except the SEC
Registration Fee, the NASD Filing Fee and the Nasdaq National Market Listing
Fee) are estimates.
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 18,726
NASD Filing Fee............................................... 6,848
Nasdaq National Market Listing Fee............................ 72,875
Blue Sky Fees and Expenses.................................... 5,000
Printing and Engraving Costs.................................. 300,000
Legal Fees and Expenses....................................... 400,000
Accounting Fees and Expenses.................................. 250,000
Transfer Agent and Registrar Fees and Expenses................ 5,000
Miscellaneous................................................. 441,000
----------
Total....................................................... $1,499,449
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 67 of Chapter 156B of the Massachusetts General Laws, or the
Massachusetts Business Corporation Law (the "MBCL"), provides that the
indemnification of directors, officers, employees and other agents of a
corporation, and persons who serve at its request as directors, officers,
employees or other agents of another organization, or who serve at its request
in any capacity with respect to any employee benefit plan, may be provided by
it to whatever extent shall be specified in or authorized by (i) the articles
of organization or (ii) a by-law adopted by the stockholders or (iii) a vote
adopted by the holders of a majority of the shares of stock entitled to vote
on the election of directors. Except as the articles of organization or by-
laws otherwise require, indemnification of any persons who are not directors
of the corporation may be provided by it to the extent authorized by the
directors. Such indemnification may include payment by the corporation of
expenses incurred in defending a civil or criminal action or proceeding in
advance of the final disposition of such action or proceeding, upon receipt of
an undertaking by the person indemnified to repay such payment if he shall be
adjudicated to be entitled to indemnification, which undertaking may be
accepted without reference to the financial ability of such person to make
repayment. Any such indemnification may be provided although the person to be
indemnified is no longer an officer, director, employee or agent of the
corporation or of such other organization or no longer serves with respect to
any such employee benefit plan. Section 67 further provides that no
indemnification shall be provided for any person with respect to any matter as
to which he shall have been adjudicated in any proceeding not to have acted in
good faith in the reasonable belief that his action was in the best interest
of the corporation or to the extent that such matter relates to service with
respect to any employee benefit plan, in the best interests of the
participants or beneficiaries of such employee benefit plan. Article VI of the
Company's Articles of Organization provides that the Company shall, to the
fullest extent permitted by the laws of the Commonwealth of Massachusetts,
indemnify each person who is, or shall have been, a director, officer,
employee or agent of the Company, or who is serving or shall have served, at
the request of the Company, as director or officer of another organization or
in any capacity with respect to any employee benefit plan of the Company,
against all liabilities and expenses (including judgments, fines, penalties,
amounts paid or to be paid in settlement and reasonable attorney's fees)
imposed upon or incurred by any such person in connection with or arising out
of claims made, or any action, suit or proceeding threatened or brought
against him or in which he may be involved by reason of any action taken or
omitted by him as a director, officer, employee or agent, or as a result of
any service with respect to any such employee benefit plan.
Section 13(b)(1 1/2) of Chapter 156B of the MBCL permits a corporation to
include in its articles of organization a provision eliminating or limiting
the personal liability of a director to the corporation or its
II-1
<PAGE>
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 61 or 62 of the MBCL (relating to unlawful payment of dividends,
unlawful stock purchase and redemption and loans to insiders) or (iv) for any
transaction from which the director derived an improper personal benefit.
Article VI of the Company's Articles of Organization provides that the
Company's directors shall not be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except in the
circumstances that are set forth in the MBCL.
The effect of these provisions is to permit indemnification by the Company
for, among other liabilities, liabilities arising out of the Securities Act.
The Underwriting Agreement (the form of which appears as Exhibit 1.1)
provides for indemnification of the Company's directors and officers in
certain circumstances.
Section 67 of the MBCL also affords a Massachusetts corporation the power to
obtain insurance on behalf of its directors and officers against liabilities
incurred by them in those capacities. The Company currently maintains a
$5,000,000 Directors and Officers Liability Insurance Policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities of the Company issued or
sold within the past three years which were not registered under the
Securities Act of 1933. Except as set forth in (vii) below, none of the sales
of the securities issued by the Company have involved the use of an
underwriter, and no commissions were paid in connection with the sale of any
of the securities issued by the Company.
(i) From January 1, 1996 to October 31, 1996, the Company issued
1,222,650 shares of Common Stock, $.01 par value to twelve accredited
investors and twenty-one of its consultants and employees at value ranging
from $.01 per share to $.555 per share for a total consideration of
$173,152. The issuance of shares to consultants and employees may be
considered to be compensation to such individuals and the Company expensed
$36,753 in 1996 as compensation.
(ii) In November 1996 the Company issued 212,500 shares of Common Stock
to twenty accredited investors and four employees at a value of $4.00 per
share for a total consideration of $850,000. The issuance of shares to
employees may be considered to be compensation to such individuals and the
Company expensed $90,000 in 1996 as compensation.
(iii) On February 12, 1997, the Company issued an aggregate of 52,000
shares of Common Stock at $.05 per share to two of its consultants upon the
exercise of two NQSOs for an aggregate purchase price of $2,600.
(iv) On February 24, 1997, the Company issued to eight accredited
investors 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 II 1, 1 18 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 Registration Statement, the February
Warrants entitle the holders thereof to purchase an aggregate of 33,450
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.
(v) In September 1997, the Company issued to fifteen accredited investors
(who were existing stockholders or noteholders of the Company) 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
II-2
<PAGE>
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"). Each
September Note was 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
Note by $4.00. 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.
(vi) On October 16, 1997, the Company declared a 2:1 stock split.
(vii) On November 12, 1997, the Company issued to Jefferies & Company, as
underwriter, 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% 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 warrants to purchase 302,658 shares of the
Company's Common Stock at an initial exercise price of $.01 per share.
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.
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).
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.
(viii) See "Certain Transactions-Organization of the Company" in the
Prospectus 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 Operating
Centers.
(ix) On January 12, 1998, the Company issued 45,030 shares of Common
Stock at $.2775 per share to one of its former employees upon the exercise
of his incentive stock option for an aggregate purchase price of
$12,495.83.
II-3
<PAGE>
(x) On April 14, 1998, the Company issued 2,500 shares of Common Stock to
Thomas Walsh as partial compensation for his services in connection with
the Company's purchase of the Reston Center in November 1997.
(xi) Between April 14, 1998 and June 25, 1998, the Company issued an
aggregate of 131,162 shares of Common Stock at prices ranging from $.025 to
$.2775 per share to nine of its former employees or consultants upon the
exercise of stock options by such individuals for an aggregate purchase
price of $28,442.
Each of the transactions set forth in the preceding clauses were completed
without registration of the relevant security under the Securities Act in
reliance upon one or more of the exemptions afforded by Section 4(2) of the
Securities Act for transactions not involving a public offering, Rule 701
promulgated under the Securities Act for transactions with directors,
consultants, and employees and Rule 506 of Regulation D promulgated under the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1**** Form of Underwriting Agreement.
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.
2.11++ Agreement and Plan of Reorganization by and among VIALOG
Corporation, ABC Acquisition Corporation, A Business Conference
Call, Inc. and Daniel L. Barber and Robert M. Kalla dated as of
May 23, 1998.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.12*** First Amendment to Agreement and Plan of Reorganization by and
among VIALOG Corporation, ABC Acquisition Corporation, A Business
Conference Call, Inc. and Daniel L. Barber and Robert M. Kalla
dated as of June 5, 1998.
3.1 Restated Articles of Organization of the Company.
3.2 Amended and Restated By-Laws of the Company.
3.3 Certificate of Incorporation of Communication 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.
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*** Form of certificate evidencing ownership of Common Stock of the
Company.
4.2 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).
4.3 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.,
Communication Development Corporation, and State Street Bank and
Trust Company (including Form of Unit Certificate attached to the
Unit Agreement as Exhibit A).
4.4 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).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.5 Security Holders' and Registration Rights Agreement Dated as of
November 12, 1997 Among VIALOG Corporation and Jefferies &
Company, Inc.
4.6 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.
5.1*** Form of Opinion of Mirick, O'Connell, DeMallie & Lougee, LLP.
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.
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.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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.
10.31** Assignment of Lease between Telephone Business Meetings, Inc. and
CMC Datacomm, Inc. dated as of March 13, 1998.
10.32*** Letter Agreement between Nolan Enterprises and Communication
Development Corporation dated March 31, 1998.
10.33*** Fourth Lease Modification & Extension Agreement by and between
Danbury Executive Tower Investment Group Limited Liability
Partnership and Communication Development Corporation dated April
1998.
10.34*** Lease between Connecticut General Life Insurance Company, on
behalf of its Separate Account R, and VIALOG Corporation dated
April 7, 1998.
11.1+++ Statements regarding computation of per share earnings.
21.1 Subsidiaries of the Company.
23.1+ Consent of KPMG Peat Marwick LLP.
23.2 Consent of Mirick, O'Connell, DeMallie & Lougee, LLP (included in
Exhibit 5.1).
23.3+ Consent of Edward M. Philip as nominee for director.
24*** Power of Attorney.
27.1+++ Financial Data Schedules.
</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).
* 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).
** Incorporated by reference to the Exhibits to Form 10-K for the fiscal year
ended December 31, 1997 filed with the Securities and Exchange Commission
on March 31, 1998 (File No. 333-22585).
*** Previously filed.
**** Revised from previously filed Exhibit to this Registration Statement.
II-7
<PAGE>
+ Filed herewith.
++ Incorporated by Reference to the Exhibits to the Current Report Pursuant to
Section 13 or 15(d) of the Securities Act of 1934 on Form 8-K filed with
the Securities and Exchange Commission on May 28, 1998.
+++ Incorporated by reference to the Exhibits to (i) the Form 10-K for fiscal
year ended December 31, 1997 filed with the Securities and Exchange
Commission on March 31, 1998 (File No. 333-22585) and (ii) the Form 10-Q
for the quarter ended March 31, 1998 filed with the Securities and
Exchange Commission on May 14, 1998 (File No. 333-22585).
(b) 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.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance on Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it is declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
BOSTON, COMMONWEALTH OF MASSACHUSETTS, ON JULY 27, 1998.
VIALOG Corporation
/s/ John J. Dion, Attorney-in-fact
By: _________________________________
GLENN D. BOLDUC
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
II-9
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<S> <C>
SIGNATURE TITLE
DATE
* President, Chief July 27, 1998
- ------------------------------------- Executive Officer,
GLENN D. BOLDUC Treasurer and
Director
/s/ John J. Dion Vice President-- July 27, 1998
- ------------------------------------- Finance, Principal
JOHN J. DION Financial Officer
and Principal
Accounting Officer
* Director July 27, 1998
- -------------------------------------
JOANNA M. JACOBSON
* Director July 27, 1998
- -------------------------------------
DAVID L. LOUGEE
* Director July 27, 1998
- -------------------------------------
PATTI R. BISBANO
* Director July 27, 1998
- -------------------------------------
RICHARD G. HAMERMESH
* /s/ John J. Dion
ATTORNEY-IN-FACT
</TABLE>
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1**** Form of Underwriting Agreement.
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.
