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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 333-22585
VIALOG CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3305282
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
35 NEW ENGLAND
BUSINESS CENTER, SUITE 160
ANDOVER, MA 01810
(Address of principal executive offices)
(978) 975-3700
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of each exchange on
Title of each class which registered
Common Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
As of March 22, 1999, the aggregate market value of the voting and non-
voting common equity held by non-affiliates of the Company was $34,399,281.50.
Shares of voting and non-voting common equity held by each executive officer
and director and by each person who beneficially owns 10% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The aggregate market value has
been computed based on a price per share of $4.75. On such date, the Company
had 8,298,670 shares of common stock outstanding.
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PART I
This Annual Report on Form 10-K contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Forward-
looking statements should be read with the cautionary statements and important
factors included in this Form 10-K. (See Item 7.--Management's Discussion and
Analysis of Financial Condition and Results of Operations, Safe Harbor for
Forward-Looking Statements.) Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than
statements of historical facts. Such forward-looking statements may be
identified, without limitation, by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts," "projects," and
similar expressions. The Company's expectations, beliefs and projections are
expressed in good faith and are believed by the Company to have a reasonable
basis, including without limitation, management's examination of historical
operating trends, data contained in the Company's records and other data
available from third parties, but there can be no assurance that management's
expectations, beliefs or projections will result or be achieved or
accomplished.
Item 1. Business.
Introduction
VIALOG Corporation, a Massachusetts corporation, was founded on January 1,
1996 with the intention of becoming a leading provider of value-added
conferencing services. These services include audio, video and Internet
conferencing. On November 12, 1997, VIALOG Corporation acquired, in separate
transactions (the "Original Acquisitions"), six private conference service
bureaus (each, an "Acquired Company;" collectively, the "Acquired Companies")
in exchange for cash and shares of its Common Stock. On February 10, 1999,
VIALOG Corporation completed an initial public offering of its Common Stock
and acquired, in separate transactions, three private conference service
bureaus (each, a "New Acquisition;" collectively, the "New Acquisitions" and
together with the Acquired Companies, each, an "Operating Center;"
collectively, the "Operating Centers") in exchange for cash. On February 1,
1999, the operations of two of the original six Acquired Companies were
consolidated into one Operating Center. Including the New Acquisitions, VIALOG
Corporation currently maintains eight Operating Centers. Unless otherwise
indicated, (i) all references to "VIALOG Corporation" mean VIALOG Corporation
as a stand alone entity and (ii) all references to "VIALOG" or the "Company"
refer to VIALOG Corporation and include its consolidated subsidiaries. A brief
description of each of the Operating Centers is set forth below.
Telephone Business Meetings, Inc. d/b/a Access Conference Call Service
("Access"): Access is headquartered and maintains its operations center in
Reston, Virginia. Founded in 1987, Access had net revenues of approximately
$12.6 million in 1997 and of approximately $18.4 million in 1998. Access
specializes in providing conferencing services to numerous organizations,
including financial institutions, government agencies, trade associations and
professional service firms. Access is also a leader among the Operating
Centers in the development of video teleconferencing services. As of March 1,
1999, Access had approximately 157 employees and approximately 2,696 ports of
teleconferencing capability.
Conference Source International, Inc. ("CSI"): Prior to February 1, 1999,
CSI was headquartered and maintained its operations center in Atlanta,
Georgia. On February 1, 1999, the operations were moved to Montgomery, Alabama
and consolidated with the operations of Call Points, Inc. into one Operating
Center. Founded in 1992, CSI had net revenues of approximately $6.4 million in
1997 and of approximately $7.6 million in 1998. CSI specializes in providing
conferencing services to certain facilities-based carriers and non-facilities-
based telecommunications providers. As of March 1, 1999, the combined
operations center in Montgomery, Alabama had approximately 121 employees and
approximately 5,712 ports of teleconferencing capability.
Call Points, Inc. ("Call Points"): Call Points is headquartered and
maintains its operations center in Montgomery, Alabama. Founded in 1988, Call
Points had net revenues of approximately $8.5 million in 1997
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and of approximately $10.1 million in 1998. Call Points specializes in
providing conferencing services to the retail industry. On February 1, 1999,
the operations of CSI were moved to Montgomery, Alabama and consolidated with
the operations of Call Points.
Kendall Square Teleconferencing, Inc. d/b/a The Conference Center
("TCC"): TCC is headquartered and maintains its operations center in
Cambridge, Massachusetts. Founded in 1987, TCC had net revenues of
approximately $4.1 million in 1997 and of approximately $5.9 million in 1998.
TCC services a general business clientele. As of March 1, 1999, TCC had
approximately 46 employees and approximately 720 ports of teleconferencing
capability.
American Conferencing Company, Inc. d/b/a Americo ("Americo"): Americo is
headquartered and maintains its operations center in Oradell, New Jersey.
Founded in 1987, Americo had net revenues of approximately $2.2 million in
1997 and of approximately $2.8 million in 1998. Americo services a general
business clientele. As of March 1, 1999, Americo had approximately 24
employees and approximately 456 ports of teleconferencing capability.