2.11++ Agreement and Plan of Reorganization by and among VIALOG
Corporation, ABC Acquisition Corporation, A Business Conference
Call, Inc. and Daniel L. Barber and Robert M. Kalla dated as of May
23, 1998.
2.12*** First Amendment to Agreement and Plan of Reorganization by and
among VIALOG Corporation, ABC Acquisition Corporation, A Business
Conference Call, Inc. and Daniel L. Barber and Robert M. Kalla
dated as of June 5, 1998.
3.1 Restated Articles of Organization of the Company.
3.2 Amended and Restated By-Laws of the Company.
3.3 Certificate of Incorporation of Communication 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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.
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*** Form of certificate evidencing ownership of Common Stock of the
Company.
4.2 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).
4.3 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.,
Communication Development Corporation, and State Street Bank and
Trust Company (including Form of Unit Certificate attached to the
Unit Agreement as Exhibit A).
4.4 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).
4.5 Security Holders' and Registration Rights Agreement Dated as of
November 12, 1997 Among VIALOG Corporation and Jefferies &
Company, Inc.
4.6 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.
5.1*** Form of Opinion of Mirick, O'Connell, DeMallie & Lougee, LLP.
10.1 1996 Stock Plan of the Company.
10.2 Equipment Lease between CSI and Ally Capital Corporation Dated
April 1, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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.
10.31** Assignment of Lease between Telephone Business Meetings, Inc. and
CMC Datacomm, Inc. dated as of March 13, 1998.
10.32*** Letter Agreement between Nolan Enterprises and Communication
Development Corporation dated March 31, 1998.
10.33*** Fourth Lease Modification & Extension Agreement by and between
Danbury Executive Tower Investment Group Limited Liability
Partnership and Communication Development Corporation dated April
1998.
10.34*** Lease between Connecticut General Life Insurance Company, on
behalf of its Separate Account R, and VIALOG Corporation dated
April 7, 1998.
11.1+++ Statements regarding computation of per share earnings.
21.1 Subsidiaries of the Company.
23.1+ Consent of KPMG Peat Marwick LLP.
23.2*** Consent of Mirick, O'Connell, DeMallie & Lougee, LLP (included in
Exhibit 5.1).
23.3+ Consent of Edward M. Philip as nominee for director.
24*** Power of Attorney.
27.1+++ Financial Data Schedules.
</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).
* 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).
** Incorporated by reference to the Exhibits to Form 10-K for the fiscal year
ended December 31, 1997 filed with the Securities and Exchange Commission
on March 31, 1998 (File No. 333-22585).
*** Previously filed.
**** Revised from previously filed Exhibit to this Registration Statement.
+ Filed herewith.
++ Incorporated by Reference to the Exhibits to the Current Report Pursuant to
Section 13 or 15(d) of the Securities Act of 1934 on Form 8-K filed with
the Securities and Exchange Commission on May 28, 1998.
+++ Incorporated by reference to the Exhibits to (i) the Form 10-K for fiscal
year ended December 31, 1997 filed with the Securities and Exchange
Commission on March 31, 1998 (File No. 333-22585) and (ii) the Form 10-Q
for the quarter ended March 31, 1998 filed with the Securities and
Exchange Commission on May 14, 1998 (File No. 333-22585).
<PAGE>
Exhibit 1.1
VIALOG CORPORATION
_______ Shares/1/
Common Stock
UNDERWRITING AGREEMENT
----------------------
________ ___, 1998
PRUDENTIAL SECURITIES INCORPORATED
JEFFERIES & COMPANY, INC.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Ladies and Gentlemen:
Vialog Corporation, a Massachusetts corporation (the "Company"), each of
-------
Conference Source International, Inc., a Georgia corporation, Call Points, Inc.,
a Delaware corporation, Kendall Square Teleconferencing, Inc., a Massachusetts
corporation, American Conferencing Company, Inc., a Delaware corporation,
Telephone Business Meetings, Inc., a Delaware corporation, Communication
Development Corporation, a Connecticut corporation, and ABC Acquisition
Corporation, a Delaware corporation (the "Vialog Merger Subsidiary") (each, a
------------------------
"Subsidiary" and collectively, the "Subsidiaries"), and David L. Lipsky (the
- ----------- ------------
"Selling Securityholder") hereby confirm their agreement with the several
- -----------------------
underwriters named in Schedule 1 hereto (the "Underwriters"), for whom you have
------------
been duly authorized to act as representatives (in such capacities, the
"Representatives"), as set forth below. All references herein to the
- ----------------
Representatives shall be deemed to be to the Underwriters.
Pursuant to an agreement and plan of reorganization (the "Acquisition
-----------
Agreement") by and among the Company, the Vialog Merger Subsidiary, A Business
- ---------
Conference Call, Inc., a Minnesota corporation ("ABCC"), Daniel L. Barber and
----
Robert M. Kalla, the Company through the Vialog Merger Subsidiary, its wholly-
owned subsidiary, will acquire by merger, all of the issued and outstanding
stock of ABCC. The transactions contemplated by the Acquisition Agreement are
herein referred to as the "Acquisition."
-----------
- ----------------
/1/ Plus an option to purchase from Vialog Corporation up to _____________
additional shares to cover over-allotments.
<PAGE>
1. Securities. Subject to the terms and conditions herein contained,
----------
(i) the Company proposes to issue and sell to the several Underwriters an
aggregate of ___ shares (the "Firm Securities") of the Company's common stock,
---------------
par value $.01 per share ("Common Stock") and (ii) the Selling Securityholder
------------
proposes to sell to the several Underwriters an aggregate of 267,826 shares of
Common Stock, which shares constitute all of the shares of Common Stock owned by
him (the "Selling Securityholder Securities"). The Company also proposes to
----------------------------------
issue and sell to the several Underwriters not more than _______________
additional shares of Common Stock if requested by the Representatives as
provided in Section 4 of this Agreement. Any and all shares of Common Stock to
be purchased by the Underwriters pursuant to such option are referred to herein
as the "Option Securities," and the Firm Securities, the Selling Securityholder
-----------------
Securities and any Option Securities are collectively referred to herein as the
"Securities."
----------
2. Representations and Warranties of the Company and the Subsidiaries. The
------------------------------------------------------------------
Company and the Subsidiaries, jointly and severally, represent and warrant to
and agree with each of the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-53395) with respect to
the Securities, including a prospectus subject to completion, has been filed by
the Company with the Securities and Exchange Commission (the "Commission") under
----------
the Securities Act of 1933, as amended (the "Act"), and one or more amendments
---
to such registration statement may have been so filed. After the execution of
this Agreement, the Company will file with the Commission either (i) if such
registration statement, as it may have been amended, has been declared by the
Commission to be effective under the Act, either (A) if the Company relies on
Rule 434 under the Act, a Term Sheet (as hereinafter defined) relating to the
Securities, that shall identify the Preliminary Prospectus (as hereinafter
defined) that it supplements containing such information as is required or
permitted by Rules 434, 430A and 424(b) under the Act or (B) if the Company does
not rely on Rule 434 under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act, and in the case of either clause (i)(A) or (i)(B) of
this sentence as have been provided to and approved by the Representatives prior
to the execution of this Agreement, or (ii) if such registration statement, as
it may have been amended, has not been declared by the Commission to be
effective under the Act, an amendment to such registration statement, including
a form of prospectus, a copy of which amendment has been furnished to and
approved by the Representatives prior to the execution of this Agreement. The
Company may also file a related registration statement with the Commission
pursuant to Rule 462(b) under the Act for the purpose of registering certain
additional Securities, which registration shall be effective upon filing with
the Commission. As used in this Agreement, the term "Original Registration
---------------------
Statement" means the registration statement initially filed relating to the
- ---------
Securities, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration
------------------------
Statement" means any registration statement filed with the Commission pursuant
- ---------
to Rule
2
<PAGE>
462(b) under the Act (including the Registration Statement and any Preliminary
Prospectus or Prospectus incorporated therein at the time such Registration
Statement becomes effective); the term "Registration Statement" includes both
----------------------
the Original Registration Statement and any Rule 462(b) Registration Statement;
the term "Preliminary Prospectus" means each prospectus subject to completion
----------------------
filed with such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration Statement
or any amendment thereto at the time it was or is declared effective); the term
"Prospectus" means:
----------
(A) if the Company relies on Rule 434 under the Act, the Term Sheet
relating to the Securities that is first filed pursuant to Rule 424(b)(7)
under the Act, together with the Preliminary Prospectus identified therein
that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act, the prospectus
first filed with the Commission pursuant to Rule 424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under the Act,
the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
----------
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
----
that includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or suspending use of
any Preliminary Prospectus. When any Preliminary Prospectus was filed with the
Commission it (i) contained all statements required to be stated therein in
accordance with, and complied in all material respects with the requirements of,
the Act and the rules and regulations of the Commission thereunder and (ii) did
not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. When the
Registration Statement or any amendment thereto was or is declared effective, it
(i) contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any Term Sheet that is
a part thereof or any amendment or supplement to the Prospectus is filed with
the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or
such amendment or supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing such amendment or
supplement to the Prospectus was or is declared effective) and on the Firm
Closing Date and any Option Closing Date (both as hereinafter defined), the
Prospectus, as amended or supplemented at any such time, (i) contained or will
contain all statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements
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of, the Act and the rules and regulations of the Commission thereunder and (ii)
did not or will not include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (b) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement or any
amendment thereto or the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein.
(c) If the Company has elected to rely on Rule 462(b) and the Rule 462(b)
Registration Statement has not been declared effective (i) the Company has filed
a Rule 462(b) Registration Statement in compliance with and that is effective
upon filing pursuant to Rule 462(b) and has received confirmation of its receipt
and (ii) the Company has given irrevocable instructions for transmission of the
applicable filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under the Act or
the Commission has received payment of such filing fee.
(d) Each written contract to which the Company is a party and to which
reference is made in the Prospectus has been duly and validly executed, is in
full force and effect in accordance with its respective terms, and, except as
set forth in the Prospectus, none of such contracts has been assigned by the
Company; and, except as set forth in the Prospectus, the Company knows of no
present fact, condition or act which could prevent compliance with the terms of
such contracts, as amended to date. Except for amendments or modifications of
such contracts in the ordinary course of business and except as may be disclosed
in the Prospectus, the Company has no intention of exercising any right which it
may have to cancel any of its obligations under any of such contracts, and has
no knowledge that any other party to any of such contracts has any intention not
to render full performance under such contracts. None of the provisions of such
contracts or documents violates any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court having
jurisdiction over the Company or any of its assets or businesses.
(e) The Company and each of the Subsidiaries have been duly organized and
are validly existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation and are duly qualified to transact
business as foreign corporations and are in good standing under the laws of all
other jurisdictions where the ownership or leasing of their respective
properties or the conduct of their respective businesses requires such
qualification, except where the failure to be so qualified would not,
individually or in the aggregate, have a material adverse effect on the general
affairs, management, business, condition (financial or otherwise), prospects,
net worth or results of operations of the Company and the Subsidiaries, taken as
a whole (any such event, a "Material Adverse Effect").
-----------------------
(f) The Company and each of the Subsidiaries have full power (corporate and
other) to own or lease their respective properties and conduct their respective
businesses as described in the Registration Statement and the Prospectus or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus; and
the Company and each of the Subsidiaries have full
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power (corporate and other) to enter into this Agreement and to carry out all
the terms and provisions hereof to be carried out by each of them, respectively.
(g) The issued shares of capital stock of each of the Subsidiaries have
been duly authorized and validly issued, are fully paid and nonassessable, were
not issued in violation of any preemptive or similar rights and are owned
beneficially by the Company free and clear of any security interests, liens,
encumbrances, equities, claims or restrictions on transferability (other than
those imposed by the Act and the securities or "Blue Sky" laws of certain
jurisdictions) or voting.
(h) The Company has an authorized, issued and outstanding capitalization as
set forth in the Prospectus or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus. All of the issued shares of capital stock of the
Company have been duly authorized and validly issued, were not issued in
violation of any preemptive or similar rights and are fully paid and
nonassessable. No sales of securities have been made by the Company in violation
of the provisions of the Act, the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or state securities laws. The Firm Securities and the
------------
Option Securities have been duly authorized and at the Firm Closing Date or the
related Option Closing Date (as the case may be), after payment therefor in
accordance herewith, will be validly issued, fully paid and nonassessable. No
holders of outstanding shares of capital stock of the Company are entitled as
such to any preemptive or other rights to subscribe for any of the Securities,
and no holder of securities of the Company has any right which has not been
fully exercised or waived to require the Company to register the offer or sale
of any securities owned by such holder under the Act in the public offering
contemplated by this agreement.
(i) The capital stock of the Company conforms to the description thereof
contained in the Prospectus or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus.
(j) Except as disclosed in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), there are no outstanding
(A) securities or obligations of the Company or any of the Subsidiaries
convertible into or exchangeable for any capital stock of the Company or any
such Subsidiary, (B) warrants, rights or options to subscribe for or purchase
from the Company or any Subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations, or (C) obligations of the
Company or any Subsidiary to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any such warrants,
rights or options.
(k) The consolidated financial statements and schedules of the Company and
its consolidated subsidiaries (including the notes thereto) included in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present the financial
position of the Company and its consolidated subsidiaries and the results of
operations and changes in financial condition as of the dates and periods
therein specified. Such financial statements and schedules (including the notes
thereto) have been prepared in accordance with generally accepted accounting
principles consistently
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applied throughout the periods involved (except as otherwise noted therein). The
summary and selected financial data set forth under the captions "Summary
Historical and Pro Forma Financial Data" and "Selected Financial Data" in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present, on the basis stated in the Prospectus
(or such Preliminary Prospectus), the information included therein. Except as
described in the Prospectus (or, if the Prospectus is not in existence, the
Preliminary Prospectus), the pro forma financial statements under the headings
"Summary Historical and Pro Forma Financial Data" and "Selected Financial Data"
(including the notes thereto) and the other pro forma financial information (but
excluding all projected or forecasted financial information) included in the
Prospectus (or, if the Prospectus is not in existence, the Preliminary
Prospectus) (i) comply as to form in all material respects with the applicable
requirements of Regulation S-X promulgated under the Exchange Act, (ii) have
been prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements, and (iii) have been properly computed
on the bases described therein. The assumptions used in the preparation of the
pro forma financial data and other pro forma and projected financial information
included in the Prospectus (or, if the Prospectus is not in existence, the
Preliminary Prospectus) are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein.
(l) KPMG Peat Marwick, LLP, who have certified certain financial statements
of the Company and the Subsidiaries and delivered their report with respect to
the audited financial statements and schedules included in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), are independent public accountants as
required by the Act and the applicable rules and regulations thereunder.
(m) The execution and delivery of this Agreement have been duly authorized
by the Company and each of the Subsidiaries and this Agreement has been duly
executed and delivered by the Company and each of the Subsidiaries, and is the
valid and binding agreement of the Company and each of the Subsidiaries,
enforceable against the Company and each of the Subsidiaries in accordance with
its terms.
(n) No legal or governmental proceedings are pending to which the Company
or any of the Subsidiaries is a party or to which the property of the Company or
any of the Subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not described therein (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus), and
no such proceedings have been threatened against the Company or any of the
Subsidiaries or with respect to any of their respective properties; and no
contract or other document is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement that is not described therein (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) or filed as required.
(o) The issuance, offering and sale of the Securities to the Underwriters
by the Company pursuant to this Agreement, the compliance by the Company and
each of the
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Subsidiaries with the other provisions of this Agreement and the consummation of
the other transactions herein contemplated do not (i) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained, such as may be
required under state securities or blue sky laws and, if the registration
statement filed with respect to the Securities (as amended) is not effective
under the Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the Act, or (ii) conflict
with or result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any indenture, mortgage, deed of trust, lease or
other agreement or instrument to which the Company or any of its subsidiaries is
a party or by which the Company or any of its subsidiaries or any of their
respective properties are bound, or the charter documents or by-laws of the
Company or any of its subsidiaries, or any law or statute or any judgment,
decree, order, rule or regulation of any court or other governmental authority
or any arbitrator applicable to the Company or any of its subsidiaries.
(p) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus, neither the Company nor any
of the Subsidiaries has sustained any material loss or interference with their
respective businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding and there has not been any Material
Adverse Effect, or any development involving a prospective Material Adverse
Effect, except in each case as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(q) None of the Company and the Subsidiaries has, directly or indirectly,
(i) taken any action designed to cause or to result in, or that has constituted
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or (ii) since the filing of the Registration
Statement (A) sold, bid for, purchased, or paid anyone any compensation for
soliciting purchases of, the Securities or (B) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company (except for the sale of Securities under this Agreement).
(r) The Company has not distributed and, prior to the later of (i) the Firm
Closing Date and (ii) the completion of the distribution of the Securities, will
not distribute any offering material in connection with the offering and sale of
the Securities other than the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or other materials, if any permitted by the Act.
(s) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), (1) the Company and the
Subsidiaries have not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction
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not in the ordinary course of business; (2) the Company has not purchased any of
its outstanding capital stock, nor declared, paid or otherwise made any dividend
or distribution of any kind on its capital stock; and (3) there has not been any
material change in the capital stock, short-term debt or long-term debt of the
Company and the Subsidiaries, except in each case as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(t) The Company and each of the Subsidiaries have good and marketable title
in fee simple to all items of real property and marketable title to all personal
property owned by each of them and/or described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), in each
case free and clear of any security interests, liens, encumbrances, equities,
claims and other defects, except such as do not materially and adversely affect
the value of such property and do not interfere with the use made or proposed to
be made of such property by the Company or such Subsidiary, and any real or
personal property and buildings held under lease by the Company or any of the
Subsidiaries are held under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the use made or
proposed to be made of such property and buildings by the Company or such
Subsidiary, in each case except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(u) No labor dispute with the employees of the Company or any of the
Subsidiaries exists or is threatened or imminent that could result in a Material
Adverse Effect, except as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
(v) The Company and the Subsidiaries own or possess, or can acquire on
reasonable terms, all material patents, patent applications, trademarks, service
marks, trade names, licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with their respective
businesses, and neither the Company nor any Subsidiary has received any notice
of infringement of or conflict with asserted rights of any third party with
respect to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(w) The Company and each of the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any Subsidiary has been refused any insurance
coverage sought or applied for; and neither the Company nor any Subsidiary has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not result in a Material Adverse Effect, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
8
<PAGE>
(x) No Subsidiary is currently prohibited, directly or indirectly, from
paying any dividends to the Company, from making any other distribution on such
Subsidiary's capital stock, from repaying to the Company any loans or advances
to such Subsidiary from the Company or from transferring any of such
Subsidiary's property or assets to the Company or any other Subsidiary of the
Company, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(y) The Company and each of the Subsidiaries possess all licenses,
certificates, authorizations, consents, orders, approvals and permits issued by,
and has made all declarations and filings with, all appropriate federal, state,
local or foreign regulatory authorities necessary to own or lease and to operate
its respective properties and to conduct their respective businesses as now or
proposed to be conducted as set forth in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), and neither the
Company nor any Subsidiary has received any notice of proceedings relating to
the revocation or modification of any such license, certificate, authorization,
consent, order, approval or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(z) Neither the Company nor any of the Subsidiaries will conduct its
operations in a manner that will subject it to registration as an investment
company under the Investment Company Act of 1940, as amended, and this
transaction will not cause the Company to become an investment company subject
to registration under such Act.
(aa) Each of the Company and the Subsidiaries has filed all foreign,
federal, state and local tax returns that are required to be filed or has
requested extensions thereof (except in any case in which the failure so to file
would not have a Material Adverse Effect) and has paid all taxes required to be
paid by it and any other assessment, fine or penalty levied against it, to the
extent that any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good faith and
for which the company or such Subsidiary has provided adequate reserves, or as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(bb) Neither the Company nor any of the Subsidiaries is in violation of any
federal or state law or regulation relating to public or occupational safety and
health or to pollution, the environment or the storage, handling or
transportation of hazardous or toxic materials ("Environmental Law") and
-----------------
the Company and each Subsidiary have received all permits, licenses or other
approvals required of them under applicable Environmental Law in connection with
the ownership, operation or use of their respective businesses, property and
assets, and the Company and each Subsidiary are in compliance with all terms and
conditions of any such permit, license or approval, except any such violation of
law or regulation, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such permits,
licenses or approvals which would not, singly or in the aggregate, result in a
Material Adverse Effect, and except as described in or contemplated by the
9
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Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). Except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the Preliminary Prospectus), none of the Company
or the Subsidiaries is subject to any liability, absolute or contingent, under
any Environmental Law except for any such liability which would not,
individually or in the aggregate, have a Material Adverse Effect.
(cc) Each certificate signed by any officer of the Company or any of the
Subsidiaries and delivered to the Representatives or counsel for the
Underwriters shall be deemed to be a joint and several representation and
warranty by the Company and each of the Subsidiaries to each Underwriter as to
the matters covered thereby.
(dd) Except for the shares of capital stock of each of the Subsidiaries
owned by the Company, neither the Company nor any Subsidiary owns any shares of
stock or any other equity securities or long-term debt securities or has any
equity interest in any firm, partnership, association or other entity, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(ee) There are no holders of securities of the Company, other than the
Selling Securityholder, who, by reason of the filing of the Registration
Statement, have the right (and have not waived such right) to request the
Company to register under the Act, or to include in the Registration Statement,
securities held by them.
(ff) The Company and each of the Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(gg) No breach or default exists, and no event has occurred which, with
notice or lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any indenture,
mortgage, deed of trust, lease or other agreement or instrument to which the
Company or any of the Subsidiaries is a party or by which the Company or any of
the Subsidiaries or any of their respective properties is bound, except for any
such breach, default or event which would not, individually or in the aggregate,
have a Material Adverse Effect.
(hh) None of the Company or the Subsidiaries has any liability for any
prohibited transaction or funding deficiency or any complete or partial
withdrawal liability with respect to any pension, profit sharing or other plan
which is subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), to which the Company or any of the Subsidiaries makes or
-----
ever has made a contribution and in which any employee of the Company or any of
the Subsidiaries is or has ever been a participant. With respect to such
10
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plans, the Company and each Subsidiary is in compliance in all material
respects with all applicable provisions of ERISA.