Communication Development Corporation ("CDC"): CDC is headquartered and
maintains its operations center in Danbury, Connecticut. Founded in 1990, CDC
had net revenues of approximately $2.1 million in 1997 and of approximately
$2.7 million in 1998. CDC specializes in providing a range of conferencing
services and customized communications solutions to its clients, the majority
of whom are in the pharmaceutical industry. As of March 1, 1999, CDC had
approximately 37 employees and approximately 293 ports of teleconferencing
capability.
A Business Conference-Call, Inc. ("ABCC"): ABCC is headquartered and
maintains its operations center in Chaska, Minnesota. Founded in 1988, ABCC
had net revenues of approximately $5.7 million in 1997 and of approximately
$7.5 million in 1998. ABCC services a general corporate clientele with a
specialty in the communications industry. As of March 1, 1999, ABCC had
approximately 52 employees and approximately 864 ports of teleconferencing
capability.
Conference Pros International, Inc. ("CPI"): CPI is headquartered and
maintains its operations center in Houston, Texas. Founded in 1989, CPI had
net revenues of approximately $2.0 million in 1997 and of approximately $2.5
million in 1998. CPI services a general corporate clientele. As of March 1,
1999, CPI had approximately 30 employees and approximately 796 ports of
teleconferencing capability.
A Better Conference, Inc. ("ABCI"): ABCI is headquartered and maintains its
operations center in Palm Springs, California. Founded in 1991, ABCI had net
revenues of approximately $2.0 million in 1997 and of approximately $3.0
million in 1998. ABCI services a general corporate clientele with a speciality
in the software, financial services and legal services industries. As of March
1, 1999, ABCI had approximately 24 employees and approximately 432 ports of
teleconferencing capability.
Description of Business
Company Overview
VIALOG is a leading independent provider of audio, video and Internet
conferencing services. The Company believes it is the largest company focused
solely on conferencing services, with eight operating centers, approximately
11,969 ports of conferencing capability (one "port" is required for each
participating telephone line), state-of-the-art digital conferencing
technology and an experienced national sales force. The Company believes it
differentiates itself from its competitors by providing superior customer
service and an extensive range of enhanced and customized conferencing
solutions. The Company has capitalized on the growth in the conferencing
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 conferencing
services to the Company. The Company provided services to more than 5,000
customers representing over 30,000 accounts during the twelve months ended
December 31, 1998.
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Operator-attended audioconferencing 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 audioconferencing as well
as enhanced audioconferencing services such as digital replay, broadcast fax
and audio streaming. The Company's other services include multipoint
videoconferencing, as well as a family of Internet conferencing services.
VIALOG offers customized communications solutions, which include conference
event planning and coaching, as well as customized formats specifically
designed for such applications as auctions, investor relations calls and
interactive educational 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 expands its 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 service providers in the
North American conferencing industry to outsource labor-intensive activities
such as teleconferencing will lead to new outsourcing contracts, particularly
as Regional Bell Operating Companies ("RBOCs") become approved to provide long
distance service. Further, the Company intends to augment its internal growth
through selective acquisitions in the conferencing 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 conferencing services.
Industry Overview
Services
The conferencing industry, which includes audio, video and Internet
conferencing, provides a range of services to facilitate multiparty
communications with participants in different locations. Through conferencing
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 conferencing 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 conferencing
services sector will grow at a compound annual rate of approximately 24%
between 1998 and 2003.
Audioconferencing
Audioconferencing 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 inter-exchange carrier ("IXC"). Using MCU
technology, the maximum number of participants is only limited by the number
of conference "ports" available to the conferencing service provider. Calls
may be established manually by an operator who places 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 audioconferencing, 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 audioconferencing as a business tool, have
contributed to the increased usage of conferencing over the last five years.
The Company believes that the demand for audioconferencing services has also
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 audioconferencing are able to replace
travel to existing meetings, with attendant savings of actual and
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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
audioconferencing services, combined with a lack of expertise and a desire to
focus on their core businesses, have caused most organizations to outsource
audioconferencing. Industry sources project compound annual growth in
audioconferencing services revenues of 23% between 1998 and 2003, from $723
million to $2 billion.
Videoconferencing
Videoconferencing is similar to audioconferencing 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 videoconferencing 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.
Videoconferencing 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 videoconferencing 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 the growth of the market for multipoint videoconferencing.
Industry sources estimate that videoconferencing services revenue will grow at
a compound rate of 27% between 1998 and 2003, from $240 million to $779
million.
Internet Conferencing
The Company's Internet conferencing services include web presentation
sharing and audio streaming services. Web presentation sharing, which enables
multiple users to conference and collaborate using both data (e.g.,
presentations) and voice is the most recent advancement in conferencing. Audio
streaming enables participants to listen to an audioconference being
"streamed" live over the Internet. Listen-only participants can access the
audioconference by logging on to a web site and listening via a multimedia PC.
The adoption of industry standards for multimedia conferencing and new
Internet application services and software are expected to facilitate greater
adoption of web conferencing. The Company believes that Internet conferencing
programs will likely be used in conjunction with audioconferencing to allow
simultaneous group discussions during display of documents.