(ii) None of the Company or any of the Subsidiaries nor any director,
officer, agent, employee or other person associated with or acting on behalf of
the Company or any of the Subsidiaries has used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expense relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic governmental official or employee from corporate funds; violated or
is in violation of any provision of the Foreign Corrupt Practices Act of 1977;
or made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment.
(jj) As of the date hereof, the Acquisition has closed in escrow and on
the Firm Closing Date the Acquisition shall have been finally consummated. On
and as of the Firm Closing Date, the merger contemplated by the Acquisition
Agreement shall have become effective pursuant to the laws of Minnesota and
Delaware and the Company shall be the sole record and beneficial owner of the
equity of the surviving corporation of the merger, as contemplated by the
Acquisition Agreement. Other than the payment of the cash consideration to be
paid in the Acquisition, all conditions precedent to the Acquisition have been
satisfied (and not waived) and the Acquisition Agreement has not been modified
or amended in any way and is identical in all respects to the Acquisition
Agreement delivered to the Representatives on or prior to the date hereof. The
Acquisition Agreement will, on the Firm Closing Date, conform in all material
respects to the description thereof contained in the Prospectus.
(kk) The Company has good and marketable title to all of the securities of
the surviving corporation of the merger contemplated by the Acquisition
Agreement, in each case free and clear of any security interests, liens,
encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such securities and do not
interfere with the use made or proposed to be made of such securities by the
Company, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(ll) No relationship, direct or indirect, exists and no transaction has
occurred between or among the Company and/or any of its Subsidiaries, on the one
hand, and the directors, officers, stockholders, customers or suppliers of the
Company and/or any of its Subsidiaries on the other hand, which is required to
be described in the Prospectus and is not so described.
3. Representations and Warranties of the Selling Securityholder.
------------------------------------------------------------
The Selling Securityholder represents and warrants to, and agrees with,
each of the several Underwriters that:
(a) The Selling Securityholder has full power to enter into this Agreement
and to sell, assign, transfer and deliver to the Underwriters the Selling
Securityholder Securities hereunder in accordance with the terms of this
Agreement; and this Agreement has been duly executed and delivered by the
Selling Securityholder, and is the valid and binding agreement of
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the Selling Securityholder, enforceable against the Selling Securityholder
in accordance with its terms.
(b) The Selling Securityholder has duly executed and delivered a power of
attorney and custody agreement (the "Power-of-Attorney" and the "Custody
Agreement", respectively), each in the form heretofore delivered to the
Representatives, appointing _________________________ as the Selling
Securityholder's attorney-in-fact (the "Attorney-in-Fact") with authority to
execute, deliver and perform this Agreement on behalf of the Selling
Securityholder and appointing _________________________, as custodian thereunder
(the "Custodian"). Certificates in negotiable form, endorsed in blank or
accompanied by blank stock powers duly executed, with signatures appropriately
guaranteed, representing the Selling Securityholder Securities hereunder have
been deposited with the Custodian pursuant to the Custody Agreement for the
purpose of delivery pursuant to this Agreement. The Selling Securityholder has
full power to enter into the Custody Agreement and the Power-of-Attorney and to
perform its obligations under the Custody Agreement. Assuming due authorization,
execution and delivery by the Custodian, the Custody Agreement and the Power-of-
Attorney are the legal, valid, binding and enforceable instruments of the
Selling Securityholder, enforceable against the Selling Securityholder in
accordance with their respective terms. The Selling Securityholder agrees that
each of the Securities represented by the certificates on deposit with the
Custodian is subject to the interests of the Underwriters hereunder, that the
arrangements made for such custody, the appointment of the Attorney-in-Fact and
the right, power and authority of the Attorney-in-Fact to execute and deliver
this Agreement, to agree on the price at which the Securities (including the
Selling Securityholder's Securities) are to be sold to the Underwriters, and to
carry out the terms of this Agreement, are to that extent irrevocable and that
the obligations of the Selling Securityholder hereunder shall not be terminated,
except as provided in this Agreement or the Custody Agreement, by any act of the
Selling Securityholder, by operation of law or otherwise, whether in the case of
any individual Selling Securityholder by the death or incapacity of such Selling
Securityholder, in the case of a trust or estate by the death of the trustee or
trustees or the executor or executors or the termination of such trust or
estate, or in the case of a corporate or partnership Selling Securityholder by
its liquidation or dissolution or by the occurrence of any other event. If any
individual Selling Securityholder, trustee or executor should die or become
incapacitated or any such trust should be terminated, or if any corporate or
partnership Selling Securityholder shall liquidate or dissolve, or if any other
event should occur, before the delivery of such Securities hereunder, the
certificates for such Securities deposited with the Custodian shall be delivered
by the Custodian in accordance with the respective terms and conditions of this
Agreement as if such death, incapacity, termination, liquidation or dissolution
or other event had not occurred, regardless of whether or not the Custodian or
the Attorney-in-Fact shall have received notice thereof.
(c) The Selling Securityholder is the lawful owner of the Selling
Securityholder Securities hereunder and upon sale and delivery of, and payment
for, such Securities, as provided herein, the Selling Securityholder will convey
good and marketable title to such Securities, free and clear of any security
interests, liens, encumbrances, equities, claims or other defects.
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(d) The Selling Securityholder has not, directly or indirectly, (i) taken
any action designed to cause or result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement (A) sold, bid
for, purchased, or paid anyone any compensation for soliciting purchases of, the
Securities or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company (except for
the sale of Selling Securityholder Securities by the Selling Securityholder
under this Agreement).
(e) To the extent that any statements or omissions are made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by the Selling Securityholder specifically
for use therein, such Preliminary Prospectus did, and the Registration Statement
and the Prospectus and any amendments or supplements thereto, when they become
effective or are filed with the Commission, as the case may be, will (i) conform
in all material respects to the requirements of the Act and the respective rules
and regulations of the Commission thereunder and (ii) not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they are made, not misleading. The Selling
Securityholder has reviewed the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and the Registration
Statement, and the information regarding the Selling Securityholder set forth
therein under the caption "Selling Securityholder" is complete and accurate.
(f) The sale by the Selling Securityholder of Securities pursuant hereto
is not prompted by any adverse information concerning the Company that is not
set forth in the Registration Statement or the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus).
(g) The sale of the Securities to the Underwriters by the Selling
Securityholder pursuant to this Agreement, the compliance by the Selling
Securityholder with the other provisions of this Agreement, the Custody
Agreement and the consummation of the other transactions herein contemplated do
not (i) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have been
obtained, such as may be required under state securities or blue sky laws and,
if the registration statement filed with respect to the Securities (as amended)
is not effective under the Act as of the time of execution hereof, such as may
be required (and shall be obtained as provided in this Agreement) under the Act,
or (ii) conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Selling
Securityholder is a party or by which the Selling Securityholder or any of the
Selling Securityholder's properties are bound, or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental authority
or any arbitrator applicable to the Selling Securityholder.
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(h) The Selling Securityholder has not distributed and, prior to the later
of (i) the Firm Closing Date and (ii) the completion of the distribution of the
Securities, will not distribute any offering material in connection with the
offering and sale of the Securities other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or other materials, if any permitted by the Act.
(i) In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Internal Revenue Code of 1986, as amended,
with respect to the transactions herein contemplated, the Selling Securityholder
agrees to deliver to the Representatives prior to or on the Firm Closing Date a
properly completed and executed United States Treasury Department Form W-8 or
W-9 (or other applicable form of statement specified by Treasury Department
regulations in lieu thereof).
4. Purchase, Sale and Delivery of the Securities. (a) On the basis of
---------------------------------------------
the representations, warranties, agreements and covenants herein contained and
subject to the terms and conditions herein set forth, (i) the Company agrees to
issue and sell to each of the Underwriters, and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company, at a purchase
price of $________ per share, the number of Firm Securities set forth opposite
the name of such Underwriter in Schedule 1 hereto and (ii) the Selling
Securityholder agrees to sell to each of the Underwriters, and each of the
Underwriters, severally and not jointly, agrees to purchase from the Selling
Securityholder, at a purchase price of $________ per share, the number of
Selling Securityholder Securities set forth opposite the name of such
Underwriter in Schedule 1 hereto. One or more certificates in definitive form
for the Firm Securities and Selling Securityholder Securities that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representatives
request upon notice to the Company and Selling Securityholder, respectively, at
least 48 hours prior to the Firm Closing Date, shall be delivered by or on
behalf of the Company and Selling Securityholder, respectively, to the
Representatives for the respective accounts of the Underwriters, against payment
by or on behalf of the Underwriters of the purchase price therefor by wire
transfer in same-day funds (the "Wired Funds") to the accounts of the Company
-----------
and the Selling Securityholder, respectively. Such delivery of and payment for
the Firm Securities and Selling Securityholder Securities shall be made at the
offices of Cadwalader, Wickersham & Taft, 100 Maiden Lane, New York, New York
10038 at 9:30 A.M., New York time, on __________, 1998, or at such other place,
time or date as the Representatives and the Company may agree upon or as the
Representatives may determine pursuant to Section 10 hereof, such time and date
of delivery against payment being herein referred to as the "Firm Closing Date".
-----------------
The Company will make such certificate or certificates for the Firm Securities,
and the Selling Securityholder will (or will cause the Custodian to) make such
certificate or certificates for the Selling Securityholder Securities, available
for checking and packaging by the Representatives at the offices in New York,
New York of the Company's transfer agent or registrar or of Prudential
Securities Incorporated at least 24 hours prior to the Firm Closing Date.
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(b) For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Securities as contemplated by the Prospectus,
the Company hereby grants to the several Underwriters an option to purchase,
severally and not jointly, the Option Securities. The purchase price to be paid
for any Option Securities shall be the same price per share as the price per
share for the Firm Securities set forth above in paragraph (a) of this Section
4. The option granted hereby may be exercised as to all or any part of the
Option Securities from time to time within thirty days after the date of the
Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the New York Stock Exchange is open for
trading). The Underwriters shall not be under any obligation to purchase any of
the Option Securities prior to the exercise of such option. The Representatives
may from time to time exercise the option granted hereby by giving notice in
writing or by telephone (confirmed in writing) to the Company setting forth the
aggregate number of Option Securities as to which the several Underwriters are
then exercising the option and the date and time for delivery of and payment for
such Option Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representatives and Company
may agree upon or as the Representatives may determine pursuant to Section 10
hereof, is herein called the "Option Closing Date" with respect to such Option
-------------------
Securities. Upon exercise of the option as provided herein, the Company shall
become obligated to sell to each of the several Underwriters, and, subject to
the terms and conditions herein set forth, each of the Underwriters (severally
and not jointly) shall become obligated to purchase from the Company, the same
percentage of the total number of the Option Securities as to which the several
Underwriters are then exercising the option as such Underwriter is obligated to
purchase of the aggregate number of Firm Securities, as adjusted by the
Representatives in such manner as they deem advisable to avoid fractional
shares. If the option is exercised as to all or any portion of the Option
Securities, one or more certificates in definitive form for such Option
Securities, and payment therefor, shall be delivered on the related Option
Closing Date in the manner, and upon the terms and conditions, set forth in
paragraph (a) of this Section 4, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph (b), to refer to such Option Securities and Option Closing Date,
respectively.