Service Providers
There are three categories of service providers in the North American
conferencing industry: (i) IXCs, such as AT&T Corporation ("AT-T"), MCI
WorldCom, Inc. ("MCI"), Sprint Corporation ("Sprint"), Frontier Corporation
("Frontier") and Cable & Wireless, Inc. ("Cable & Wireless"), (ii) private
conference service bureaus ("PCSBs"), a group of approximately 20 companies
(excluding the Company), and (iii) independent local exchange carriers
("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
conferencing market. See "Business--Regulation."
According to industry sources, the IXCs are currently the largest providers
of conferencing services, constituting approximately 80% of audioconferencing
services revenue. 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 conferencing services separately, but rather
offer such services as part of a "bundled"
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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 conferencing services are the PCSBs.
There are approximately 20 PCSBs, excluding the Company. PCSBs emerged in the
conferencing market in the mid-1980s when businesses were beginning to find
applications for conferencing due to significant technological improvements in
conferencing 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 conferencing industry,
such as the introduction of video and data service, 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 conferencing 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 conferencing services are the independent
LECs. Similar to the IXCs, the Company believes the LECs have generally not
included conferencing, 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, which
drastically limited their conferencing 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 conferencing
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
conferencing business unit or to outsource this service, the Company believes
that some of the potential new entrants will elect to outsource conferencing
services and focus on entering the long distance market.
Competitive Strengths
The Company believes that several characteristics differentiate it from many
of its competitors, including:
Diverse and stable customer base. The Company has a diverse base of
customers that numbered more than 5,000 in 1998, with no customer representing
greater than 10% of consolidated net revenues and the Company's top ten
customers representing less than 23% of consolidated net revenues. The Company
believes that it has created strong customer loyalty for its services through
its emphasis on superior customer service and the importance of such service
to its clients.
Unique industry position. The Company believes that it is positioned as one
of the largest and most geographically diverse companies in the industry that
focuses solely on conferencing services. The Company's largest competitors are
long distance service providers for whom conferencing represents only a small
fraction of their total revenues. The Company can focus its capabilities and
resources solely on conferencing, including its information systems, capital
equipment, hiring practices, training and marketing. The Company believes that
this focus offers significant flexibility and competitive advantages in
responding to the needs of customers. The Company is also well situated to
obtain future outsourcing contracts from long distance service providers which
the Company believes are reluctant to outsource to a long distance service
competitor, and would prefer to outsource to a larger, independent
conferencing company with experience in managing the outsourcing process.
Superior customer service capabilities. The Company believes that it has a
core competency in its customer service capabilities, which stress operator
training, personalized service and anticipation of customer
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needs. The Company has developed and refined the technological capabilities,
procedures and management information systems necessary to provide superior
customer service, a factor that is critical to both customer retention and new
business. An example of these capabilities is the Company's proprietary
billing system for outsourced services. The Company has spent several years
developing and revising this software and believes that no competitor can
currently match the flexibility of this system in meeting customer needs.
Broad range of services. The Company believes that it offers the most
comprehensive selection of audio, video and Internet conferencing services in
its industry, providing it with significant marketing advantages. The Company
offers the features and pricing options to meet a wide variety of customer
needs. The Company intends to remain at the forefront of the conferencing
industry by continuing to augment its existing service offerings through the
development and introduction of additional enhanced services and customized
conferencing solutions.
Experienced management team. The Company has one of the most experienced
management teams in the conferencing industry. The top 10 managers of the
Company have on average 11 years of experience within the
conferencing/telecommunications industry. This experience is critical to the
Company's ability to implement its business strategy, respond to industry
trends and to identify and consummate acquisition opportunities successfully.
Operating Strategy
The Company provides a full array of conferencing services through its eight
Operating Centers, five of which were acquired by the Company in November,
1997 and three of which were acquired by the Company in February 1999. The
basic goals of the Company's operating strategy consist of the following:
Focus exclusively on conferencing services. VIALOG believes that it is the
largest and most geographically diverse company focused solely on conferencing
services. The Company believes that its dedicated focus on conferencing
enables it to respond to the needs of its customers better than competitors
which do not focus on conferencing as a core business activity.
Deliver a broad range of services. VIALOG believes that it offers the most
comprehensive selection of audio, video and Internet conferencing services
among the independent conferencing service providers, providing the Company
with significant marketing advantages. The Company 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. The Company intends to remain at the forefront of
the conferencing 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 its 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.
Additionally, the Company recently consolidated the Atlanta and Montgomery
Operating Centers, which the Company believes will provide operational
efficiencies and reduce operating costs. 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 3 to 9 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.
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Retain customers and stimulate usage. Through the implementation of new
focused selling strategies and cross-selling programs designed to stimulate
use by its existing customer base, the Company intends to expand sales to its
diverse base of customers, which numbered more than 5,000 during the twelve
months ended December 31, 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 conferencing 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 conferencing services industry. Industry sources project
that conferencing 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 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 conferencing. As a result, some RBOCs
and LECs may seek to outsource their conferencing requirements in order to
speed up their time to market. The Company believes that it is well-positioned
to compete for outsourced conferencing 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
conferencing 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 its knowledge of the industry will be instrumental in
successfully identifying and negotiating additional acquisitions. The Company
further believes that its position as the largest publicly-traded company
focused solely on the conferencing market will make it attractive to potential
acquisition candidates.