(c) The Company and the Selling Securityholder hereby acknowledge that the
wire transfer by or on behalf of the Underwriters of the purchase price for any
Shares does not constitute closing of a purchase and sale of the Shares. Only
execution and delivery of a receipt for Shares by the Underwriters indicates
completion of the closing of a purchase of the Shares from the Company or the
Selling Securityholder. Furthermore, in the event that the Underwriters wire
funds to the Company or the Selling Securityholder prior to the completion of
the closing of a purchase of Shares, each of the Company and the Selling
Securityholder hereby acknowledges that until the Underwriters execute and
deliver a receipt for the Shares, by facsimile or otherwise, the Company and the
Selling Securityholder will not be entitled to the Wired Funds transferred to
their respective accounts and shall return such Wired Funds to the Underwriters
as soon as practicable (by wire transfer of same-day funds) upon demand. In
15
<PAGE>
the event that the closing of a purchase of Shares is not completed and such
Wired Funds are not returned by the Company or the Selling Securityholder to the
Underwriters on the same day the Wired Funds were received by the Company or the
Selling Securityholder, respectively, the Company and the Selling Securityholder
agree to pay to the Underwriters in respect of each day such Wired Funds are not
returned by it, in same-day funds, interest on the amount of such Wired Funds in
an amount representing the Underwriters' cost of financing as reasonably
determined by Prudential Securities Incorporated.
(d) It is understood that either of you, individually and not as one of the
Representatives, may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such
Underwriter or Underwriters from any of its or their obligations hereunder.
5. Offering by the Underwriters. Upon your authorization of the release
----------------------------
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
6. Covenants of the Company and the Selling Securityholder. Each of the
-------------------------------------------------------
Company and the Selling Securityholder (as to itself only) covenants and agrees
with each of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and any
amendments thereto to become effective as promptly as possible. If required,
the Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under the
Act. During any time when a prospectus relating to the Securities is required
to be delivered under the Act, the Company (i) will comply with all requirements
imposed upon it by the Act and the rules and regulations of the Commission
thereunder to the extent necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission the prospectus, Term Sheet or the amendment referred to in the second
sentence of Section 2(a) hereof, any amendment or supplement to such Prospectus,
Term Sheet or any amendment to the Registration Statement or any Rule 462(b)
Registration Statement of which the Representatives previously have been advised
and furnished with a copy for a reasonable period of time prior to the proposed
filing and as to which filing the Representatives shall not have given their
consent. The Company will prepare and file with the Commission, in accordance
with the rules and regulations of the Commission, promptly upon request by the
Representatives or counsel for the Underwriters, any amendments to the
Registration Statement or amendments or supplements to the Prospectus that may
be necessary or advisable in connection with the distribution of the Securities
by the several Underwriters, and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will advise the
Representatives, promptly after receiving notice thereof, of the time when the
Registration
16
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Statement or any amendment thereto has been filed or declared effective or the
Prospectus or any amendment or supplement thereto has been filed and will
provide evidence satisfactory to the Representatives of each such filing or
effectiveness.
(b) The Company will advise the Representatives, promptly after receiving
notice or obtaining knowledge thereof, of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Original Registration
Statement or any Rule 462(b) Registration Statement or any amendment thereto or
any order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (ii) the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, (iii)
the institution, threatening or contemplation of any proceeding for any such
purpose or (iv) any request made by the Commission for amending the Original
Registration Statement or any Rule 462(b) Registration Statement, for amending
or supplementing the Prospectus or for additional information. The Company will
use its best efforts to prevent the issuance of any such stop order and, if any
such stop order is issued, to obtain the withdrawal thereof as promptly as
possible.
(c) The Company will arrange for the qualification of the Securities for
offering and sale under the securities or blue sky laws of such jurisdictions as
the Representatives may designate and will continue such qualifications in
effect for as long as may be necessary to complete the distribution of the
Securities, provided, however, that in connection therewith the Company shall
-----------------
not be required to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly notify the
Representatives thereof and, subject to Section 6(a) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the Representatives
and to counsel for the Underwriters a signed copy and a conformed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) or any Rule 462(b)
Registration Statement, certified by the Secretary or an Assistant Secretary of
the Company to be true and complete copies thereof as filed with the Commission
by electronic transmission, (ii) to each other Underwriter, a conformed copy of
such registration statement or any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (iii) so long as a
prospectus relating to the Securities is required to be delivered under the Act,
as many copies of each
17
<PAGE>
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto
as the Representatives may reasonably request; without limiting the application
of clause (iii) of this sentence, the Company, not later than (A) 6:00 P.M., New
York City time, on the date of determination of the public offering price, if
such determination occurred at or prior to 10:00 A.M., New York City time, on
such date or (B) 2:00 P.M., New York City time, on the business day following
the date of determination of the public offering price, if such determination
occurred after 10:00 A.M., New York City time, on such date, will deliver to the
Underwriters, without charge, as many copies of the Prospectus and any amendment
or supplement thereto as the Representatives may reasonably request for purposes
of confirming orders that are expected to settle on the Firm Closing Date.
(f) The Company, as soon as practicable, will make generally available to
its securityholders and to the Representatives a consolidated earnings statement
of the Company and its subsidiaries that satisfies the provisions of Section
11(a) of the Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of the Securities
as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will not, directly or indirectly, without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or any securities convertible into,
or exchangeable or exercisable for, shares of Common Stock for a period of 180
days after the date hereof, except pursuant to this Agreement and except for
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof or pursuant to the terms of convertible securities (including,
without limitation, warrants) of the Company outstanding on the date hereof.
(i) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company (except for the sale of Securities under this Agreement).
(j) The Company will obtain the agreements described in Section 8(f) hereof
prior to the Firm Closing Date.
(k) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
18
<PAGE>
Prospectus), the Company will, after notice from you advising the Company to the
effect set forth above, forthwith prepare, consult with you concerning the
substance of, and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such rumor,
publication or event.
(l) If the Company elects to rely on Rule 462(b), the Company shall both
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated
under the Act by the earlier of (i) 10:00 P.M. Eastern time on the date of this
Agreement and (ii) the time confirmations are sent or given, as specified by
Rule 462(b)(2).
(m) The Company will cause the Securities to be duly included for quotation
on the Nasdaq National Market prior to the Firm Closing Date. The Company will
ensure that the Securities remain included for quotation on the Nasdaq National
Market following the Firm Closing Date.
(n) Prior to the Option Closing Date, the Company will furnish to the
Representatives, as soon as they have been prepared, a copy of any unaudited
interim, financial statements of the Company for any period subsequent to the
period covered by the most recent financial statements appearing in the
Prospectus.
(o) During the period of three years after the last date of original
issuance of the Securities, the Company will not be or become an "investment
company" under the Investment Company Act.
(p) The Selling Securityholder will not, directly or indirectly, without
the prior written consent of Prudential Securities Incorporated, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock legally or beneficially owned by the Selling
Securityholder or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock for a period of 180 days after the date
hereof.
(q) The Selling Securityholder will not, directly or indirectly, (i) take
any action designed to cause or result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company (except for the sale of Selling Securityholder Securities by the
Selling Securityholder under this Agreement).
7. Expenses. The Company and the Subsidiaries agree, jointly and
--------
severally, to pay all costs and expenses incident to the performance of their
obligations under this Agreement, whether or not the transactions contemplated
herein are consummated or this Agreement is terminated pursuant to Section 12
hereof, including all costs and expenses
19
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incident to (i) the printing or other production of documents with respect to
the transactions, including any costs of printing the registration statement
originally filed with respect to the Securities and any amendment thereto, any
Rule 462(b) Registration Statement, any Preliminary Prospectus and the
Prospectus and any amendment or supplement thereto, this Agreement and any blue
sky memoranda, (ii) all arrangements relating to the delivery to the
Underwriters of copies of the foregoing documents, (iii) the fees and
disbursements of the counsel, the accountants and any other experts or advisors
retained by the Company, (iv) preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Securities, including transfer
agent's and registrar's fees, (v) the qualification of the Securities under
state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Underwriters relating thereto, (vi) the filing
fees of the Commission and the National Association of Securities Dealers, Inc.
relating to the Securities, (vii) any quotation of the Securities on the Nasdaq
National Market, (viii) any meetings with prospective investors in the
Securities (other than as shall have been specifically approved by the
Representatives to be paid for by the Underwriters) and (ix) advertising
relating to the offering of the Securities (other than as shall have been
specifically approved by the Representatives to be paid for by the
Underwriters). If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 8 hereof is not satisfied, because this Agreement is terminated
pursuant to Section 12 hereof or because of any failure, refusal or inability on
the part of the Company to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including counsel fees and
disbursements) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities. The Company shall not in any event
be liable to any of the Underwriters for the loss of anticipated profits from
the transactions covered by this Agreement.
8. Conditions of the Underwriters' Obligations. The obligations of the
-------------------------------------------
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
respective representations and warranties of the Company and the Selling
Securityholder contained herein as of the date hereof and as of the Firm Closing
Date, as if made on and as of the Firm Closing Date, to the accuracy of the
statements of the Company's officers made pursuant to the provisions hereof, to
the performance by the Company and the Selling Securityholder of their
respective covenants and agreements hereunder and to the following additional
conditions:
(a) If the Original Registration Statement or any amendment thereto filed
prior to the Firm Closing Date has not been declared effective as of the time of
execution hereof, the Original Registration Statement or such amendment and, if
the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have been declared effective not later than the earlier of (i)
11:00 A.M., New York time, on the date on which the amendment to the
registration statement originally filed with respect to the Securities or to the
Registration Statement, as the case may be, containing information regarding the
initial public offering price of the Securities has been filed with the
Commission and (ii) the time confirmations are sent or given as specified by
Rule 462(b)(2), or with respect to the Original
20
<PAGE>
Registration Statement, or such later time and date as shall have been consented
to by the Representatives; if required, the Prospectus or any Term Sheet that
constitutes a part thereof and any amendment or supplement thereto shall have
been filed with the Commission in the manner and within the time period required
by Rules 434 and 424(b) under the Act; no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto shall have
been issued, and no proceedings for that purpose shall have been instituted or
threatened or, to the knowledge of the Company or the Representatives, shall be
contemplated by the Commission; and the Company shall have complied with any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise).
(b) The Representatives shall have received an opinion, dated the Firm
Closing Date of Mirick, O'Connell, De Mallie & Lougee, LLP, counsel for the
Company and the Subsidiaries, to the effect that:
(i) the Company and each of the Subsidiaries have been duly organized
and are validly existing as corporations in good standing under the laws of
their respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing under
the laws of all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses
requires such qualification, except where the failure to be so qualified
would not, individually or in the aggregate, have a Material Adverse
Effect;
(ii) the Company and each of the Subsidiaries have corporate power to
own or lease their respective properties and conduct their respective
businesses as described in the Registration Statement and the Prospectus,
and the Company and each of the Subsidiaries have corporate power to enter
into this Agreement and to carry out all the terms and provisions hereof to
be carried out by it;
(iii) the issued shares of capital stock of each of the Subsidiaries
have been duly authorized and validly issued, are fully paid and
nonassessable, were not issued in violation of any preemptive or similar
rights and are owned beneficially by the Company free and clear of any
perfected security interest or, to the best knowledge of such counsel, any
other security interests, liens, encumbrances, equities, claims or
restrictions on transferability (other than those imposed by the Act and
the securities or "Blue Sky" laws of certain jurisdictions) or voting;
other than the Subsidiaries, there is no other subsidiary of the Company;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued shares of
capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, have been issued in compliance with
all applicable federal and state securities laws and were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities; no sales of securities have been made
by the Company in violation of the provisions of the Act, the Exchange Act,
or state securities laws; the
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Firm Securities have been duly authorized by all necessary corporate action
of the Company and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will be validly issued, fully paid
and nonassessable; the Securities have been duly included for trading on
the Nasdaq National Market; no holders of outstanding shares of capital
stock of the Company are entitled as such to any preemptive or other rights
to subscribe for any of the Securities; and no holders of securities of the
Company are entitled to have such securities registered under the
Registration Statement;
(v) the statements set forth under the heading "Description of Capital
Stock" in the Prospectus, insofar as such statements purport to summarize
certain provisions of the capital stock of the Company, provide a fair
summary of such provisions; and the statements set forth under the headings
"Risk Factors--Regulation," "Business--Regulation," "Business--Legal
Proceedings" and "Description of Capital Stock" in the Prospectus, insofar
as such statements constitute a summary of the legal matters, documents or
proceedings referred to therein, provide a fair summary of such legal
matters, documents and proceedings;
(vi) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company and the
Subsidiaries. This Agreement has been duly executed and delivered by each
of the Company and the Subsidiaries;
(vii) (A) no legal or governmental proceedings are pending to which
the Company or any of the Subsidiaries is a party or to which the property
of the Company or any of the Subsidiaries is subject that are required to
be described in the Registration Statement or the Prospectus and are not
described therein, and, to the best knowledge of such counsel, no such
proceedings have been threatened against the Company or any of the
Subsidiaries or with respect to any of their respective properties and (B)
no contract or other document is required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to
the Registration Statement that is not described therein or filed as
required;
(viii) the issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by
the Company and the Subsidiaries with the other provisions of this
Agreement and the consummation of the other transactions herein
contemplated do not (A) require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except
such as have been obtained and such as may be required under state
securities or blue sky laws, or (B) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, lease, or other agreement or
instrument, known to such counsel, to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries
or any of their respective properties are bound, or the charter documents
or by-laws of the Company or any of the Subsidiaries, or any statute or any
judgment,
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decree, order, rule or regulation of any court or other governmental
authority or any arbitrator known to such counsel and applicable to the
Company or the Subsidiaries or any of their respective properties or
assets;
(ix) the Registration Statement is effective under the Act; any
required filing of the Prospectus, or any Term Sheet that constitutes a
part thereof, pursuant to Rules 434 and 424(b) has been made in the manner
and within the time period required by Rules 434 and 424(b); and no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued, and no proceedings for that purpose have
been instituted or threatened or, to the best knowledge of such counsel,
are contemplated by the Commission;
(x) the Registration Statement originally filed with respect to the
Securities and each amendment thereto, any Rule 462(b) Registration
Statement and the Prospectus (in each case, other than the financial
statements and other financial information contained therein, as to which
such counsel need express no opinion) comply as to form in all material
respects with the applicable requirements of the Act and the rules and
regulations of the Commission thereunder;
(xi) if the Company elects to rely on Rule 434, the Prospectus is not
"materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including
such information that is permitted to be omitted pursuant to Rule 430A);
(xii) neither the Company nor any of the Subsidiaries is an
"investment company" or "promoter" or "principal underwriter" for an
"investment company" as such terms are defined in the Investment Company
Act;
(xiii) the merger contemplated by the Acquisition Agreement shall
have become effective pursuant to the laws of Minnesota and Delaware, and
the Company is the sole record and beneficial owner of the shares of the
equity of the surviving corporation of the merger;
(xiv) except as disclosed in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there are no
outstanding (A) securities or obligations of the Company or any of the
Subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such Subsidiary, (B) warrants, rights or options to
subscribe for or purchase from the Company or any Subsidiary any such
capital stock or any such convertible or exchangeable securities or
obligations, or (C) obligations of the Company or any Subsidiary to issue
any shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options; and
(xv) to the knowledge of such counsel, each of the Company and the
Subsidiaries hold all material licenses, certificates and permits from
governmental
23
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authorities necessary for the conduct of its business as described in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
Such counsel shall also state that they have no reason to believe that the
Registration Statement, as of its effective date, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or the date of such opinion, included or includes any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials and, as to matters involving the
application of laws of the State of ________, to the extent satisfactory in form
and scope to counsel for the Underwriters, upon the opinion of [insert name of
---------------
local counsel], addressed to the Underwriters and dated the Firm Closing Date, a
- --------------
copy of which will be attached to the opinion of counsel for the Company. The
foregoing opinion shall also state that the Underwriters are justified in
relying upon such opinion of [insert name of local counsel], copies of such
------------------------------
opinion shall be delivered to the Representatives and counsel for the
Underwriters.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Cadwalader, Wickersham & Taft, counsel for the Underwriters,
with respect to the issuance and sale of the Firm Securities, the Registration
Statement and the Prospectus, and such other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters. In rendering such opinion, such
counsel may rely as to all matters of law upon the opinion of Mirick, O'Connell,
DeMallie & Lougee, LLP referred to in paragraph (b) above.
(d) The Representatives shall have received from KPMG Peat Marwick, LLP a
letter or letters dated, respectively, the date hereof and the Firm Closing
Date, in form and substance satisfactory to the Representatives, to the effect
that:
(i) they are independent public accountants with respect to the
Company and its consolidated subsidiaries within the meaning of the Act and
the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial statements
and schedules and pro forma financial statements examined by them and
included in the Registration Statement and the Prospectus comply in form in
all material respects with the applicable accounting requirements of the
Act and the Exchange Act and the related published rules and regulations;
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(iii) on the basis of their limited review in accordance with
standards established by the American Institute of Certified Public
Accountants of any interim unaudited consolidated condensed financial
statements of the Company and its consolidated subsidiaries as indicated in
their report included in the Registration Statement and the Prospectus,
carrying out certain specified procedures (which do not constitute an
examination made in accordance with generally accepted auditing standards)
that would not necessarily reveal matters of significance with respect to
the comments set forth in this paragraph (iii), a reading of the minute
books of the shareholders, the board of directors and any committees
thereof of the Company and each of its consolidated subsidiaries, and
inquiries of certain officials of the Company and its consolidated
subsidiaries who have responsibility for financial and accounting matters,
nothing came to their attention that caused them to believe that:
(A) the unaudited consolidated condensed financial statements of the
Company and its consolidated subsidiaries included in the Registration
Statement and the Prospectus do not comply in form in all material
respects with the applicable accounting requirements of the Act and
the related published rules and regulations thereunder or are not in
conformity with generally accepted accounting principles applied on a
basis substantially consistent with that of the audited consolidated
financial statements included in the Registration Statement and the
Prospectus;
(B) at a specific date not more than five business days prior to the
date of such letter, there were any changes in the capital stock or
long-term debt of the Company and its consolidated subsidiaries or any
decreases in net current assets or stockholders' equity of the Company
and its consolidated subsidiaries, in each case compared with amounts
shown on the March 31, 1998 unaudited consolidated balance sheet
included in the Registration Statement and the Prospectus, or for the
period from April 1, 1998 to such specified date there were any
decreases (or increases in any negative amounts), as compared with the
period commencing January 1, 1998 and ending on such date which is the
same number of days after January 1, 1998 as the specified date is
after April 1, 1998, in net revenues, loss before income taxes or
total or per share amounts of net loss of the Company and its
consolidated subsidiaries, except in all instances for changes,
decreases or increases set forth in such letter;
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records
of the Company and its consolidated subsidiaries and are included in the
Registration Statement and the Prospectus under the captions "Prospectus
Summary," "Risk Factors," "Capitalization," "Dilution," "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," "Management," "Certain Transactions,"
"Principal Stockholders" and "Description of Capital Stock" and in Exhibit
11 to the Registration Statement, and have compared such amounts,
percentages and financial information with such records of the Company and
its consolidated subsidiaries and with information derived from such records
and have found them to be in agreement, excluding any questions of legal
interpretation; and
25
<PAGE>
(v) on the basis of a reading of the unaudited pro forma consolidated
condensed financial statements included in the Registration Statement and the
Prospectus, carrying out certain specified procedures that would not necessarily
reveal matters of significance with respect to the comments set forth in this
paragraph (v), inquiries of certain officials of the Company and the
Subsidiaries and ABCC who have responsibility for financial and accounting
matters and proving the arithmetic accuracy of the application of the pro forma
adjustments to the historical amounts in the unaudited pro forma consolidated
condensed financial statements, nothing came to their attention that caused them
to believe that the unaudited pro forma consolidated condensed financial
statements do not comply in form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of such statements.
In the event that the letters referred to above set forth any such changes,
decreases or increases, it shall be a further condition to the obligations of
the Underwriters that (A) such letters shall be accompanied by a written
explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended as of the
date hereof.
References to the Registration Statement and the Prospectus in this
paragraph (d) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(e) The Representatives shall have received a certificate, dated the Firm
Closing Date, of the principal executive officer and the principal financial or
accounting officer of the Company and each of the Subsidiaries to the effect
that:
(i) the representations and warranties of the Company and each of the
Subsidiaries in this Agreement are true and correct as if made on and as of
the Firm Closing Date; the statements of the Company's and the
Subsidiaries' officers made pursuant to any certificate delivered in
accordance with the provisions hereof shall be true and correct in all
material respects as if made on and as of the Firm Closing Date. The
Registration Statement, as amended as of the Firm Closing Date, does not
include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading, and
the Prospectus, as amended or supplemented as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; and
the Company has performed all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the Firm
Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto has been issued, and no proceedings for
that purpose have
26
<PAGE>
been instituted or threatened or, to the best of the Company's knowledge,
are contemplated by the Commission; and
(iii) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, neither the Company
nor any of the Subsidiaries has sustained any material loss or interference
with their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any legal or governmental proceeding, and there has
not been any material adverse change, or any development involving a
prospective material adverse change which could result in a Material
Adverse Effect, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto).
(f) The Representatives shall have received from each person who is a
director or officer of the Company and each other person or entity who owns
10,000 shares of Common Stock an agreement to the effect that such person will
not, directly or indirectly, without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise sell
or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of any
shares of Common Stock or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock for a period of 180 days after the date
of this Agreement.
(g) On or before the Firm Closing Date, the Representatives and counsel for
the Underwriters shall have received such further certificates, documents or
other information as they may have reasonably requested from the Company.
(h) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National Market.