The Company's Conferencing Services
Audioconferencing. The Company offers a broad range of audioconferencing
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 audioconferencing services
are divided into two major service categories: operator-attended and operator-
on-
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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 audioconferences allow participants
to join a conference either by dialing a toll free number provided by the
Company or by using their own local or long distance service providers. Dial
Out audioconferences consist of having the Company's operators call
participants and join them together in a conference. A combination of the two
service types is also available.
Participants may join an operator-on-demand conference 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 audioconference, 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 audioconference.
. Communication line. During a conference, the Company can keep a separate
line open with the conference host to verify participant attendance,
provide updates on the number of participants which have joined, and
have other discussions relative to the conference that may be
inappropriate to conduct in the conference.
. Digital replay. The Company can digitally record a conference and make
it available for playback over the telephone or otherwise by parties who
were unable to attend the conference.
. 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 conference.
. Participant notification. The Company can call or fax reminders to
participants in advance of the conference.
. 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 conference.
. Recording. The Company can record the conference on audiocassette tape
or compact disc, and send recordings via regular, overnight or second-
day mail.
. Transcription. The conference can be transcribed in its entirety and
provided in written format, on a 3 1/2" diskette, via e-mail, or all
three.
. Audio streaming. Participants can listen to an audioconference being
"streamed" live over the Internet. Listen-only participants can access
the audioconference by logging on to a web site and listening via a
multimedia PC.
Videoconferencing. In 1996, the Company began to offer videoconferencing
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 participants. Similar to audioconferencing, this
service is charged on a per-line, per-minute basis, with enhanced services
charged on a fee basis. Videoconferencing requires the use of a video MCU and
telecommunications facilities of greater bandwidth than that required for a
standard audioconference. The Company has three MCUs dedicated to
videoconferencing.
Videoconferences can be assembled in two ways: Meet-Me and Dial Out. Meet-Me
videoconferences 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 videoconferences are those in which
a Company operator dials out to participating
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sites prior to a videoconference 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 videoconference, based on audio level. When one
person speaks, all other sites in the videoconference 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 offers PC-based application sharing via the Company's
videoconferencing MCUs. Multiple users can view and edit the same document on
their own PCs while participating in an audio or video conference, enabling
them to present, discuss and/or modify documents in real-time. VIALOG fully
supports the International Telecommunications Union (ITU) T.120 data
conferencing series standards.
The Company believes that the use of multipoint videoconferencing services
will grow in relationship to the installed base of compatible video equipment.
The Company estimates that over 330,000 video conferencing units were sold in
1997, and that over 820,000 units were sold in 1998.
Internet Conferencing Services. In the fourth quarter of 1998, the Company
launched its Internet conferencing services with the introduction of a web
presentation sharing service. This service connects multiple computer users
over the Internet, enabling them to present documents and presentations in
real-time. Internet-based presentation sharing programs are used in
conjunction with audioconferencing to enable simultaneous group discussions
and presentations. In the first quarter of 1999, the Company introduced its
audio streaming service that allows listen-only participants to hear an
audioconference via the Internet. Listen-only participants can access the
audioconference by logging on to a web site and listening via a multimedia PC.
. Teleservices. To complement its audio, video and Internet conferencing
services, the Company offers teleservices, such as MessageCast,
Interactive Voice Response, broadcast fax and fax on-demand.
. MessageCast. The Company's MessageCast voicemail broadcast service
delivers a personalized message quickly to a large number of recipients
via the telephone. MessageCast delivers a custom voice message instantly
to any individual with a phone number--either live or to a voicemail
box.
. Interactive Voice Response ("IVR"). The Company's IVR service uses voice
and touch tone prompts to provide and/or retrieve important information
via a telephone. Applications for IVR include digital replay of an
audioconference; automated registration for events and programs; and
test administration whereby the Company's IVR system is used to generate
a test containing specific sets of questions or customized on a user-by-
user basis from a database of categorized questions.
. Broadcast Fax. This service enables customers to send faxes to a large
number of recipients simultaneously.
. Fax on-Demand. This service enables clients and employees to call a
toll-free number for 24-hour access to essential information.
Information requests can be fulfilled immediately via fax.
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.
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Sales and Marketing
VIALOG believes it is the first independent conferencing company to employ a
comprehensive marketing program to establish a national brand for conferencing
services. The Company's retail national sales organization offers a full range
of conferencing 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 conferencing 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 conferencing 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 has implemented a national retail sales strategy
utilizing both an outside and inside sales group. This new strategy has
consolidated the Company's existing sales force and at the same time provided
new national account coverage and presence in additional geographic markets.