(i) The Representatives shall have received evidence to their satisfaction
that: (i) on or before the Firm Closing Date, the Acquisition shall have been
finally consummated; (ii) on and as of the Firm Closing Date, the merger
contemplated by the Acquisition Agreement shall have become effective pursuant
to the laws of Minnesota and Delaware and the Company shall be the sole record
and beneficial owner of the equity of the surviving corporation of the merger,
as contemplated by the Acquisition Agreement; (iii) other than the payment of
the cash consideration to be paid in the Acquisition, all conditions precedent
to the Acquisition shall have been satisfied (and not waived) and the
Acquisition Agreement shall not have been modified or amended in any way and
shall be identical in all respects to the Acquisition Agreement delivered to the
Representatives on or prior to the date hereof; and (iv) the Acquisition
Agreement shall, on the Firm Closing Date, conform in all material respects to
the description thereof contained in the Prospectus.
(j) The Selling Securityholder shall have furnished to the Representatives
the opinion of ______________________________, counsel for the Selling
Securityholder, dated the Closing Date, to the effect that:
27
<PAGE>
(i) The Selling Securityholder has full power to enter into this
Agreement, the Custody Agreement and the Power-of-Attorney and to sell,
transfer and deliver the Securities being sold by the Selling
Securityholder hereunder in the manner provided in this Agreement and to
perform its obligations under the Custody Agreement; this Agreement, the
Custody Agreement and the Power-of-Attorney have been duly executed and
delivered by the Selling Securityholder; the Custody Agreement and the
Power-of-Attorney are the legal, valid, binding and enforceable instruments
of the Selling Securityholder, subject to applicable bankruptcy, insolvency
and similar laws affecting creditors' rights generally and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law);
(ii) the delivery by the Selling Securityholder to the several
Underwriters of certificates for the Selling Securityholder Securities
against payment therefor as provided herein, will convey good and
marketable title to such Securities to the several Underwriters, free and
clear of all security interests, liens, encumbrances, equities, claims or
other defects; and
(iii) the sale of the Selling Securityholder Securities to the
Underwriters by the Selling Securityholder pursuant to this Agreement, the
compliance by the Selling Securityholder with the other provisions of this
Agreement, the Custody Agreement and the consummation of the other
transactions herein contemplated do not (i) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained and such as may be required
under state securities or blue sky laws, or (ii) conflict with or result in
a breach or violation of any of the terms and provisions of, or constitute
a default under any indenture, mortgage, deed of trust, lease or other
agreement or instrument to which the Selling Securityholder is a party or
by which the Selling Securityholder or any of the Selling Securityholder's
properties are bound, or any statute or any judgment, decree, order, rule
or regulation of any court or other governmental authority or any
arbitrator applicable to the Selling Securityholder.
In rendering such opinion, such counsel may rely, as to matters of fact, to
the extent such counsel deems proper, on certificates of Selling Securityholder
and public officials and, as to matters involving the application of laws of any
jurisdiction other than the State of ________ or the United States, to the
extent satisfactory in form and scope to counsel for the Underwriters, upon the
opinion of [insert name of local counsel]. The foregoing opinion shall also
state that the Underwriters are justified in relying upon such opinion of
[insert name of local counsel], and copies of such opinion shall be delivered to
the Representatives and counsel for the Underwriters.
(k) The Representatives shall have received a certificate from the Selling
Securityholder, dated the Closing Date, to the effect that:
28
<PAGE>
(i) the representations and warranties of the Selling Securityholder
in this Agreement are true and correct as if made on and as of the Closing
Date;
(ii) to the extent that any statements or omissions are made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by the Selling Securityholder
specifically for use therein, the Registration Statement, as amended as of
the Closing Date, does not include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements therein
not misleading, and the Prospectus, as amended or supplemented as of the
Closing Date, does not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and
(iii) The Selling Securityholder has performed all covenants and
agreements on its part to be performed or satisfied at or prior to the
Closing Date.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company and the Selling Securityholder shall
furnish to the Representatives such conformed copies of such opinions,
certificates, letters and documents in such quantities as the Representatives
and counsel for the Underwriters shall reasonably request.
The respective obligations of the several Underwriters to purchase and pay
for any Option Securities shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Securities, except that all references
to the Firm Securities and the Firm Closing Date shall be deemed to refer to
such Option Securities and the related Option Closing Date, respectively.
9. Indemnification and Contribution. (a) The Company and the Subsidiaries,
--------------------------------
jointly and severally, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter or such
controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company or any of the Subsidiaries in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of any material
fact contained in (A) the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto or (B) any application or other document, or any amendment or
supplement thereto, executed by the Company or based upon written
information furnished by or on behalf of the
29
<PAGE>
Company filed in any jurisdiction in order to qualify the Securities under
the securities or blue sky laws thereof or filed with the Commission or any
securities association or securities exchange (each an "Application"),
-----------
(iii) the omission or alleged omission to state in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or
(iv) any untrue statement or alleged untrue statement of any material
fact contained in any audio or visual materials used in connection with the
marketing of the Securities, including without limitation, slides, videos,
films, tape recordings,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other out-of-pocket expenses (including, without
limitation, expert witness fees, charges or expenses) reasonably incurred by
such Underwriter or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that the
-------- -------
Company or any Subsidiary will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
Application in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the Representatives
specifically for use therein; and provided, further, that the Company or any
-------- -------
Subsidiary will not be liable to any Underwriter or any person controlling such
Underwriter with respect to any such untrue statement or omission made in any
Preliminary Prospectus that is corrected in the Prospectus (or any amendment or
supplement thereto) if the person asserting any such loss, claim, damage or
liability purchased Securities from such Underwriter but was not sent or given a
copy of the Prospectus (as amended or supplemented) at or prior to the written
confirmation of the sale of such Securities to such person in any case where
such delivery of the Prospectus (as amended or supplemented) is required by the
Act, unless such failure to deliver the Prospectus (as amended or supplemented)
was a result of noncompliance by the Company or any Subsidiary with Section 6(d)
and (e) of this Agreement. This indemnity agreement will be in addition to any
liability which the Company or any of the Subsidiaries may otherwise have. The
Company and the Subsidiaries will not, without the prior written consent of the
Underwriter or Underwriters purchasing, in the aggregate, more than fifty
percent (50%) of the Securities, settle or compromise or consent to the entry of
any judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not any
such Underwriter or any person who controls any such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to
such claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of all of the Underwriters and such
controlling persons from all liability arising out of such claim, action, suit
or proceeding.
30
<PAGE>
(b) The Selling Securityholder agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who signs the Registration
Statement, each Underwriter and each person who controls the Company or any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any losses, claims, damages or liabilities to which the
Company, any such director, officer, such Underwriter or any such controlling
person may become subject under the Act, the Exchange Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Selling Securityholder in Section 3 of this Agreement,
(ii) any untrue statement or alleged untrue statement of any material
fact contained in (A) the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or (B) any Application executed by the Selling Securityholder or
based upon written information furnished by or on behalf of the Selling
Securityholder, or
(iii) the omission or the alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or any
Application a material fact required to be stated therein or necessary to
make the statements therein not misleading,
and will reimburse, as incurred, the Company, any such director, officer, such
Underwriter or any such controlling person for any legal or other out-of-pocket
expenses (including, without limitation, expert witness fees, charges or
expenses) reasonably incurred by the Company, such director, officer, such
Underwriter or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by the Selling Securityholder for
use therein; provided, however, that the Selling Securityholder, in the case of
-------- -------
clauses (ii) and (iii), will not be liable to any Underwriter or any person
controlling such Underwriter with respect to any such untrue statement or
omission made in any Preliminary Prospectus that is corrected in the Prospectus
(or any amendment or supplement thereto) if the person asserting any such loss,
claim, damage or liability purchased Securities from such Underwriter but was
not sent or given a copy of the Prospectus (as amended or supplemented) at or
prior to the written confirmation of the sale of such Securities to such person
in any case where such delivery of the Prospectus (as amended or supplemented)
is required by the Act; and, subject to the limitation set forth immediately
preceding this clause. This indemnity agreement will be in addition to any
liability which the Selling Securityholder may otherwise have. The Selling
Securityholder will not, without the prior written consent of the Underwriter or
Underwriters purchasing, in the aggregate, more than fifty percent (50%) of the
Securities, settle or comprise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
31
<PAGE>
indemnification may be sought hereunder (whether or not any such Underwriter or
any person who controls any such Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act is a party to such claim, action, suit
or proceeding), unless such settlement, compromise or consent includes an
unconditional release of all of the Underwriters and such controlling persons
from all liability arising out of such claim, action, suit or proceeding. The
liability of the Selling Securityholder under this Section 9(b) shall not exceed
an amount equal to the initial public offering price of the Selling
Securityholder Securities.
(c) Each Underwriter, severally and not jointly, will indemnify and hold
harmless each of the Company, the Subsidiaries, their directors, officers who
signed the Registration Statement, each person, if any, who controls the Company
or any of the Subsidiaries within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act and the Selling Securityholder against any
losses, claims, damages or liabilities to which the Company, any of the
Subsidiaries, any such director, officer or controlling person or the Selling
Securityholder may become subject under the Act, Exchange Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or any Application or (ii) the omission or the
alleged omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein: and, subject to the
limitation set forth immediately preceding this clause, will reimburse, as
incurred, any legal or other expenses reasonably incurred by the Company, any of
the Subsidiaries, any such director, officer or controlling person or the
Selling Securityholder in connection with investigating or defending any such
loss, claim, damage, liability or any action in respect thereof. This indemnity
agreement will be in addition to any liability which such Underwriter may
otherwise have.
(d) Promptly after receipt by an indemnified party under this Section 9 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 9, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 9. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
- -------- -------
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the
32
<PAGE>
indemnifying party, the indemnifying party shall not have the right to direct
the defense of such action on behalf of such indemnified party or parties and
such indemnified party or parties shall have the right to select separate
counsel to defend such action on behalf of such indemnified party or parties.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and approval by such indemnified party
of counsel appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this Section 9 for any legal or other
expenses, other than reasonable costs of investigation, subsequently incurred by
such indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel (in addition to local counsel) in any
one action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or circumstances,
designated by the Representatives in the case of paragraph (a) of this Section
9, representing the indemnified parties under such paragraph (a) who are parties
to such action or actions) or (ii) the indemnifying party does not promptly
retain counsel satisfactory to the indemnified party or (iii) the indemnifying
party has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. After such notice from the indemnifying party
to such indemnified party, the indemnifying party will not be liable for the
costs and expenses of any settlement of such action effected by such indemnified
party without the consent of the indemnifying party.