The sales force leverages 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 key vertical industries and accounts. An outside sales group of
approximately 35 professionals operates from six regional offices, and is
primarily responsible for origination of new business. An inside sales group
of approximately 25 professionals responds to inbound requests, assists
customers in implementing VIALOG's service offerings and supports 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. While conferencing services make up a small portion of these
companies' overall business, they are an important part of a full-service
service provider's portfolio. The Company offers these companies the ability
to efficiently outsource all conferencing services and support. 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. 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.
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.
Reservationists assist the Company's customers in scheduling their
conferences. Reservationists access the conferencing system to determine time
and ports available and to confirm the conferences. 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 conference) to ensure a successful conference. Supervisors are available
to assist in the setup and execution of a conference. The Company's staff is
trained to facilitate effective conferences through a combination of
classroom, mentoring, teaming, and on-the-job supervision.
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Customers
The Company provided services to over 5,000 customers in 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 (based on 1998
consolidated net revenues), including both wholesale and retail customers, by
industry is as follows: financial services (five), retail (five),
telecommunications (three), industrial (three), health and pharmaceutical
(two) and high technology (two). No account represented more than 10% of the
Company's consolidated net revenues in 1998. The top 10 customers of the
Company represented approximately 23% of the Company's combined net revenues
in 1997 and 22% of the Company's consolidated net revenues in 1998.
Billing and Management Information Systems
Presently the entire billing and collection process is performed by the
Operating Centers. 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 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 are input into a centralized database being implemented by the
Company to provide management with the ability to monitor customer value and
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 is consolidating its billing function and expects to complete
the consolidation of the Original Acquisitions by the end of 1999. 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.
Competition
The conferencing 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 currently serve approximately 80% of the audio
teleconferencing market. The IXCs generally do not market conferencing
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
12
<PAGE>
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 Federal Communications Commission, 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
conferencing 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
Internet conferencing from existing providers of audio teleconferencing
services, as well as new competitors dedicated to video and/or Internet
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 10% of its 1998 consolidated net revenues
from IXCs and LECs which outsource conferencing 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 conferencing 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 its growth will occur from RBOCs which may enter the long distance market
and outsource their conferencing services. There can be no assurance that any
telecommunications company able to offer conferencing services legally, now or
in the future, will choose to do so or that those choosing to do so will
outsource their conferencing services or choose the Company as their provider
in case they do outsource conferencing.
Two of the Company's largest outsourcing customers have acquired or merged
with competitors of the Company. Collectively, these customers accounted for
approximately 12% of the Company's 1998 consolidated net revenues. Although
one of these customers, representing approximately 9% of the Company's 1998
consolidated net revenues, has verbally informed the Company that it will
honor its current outsourcing contract with the Company, which expires in
August 1999, there can be no assurance that such customer will continue to use
the Company's services going forward. The second customer, representing
approximately 3% of the Company's 1998 consolidated net revenues, has moved
its conferencing business to a conferencing 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 conferencing capabilities sufficient to
meet their own respective conferencing needs. If the manufacturers of PBXs
develop improved, cost-effective PBX capabilities for handling conferences
with the quality of existing MCUs used in the conferencing business, the
Company's customers could choose to purchase such equipment and hire the
personnel necessary to service their conferencing 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 conferencing 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
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<PAGE>
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 conferencing 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 Qwest
Communications International, Inc. 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 Acquisistions is that it has been able to to
negotiate telecommunications contracts with lower prices and improved service
guarantees. 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 different manufacturers. At present, the equipment
being utilized is not functionally identical, but is compatible with
substantially all network standards. As of December 31, 1998, approximately
53% 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
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.
Employees
As of March 1, 1999 the Company had 573 employees, 333 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.
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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 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.
Item 2. Properties.
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.
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The Operating Centers are located in leased locations in Virginia, Georgia,
Alabama, Massachusetts, New Jersey, Connecticut, Minnesota, Texas and
California. The Company believes all of its locations are fully utilized
except for its approximately 41,000 square foot facility in Reston, Virginia
and its 12,000 square foot facility in Oradell, New Jersey, each of which is
approximately 80% utilized, and its approximately 8,219 square foot facility
in Atlanta, Georgia which has been vacated in connection with the
consolidation of the Atlanta, Georgia and Montgomery, Alabama Operating
Centers (discussed below). The Company occupies the Operating Centers and
other facilities under leases which provide for a total of approximately
106,171 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 $961,000 and $1.4 million for the years ended December 31, 1997
and 1998, 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.
The Company determined that operational efficiencies would be achieved by
consolidating the Operating Centers located in Atlanta, Georgia and
Montgomery, Alabama into a new leased facility in Montgomery. In connection
with the consolidation plan being implemented by the Company, the Atlanta
Operating Center remained staffed through January 31, 1999, after which time
its traffic has been managed by operators in the Montgomery Operating Center
as well as other Operating Centers. The Company anticipates relocating its
Montgomery Operating Center into a new leased facility by May 1999. The lease
for the new Montgomery Operating Center provides for a total of approximately
23,500 square feet at a base rate of $12.25 per square foot with an expiration
date of December 31, 2004.
Item 3. Legal Proceedings.