(e) In circumstances in which the indemnity agreement provided for in the
preceding paragraphs of this Section 9 is unavailable or insufficient, for any
reason, to hold harmless an indemnified party in respect of any losses, claims,
damages or liabilities (or actions in respect thereof), each indemnifying party,
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified party on
the other from the offering of the Securities or (ii) if the allocation provided
by the foregoing clause (i) is not permitted by applicable law, not only such
relative benefits but also the relative fault of the indemnifying party or
parties on the one hand and the indemnified party on the other in connection
with the statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company, the Subsidiaries and the Selling
Securityholder on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total proceeds from the offering (before
deducting expenses) received by the Company, the Subsidiaries and the Selling
Securityholder bear to the total underwriting discounts and commissions received
by the Underwriters. The relative fault of the parties shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Subsidiaries, the Selling
Securityholder or the Underwriters, the parties' relative intents, knowledge,
access to information and opportunity to correct or prevent such statement or
omission, and any other
33
<PAGE>
equitable considerations appropriate in the circumstances. The Company, the
Subsidiaries and the Selling Securityholder and the Underwriters agree that it
would not be equitable if the amount of such contribution were determined by pro
rata or per capita allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation that does not take
into account the equitable considerations referred to above in this paragraph
(d). Notwithstanding any other provision of this paragraph (d), no Underwriter
shall be obligated to make contributions hereunder that in the aggregate exceed
the total discounts, commissions and other compensation received by such
Underwriter under this Agreement, less the aggregate amount of any damages that
such Underwriter has otherwise been required to pay in respect of the same or
any substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section II (f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Prudential Securities Incorporated Master Agreement Among Underwriters.
For purposes of this paragraph (d), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each director of the Company or the Subsidiaries, each officer of the Company or
the Subsidiaries who signed the Registration Statement and each person, if any,
who controls the Company or any of the Subsidiaries within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act or the Selling
Securityholder, shall have the same rights to contribution as the Company, the
Subsidiaries or the Selling Securityholder.
10. Default of Underwriters. If one or more Underwriters default in their
-----------------------
obligations to purchase Firm Securities, Option Securities or Selling
Securityholder Securities hereunder and the aggregate number of such Securities
that such defaulting Underwriter or Underwriters agreed but failed to purchase
is ten percent or less of the aggregate number of Firm Securities, Option
Securities or Selling Securityholder Securities to be purchased by all of the
Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities, Option
Securities or Selling Securityholder Securities that such defaulting Underwriter
or Underwriters agreed but failed to purchase. If one or more Underwriters so
default with respect to an aggregate number of Securities that is more than ten
percent of the aggregate number of Firm Securities, Option Securities or Selling
Securityholder Securities, as the case may be, to be purchased by all of the
Underwriters at such time hereunder, and if arrangements satisfactory to the
Representatives are not made within 36 hours after such default for the purchase
by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company and the Subsidiaries
other than as provided in Section 11 hereof. In the event of any default by
34
<PAGE>
one or more Underwriters as described in this Section 10, the Representatives
shall have the right to postpone the Firm Closing Date or the Option Closing
Date, as the case may be, established as provided in Section 4 hereof for not
more than seven business days in order that any necessary changes may be made in
the arrangements or documents for the purchase and delivery of the Firm
Securities, Option Securities or Selling Securityholder Securities, as the case
may be. As used in this Agreement, the term "Underwriter" includes any person
-----------
substituted for an Underwriter under this Section 10. Nothing herein shall
relieve any defaulting Underwriter from liability for its default.
11. Survival. The respective representations, warranties, agreements,
--------
covenants, indemnities and other statements of the Company and the Subsidiaries,
their officers and the several Underwriters set forth in this Agreement or made
by or on behalf of them, respectively, pursuant to this Agreement shall remain
in full force and effect, regardless of (i) any investigation made by or on
behalf of the Company and the Subsidiaries, any of their respective officers or
directors, the Selling Securityholder, any Underwriter or any controlling person
referred to in Section 9 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 7 and 9 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
12. Termination. (a) This Agreement may be terminated with respect to the
-----------
Firm Securities, Option Securities or Selling Securityholder Securities in the
sole discretion of the Representatives by notice to the Company given prior to
the Firm Closing Date or the related Option Closing Date, respectively, in the
event that the Company shall have failed, refused or been unable to perform all
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder at or prior thereto or, if at or prior to the Firm Closing Date or
such Option Closing Date, respectively,
(i) the Company or any of the Subsidiaries shall have, in the sole
judgment of the Representatives, sustained any material loss or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute, or any legal or governmental
proceeding, or there shall have been any material adverse change, or any
development involving a prospective material adverse change (including
without limitation a change in management or control of the Company,
Telephone Business Meetings, Inc. or Communication Development
Corporation), in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and the
Subsidiaries, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto);
(ii) trading in the Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or trading in securities generally
on the New York Stock Exchange, American Stock Exchange or Nasdaq National
Market shall have been suspended or minimum or maximum prices shall have
been established on any such exchange or market system;
35
<PAGE>
(iii) a banking moratorium shall have been declared by New York,
Massachusetts or United States authorities;
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or material
adverse change in general economic, political or financial conditions
having an effect on the U.S. financial markets that, in the sole judgment
of the Representatives, makes it impractical or inadvisable to proceed with
the public offering or the delivery of the Securities as contemplated by
the Registration Statement, as amended as of the date hereof; or
(v) The Acquisition Agreement shall have terminated, or in the
reasonable view of the Representatives, the Acquisition will not be finally
consummated on or prior to the Firm Closing Date with no material changes
in form or substance to the Acquisition or Acquisition Agreement from that
described in the Prospectus (exclusive of any amendment or supplement
thereto).
(b) Termination of this Agreement pursuant to this Section 12 shall be
without liability of any party to any other party except as provided in Section
11 hereof.
13. Information Supplied by Underwriters. The statements set forth in the
-------------------------------------
last paragraph on the front cover page and under the heading "Underwriting" in
any Preliminary Prospectus or the Prospectus (to the extent such statements
relate to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company for the purposes of
Sections 2(b) and 9 hereof. The Underwriters confirm that such statements (to
such extent) are correct.
14. Notices. All communications hereunder shall be in writing and, if
-------
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group, with a copy to Jefferies & Company, Inc., 11100 Santa Monica
Boulevard, 10th Floor, Los Angeles, California 90025, Attention: David J.
Losito, and a copy to Cadwalader Wickersham & Taft, 100 Maiden Lane, New York,
New York 10038, Attention: Lawrence A. Larose; and if sent to the Company, shall
be delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to the Company at Vialog Corporation, 10 New England Business Center,
Suite 302, Andover, Massachusetts 01810, Attention: Glenn D. Bolduc, with a copy
to Mirick, O'Connell, DeMallie & Lougee, LLP, 1700 BankBoston Tower, 100 Front
Street, Worcester, Massachusetts 01608, Attention: David L. Lougee; and if sent
to the Selling Securityholder, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to David L. Lipsky,
______________, __________________.
15. Successors. This Agreement shall inure to the benefit of and shall be
----------
binding upon the several Underwriters, the Company, the Subsidiaries and the
Selling Securityholder and their respective successors and legal
representatives, and nothing expressed or mentioned
36
<PAGE>
in this Agreement is intended or shall be construed to give any other person any
legal or equitable right, remedy or claim under or in respect of this Agreement,
or any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that
(i) the indemnities of the Company, the Subsidiaries and the Selling
Securityholder contained in Section 9 of this Agreement shall also be for the
benefit of any person or persons who control any Underwriter within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the
indemnities of the Underwriters contained in Section 9 of this Agreement shall
also be for the benefit of the directors of the Company and the Subsidiaries,
the officers of the Company and the Subsidiaries who have signed the
Registration Statement and any person or persons who control the Company or the
Subsidiaries within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act. No purchaser of Securities from any Underwriter shall be deemed a
successor because of such purchase.
16. Applicable Law. The validity and interpretation of this Agreement,
--------------
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
17. Consent to Jurisdiction and Service of Process. All judicial
----------------------------------------------
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of New York, and
by execution and delivery of this Agreement, the Company and the Selling
Securityholder accept for itself and in connection with its properties,
generally and unconditionally, the nonexclusive jurisdiction of the aforesaid
courts and waives any defense of forum non conveniens and irrevocably agrees to
be bound by any judgment rendered thereby in connection with this Agreement.
The Company designates and appoints Glenn D. Bolduc and/or David L. Lougee, and
the Selling Securityholder designates and appoints ________________, and such
other persons as may hereafter be selected by the Company or the Selling
Securityholder irrevocably agreeing in writing to so serve, as their respective
agents to receive on the behalf of each service of all process in any such
proceedings in any such court, such service being hereby acknowledged by the
Company and the Selling Securityholder to be effective and binding service in
every respect. A copy of any such process so served shall be mailed by
registered mail to the Company and/or the Selling Securityholder at the address
provided for such party in Section 14 hereof; provided, however, that, unless
-------- -------
otherwise provided by applicable law, any failure to mail such copy shall not
affect the validity of service of such process. If any agent appointed by the
Company or the Selling Securityholder refuses to accept service, the Company or
the Selling Securityholder, as the case may be, hereby agrees that service of
process sufficient for personal jurisdiction in any action against the Company
and/or the Selling Securityholder in the State of New York may be made by
registered or certified mail, return receipt requested, to the Company and the
Selling Securityholder at the address provided for such party in Section 14
hereof, and each of the Company and the Selling Securityholder hereby
acknowledges that such service shall be effective and binding in every respect
with respect to itself. Nothing herein shall affect the right to serve process
in any other manner permitted by law or shall limit the right of any
37
<PAGE>
Underwriter to bring proceedings against the Company and/or the Selling
Securityholder in the courts of any other jurisdiction.
18. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
38
<PAGE>
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company and each of the
several Underwriters.
Very truly yours,
THE COMPANY AND SUBSIDIARIES:
VIALOG CORPORATION
By ________________________
[Title]
CONFERENCE SOURCE INTERNATIONAL, INC.
By ________________________
[Title]
CALL POINTS, INC.
By ________________________
[Title]
KENDALL SQUARE TELECONFERENCING, INC.
By ________________________
[Title]
AMERICAN CONFERENCING COMPANY, INC.
By ________________________
[Title]
39
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
By ________________________
[Title]
COMMUNICATION DEVELOPMENT CORPORATION
By ________________________
[Title]
ABC ACQUISITION CORPORATION
By ________________________
[Title]
THE SELLING SECURITYHOLDER:
____________________________
David L. Lipsky
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PRUDENTIAL SECURITIES INCORPORATED
JEFFERIES & COMPANY, INC.
By PRUDENTIAL SECURITIES INCORPORATED
By _____________________
Jean-Claude Canfin
Managing Director
For itself and on behalf of the Representatives.
40
<PAGE>
SCHEDULE 1
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm
Securities to
Underwriter be Purchased
- ------------------------------------------------------ --------------
<S> <C>
Prudential Securities Incorporated....................
Jefferies & Company, Inc..............................
[insert names of other Underwriters
- ------------------------------------------------------
alphabetically by bracket or in other
- ------------------------------------------------------
order determined by Prudential
- ------------------------------------------------------
Securities Incorporated -
- ------------------------------------------------------
Equity Transactions Group]
- ------------------------------------------------------
Total....................................... ____________
</TABLE>
41
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
VIALOG Corporation:
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts," "Summary Historical and Pro Forma
Financial Data" and "Selected Financial Data" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
July 27, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF PERSON TO BECOME A DIRECTOR
The undersigned hereby consents to the use of my name and any reference to
me as a person nominated to become a director of VIALOG Corporation ("VIALOG")
upon the closing of an IPO in any prospectus, offering circular, registration
statement or similar financing document distributed or circulated in
connection with any debt or equity financing by VIALOG.
/s/ Edward M. Philip
By: _________________________________
Edward M. Philip
Dated: 07/13/98