Other than as described below, there are no material pending legal
proceedings to which the Company is a party or to which any of its properties
are subject.
A former employee of 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.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters.
General
The Company's authorized capital stock as of December 31, 1998 consisted of
30,000,000 shares of common stock $0.01 par value ("Common Stock") and
10,000,000 shares of preferred stock, $0.01 par value ("Preferred Stock"). As
of December 31, 1998, the Company had outstanding 3,693,672 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 Stock Plan. (See Item 11--
Executive Compensation, 1996 Stock Plan).
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On February 10, 1999, the Company completed an initial public offering
("IPO") of its Common Stock. The Company's Common Stock is quoted on the
Nasdaq Stock Market's National Market, under the symbol "VLOG". Prior to the
IPO, there was no established public trading market for the Common Stock.
As of March 22, 1999 the Company had outstanding 8,298,670 shares of Common
Stock held by approximately 129 shareholders of record.
Dividends
The Company has not declared any dividends on any class of common equity
during the past three fiscal years and has no intention of paying dividends in
the foreseeable future. Additionally, pursuant to the terms of the Indenture
and the Senior Credit Facility, 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.
Sales of Unregistered Securities in 1997 and 1998
The Company issued options in 1998 to purchase an aggregate of 823,175
shares of Common Stock to various employees of the Company under the Company's
1996 Stock Plan. The exercise price for the options ranged from $5.75 to
$10.00 per share. The vesting schedule for the options varies from recipient
to recipient based on the circumstances under which the options were granted
and the identity of the recipient. These options were issued in accordance
with Section 4(2) of the Securities Act or Rule 701 under Section 3(b) of the
Securities Act.
Use of Proceeds from Registered Offerings
Common Stock. On February 4, 1999, the Securities and Exchange Commission
declared effective a Form S-1 Registration Statement (File No. 333-53395)
filed by the Company in connection with an initial public offering of
4,867,826 shares of its Common Stock, 4,600,000 shares of which were sold by
the Company and 267,826 shares of which were sold by a selling stockholder
(the "'Selling Stockholder"). The offering of Common Stock closed on February
10, 1999 with all of the 4,867,826 shares sold. Bear, Stearns & Co. Inc., and
Prudential Securities Incorporated were the joint lead managers of the
offering.
The gross proceeds of the offering were approximately $38.9 million, of
which $36.8 million related to the Company and $2.1 million related to the
Selling Stockholder. The Company incurred approximately $4.1 million of
expenses in connection with the offering, of which approximately $2.6 million
represented underwriting discounts and commission, and an estimated $1.5
million represented offering costs, including legal fees, accounting fees,
underwriters' out-of-pocket expenses and printing expenses.
The Company received approximately $32.7 million of net proceeds from the
offering. Approximately $29.1 million was used to complete the New
Acquisitions. In addition, approximately $305,000 of indebtedness was paid to
the former stockholder of one of the New Acquisitions. The remaining $3.3
million of net proceeds will be used for working capital and general corporate
purposes. Pending such uses, the net proceeds have been invested in short-
term, interest-bearing, investment grade securities or direct or guaranteed
obligations of the U.S. government.
Item 6. Selected Financial Data.
Contemporaneously with the closing of the Private Placement, VIALOG
consummated agreements to acquire six PCSBs, all of which became wholly-owned
subsidiaries of VIALOG Corporation. 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.
The following selected financial data of VIALOG for the years ended December
31, 1996, 1997 and 1998 have been derived from the audited consolidated
financial statements of VIALOG Corporation included elsewhere in this Report.
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<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
(in thousands, except share
and per share data)
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Net revenues................................. $ -- $ 4,816 $ 46,820
Cost of revenues, excluding depreciation..... -- 2,492 24,321
Selling, general and administrative
expenses.................................... 1,308 7,178 15,196
Depreciation expense......................... -- 273 2,835
Amortization of goodwill and intangibles..... -- 306 2,490
Non-recurring charges........................ -- 8,000 1,200
--------- --------- ---------
Operating income (loss) ..................... (1,308) (13,433) 778
Interest income (expense), net............... 1 (1,866) (12,629)
--------- --------- ---------
Loss before income taxes..................... (1,307) (15,299) (11,851)
Income tax benefit (expense)................. 522 (522) (26)
--------- --------- ---------
Net loss..................................... $ (785) $ (15,821) $ (11,877)
========= ========= =========
Net loss per share--basic and diluted........ $ (0.38) $ (5.48) $ (3.27)
========= ========= =========
Weighted average shares outstanding.......... 2,088,146 2,889,005 3,632,311
========= ========= =========
Other Financial Data:
EBITDA (1)................................... $ (1,308) $ (4,854) $ 6,103
Cash flows used in operating activities...... (178) (4,148) (5,346)
Cash flows used in investing activities...... (7) (53,762) (7,848)
Cash flows provided by financing activities.. 522 67,140 3,931
<CAPTION>
December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.................... $ 337 $ 9,567 $ 232
Working capital (deficit).................... (249) 7,259 (2,378)
Total assets................................. 1,263 75,083 69,266
Total long-term debt, including current
portion (2)................................. -- 71,936 75,654
Stockholders' equity (deficit)............... 287 (4,882) (16,592)
</TABLE>
- --------
(1) EBITDA represents income from continuing operations before income taxes,
depreciation and amortization. EBITDA is not a measurement presented in
accordance with generally accepted accounting principles and should not be
considered as an alternative to net income as a measure of operating
results or as an alternative to cash flows as a better measure of
liquidity. EBITDA does not represent funds available for management's
discretionary use. The Company believes that EBITDA is accepted by the
telecommunications industry as a generally recognized measure of
performance and is used by analysts to report publicly on the performance
of telecommunications companies.
(2) Net of unamortized original issue discount of $4.2 million and $3.1
million at December 31, 1997 and 1998, respectively.
Access and CSI Selected Financial Data
VIALOG reports operating results commencing with its inception on January 1,
1996. For the purpose of providing five full years of selected historical
financial data, as required under the Securities Act, the following historical
selected financial data is presented for the two largest Acquired Companies,
Access and CSI. The selected data as of December 31, 1995 and 1996 and for the
years ended December 31, 1994, 1995 and 1996 and the period January 1, 1997 to
November 12, 1997, the date of their respective Acquisitions, are derived
from, and should be read in conjunction with, Access' and CSI's respective
audited financial statements and the notes thereto appearing elsewhere in this
Report. The selected data as of December 31, 1994 are derived from Access' and
CSI's respective audited financial statements. The selected data as of
December 31, 1993 and for the year then ended are derived from Access' and
CSI's respective unaudited financial statements for that year. The data
18
<PAGE>
presented below is neither comparable to nor indicative of the Company's post-
Acquisition financial position or results of operations.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
January 1,
1997 to
November 12,
1994 1995 1996 1997
---------- ---------- ------------ -----------------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C>
Access Statement of
Operations Data:
Net revenues............. $ 5,114 $ 6,508 $ 9,073 $ 10,945
Cost of revenues,
excluding depreciation.. 2,608 3,021 3,564 4,791
Selling, general and
administrative
expenses................ 1,691 2,484 3,332 4,124
Depreciation and
amortization expense.... 269 496 630 823
---------- ---------- ------------ ------------
Operating income......... 546 507 1,547 1,207
Interest expense, net.... 49 152 174 132
---------- ---------- ------------ ------------
Earnings before income
taxes................... 497 355 1,373 1,075
Income tax expense
(benefit)............... 52 (48) -- --
---------- ---------- ------------ ------------
Net income............... $ 445 $ 403 $ 1,373 $ 1,075
========== ========== ============ ============
Net income per share--
basic and diluted....... $ 445.00 $ 644.80 $ 2,746.00 $ 2,150.00
========== ========== ============ ============
Weighted average shares
outstanding............. 1,000 625 500 500
========== ========== ============ ============
Access Other Financial
Data:
EBITDA(1)................ $ 815 $ 1,003 $ 2,177 $ 2,030
Cash flows provided by
operating activities.... 592 821 2,048 2,932
Cash flows used in
investing activities.... (557) (1,432) (795) (1,704)
Cash flows provided by
(used in) financing
activities.............. 22 771 (839) (1,549)
<CAPTION>
December 31,
------------------------------------
1994 1995 1996
---------- ---------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Access Balance Sheet
Data:
Cash and cash
equivalents............. $ 230 $ 390 $ 804
Working capital.......... 475 141 759
Total assets............. 1,991 3,672 4,605
Total long-term debt,
including current
portion................. 626 2,416 2,052
Stockholders' equity..... 1,156 872 1,770
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, January 1, 1997
-------------------------------------- to November 12,
1994 1995 1996 1997
---------- ----------- ------------- -----------------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C>
CSI Statement of
Operations Data:
Net revenues............ $ 2,331 $ 3,808 $ 5,868 $ 5,579
Cost of revenues,
excluding
depreciation........... 1,256 1,617 2,438 2,052
Selling, general and
administrative
expenses............... 707 905 998 831
Depreciation expense.... 235 292 393 356
---------- ----------- ------------- -------------
Operating income
(loss)................. 133 994 2,039 2,340
Interest expense, net... 124 160 165 120
---------- ----------- ------------- -------------
Net income (loss)....... $ 9 $ 834 $ 1,874 $ 2,220
========== =========== ============= =============
Net income (loss) per
share--basic and
diluted................ $ 9.00 $ 834.00 $ 1,874.00 $ 2,220.00
========== =========== ============= =============
Weighted average shares
outstanding............ 1,000 1,000 1,000 1,000
========== =========== ============= =============
CSI Other Financial Da-
ta:
EBITDA(1)............... $ 368 $ 1,286 $ 2,432 $ 2,696
Cash flows provided by
(used in) operating
activities............. 53 721 2,128 2,897
Cash flows used in
investing activities... (476) (225) (41) (311)
Cash flows provided by
(used in) financing
activities............. 426 (144) (2,144) (2,801)
<CAPTION>
December 31,
--------------------------------------
1994 1995 1996
---------- ----------- -------------
(In thousands)
<S> <C> <C> <C> <C>
CSI Balance Sheet Data:
Cash and cash
equivalents............ $ 23 $ 375 $ 318
Working capital
(deficit).............. (805) (322) 445
Total assets............ 1,378 2,037 2,293
Total long-term debt,
including current
portion................ 1,590 1,446 1,405
Stockholders' equity
(deficit).............. (474) 360 676
</TABLE>
- --------
(1) EBITDA represents income from continuing operations before income taxes,
depreciation and amortization. EBITDA is not a measurement presented in
accordance with generally accepted accounting principles and should not be
considered as an alternative to net income as a measure of operating
results or as an alternative to cash flows as a better measure of
liquidity. EBITDA does not represent funds available for management's
discretionary use. The Company believes that EBITDA is accepted by the
telecommunications industry as a generally recognized measure of
performance and is used by analysts to report publicly on the performance
of telecommunications companies.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
VIALOG Corporation was founded on January 1, 1996. On November 12, 1997,
VIALOG Corporation consummated agreements to acquire six private conference
service bureaus, all of which became wholly-owned subsidiaries of VIALOG
Corporation. Contemporaneously, with the closing of the Original Acquisitions,
VIALOG Corporation closed the Private Placement. Prior to the Original
Acquisitions, VIALOG Corporation did not conduct any operations, and all
activities conducted by it were related to the Original Acquisitions and the
completion of financing transactions to fund the Original Acquisitions. On
February 10, 1999 VIALOG Corporation completed an initial public offering of
its Common Stock and consummated agreements to acquire three private
conference service bureaus, all of which became wholly-owned subsidiaries of
VIALOG Corporation. The following Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction
with the consolidated financial statements and related notes thereto for
20
<PAGE>
the years ended December 31, 1996, 1997, and 1998 and the financial statements
and related notes thereto of certain of the Operating Centers prior to the
acquisitions for the years ended December 31, 1994, 1995, 1996 1997 and 1998
and "Selected Financial Data" appearing elsewhere in this Report.
Introduction
The Company's net revenues are derived primarily from fees charged to
customers for audioconferencing services as well as videoconferencing and
enhanced and customized communication services. Cost of revenues, excluding
depreciation consists primarily of long distance telephone and network
charges, salaries and benefits for operators and reservationists, 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 pro forma combined financial statements included elsewhere
herein.
The Company, which has only conducted operations since November 12, 1997
(other than in connection with certain financing transactions, the Private
Placement and the Original 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 3 to 9 months, the
Company plans to complete the integration of 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 reductions in long distance
telephone charges as a result of new agreements recently entered into by the
Operating Centers. It is anticipated that these savings will be partially
offset by the costs related to the Company's new management. In addition, it
is anticipated that increased marketing costs will initially be required to
establish the Company's brand name in the marketplace. As a result of these
various costs and possible cost-savings, comparisons of historical operating
results may not be meaningful, and such results may not be indicative of
future performance.
VIALOG Corporation
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net revenues and cost of revenues, excluding depreciation. As VIALOG
Corporation did not conduct any operations prior to November 12, 1997, the
revenues and cost of revenues, excluding depreciation for the year ended
December 31, 1997 represent only activity for the period November 12, 1997
through December 31, 1997. Net revenues and cost of revenues, excluding
depreciation for the year ended December 31, 1998 represent the consolidated
results of the Company, including the Original Acquisitions for the full year.
Two of the Company's largest outsourcing customers have acquired or merged
with competitors of the Company. Collectively, these customers accounted for
approximately 12% of the Company's 1998 consolidated net revenues. One of
these customers, representing approximately 9% of the Company's 1998
consolidated net
21
<PAGE>
revenues, has verbally informed the Company that it will honor its current
outsourcing contract with the Company, which expires in August, 1999. The
second customer, representing approximately 3% of the Company's 1998
consolidated net revenues, has moved its conferencing business to a
conferencing 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 $8.0 million, or 112%, from $7.2 million to
$15.2 million for the years ended December 31, 1997 and 1998, respectively.
The increase was primarily due to the fact that selling, general and
administrative expenses for the year ended December 31, 1997 represented only
general and administrative expenses related to the organization of VIALOG
Corporation and the consummation of business combination agreements with the
Original Acquisitions prior to November 12, 1997 and consolidated selling,
general and administrative expenses of the Company including the Original
Acquisitions for the period November 12, 1997 through December 31, 1997, while
the expenses for the year ended December 31, 1998 represent consolidated
selling, general and administrative expenses of the Company, including the
Original Acquisitions for the full year. Selling, general and administrative
expenses for the years ended December 31, 1997 and 1998 consisted primarily of
the following: (i) compensation, benefits and travel expenses of $3.0 million
and $10.4 million, respectively, (ii) certain marketing expenses, including
advertising, promotions, trade shows and consulting, of $490,000 and $1.5
million, respectively, (iii) professional services expenses of $3.4 million
and $721,000, respectively, (iv) occupancy costs of $216,000 and $851,000,
respectively, (v) materials, supplies and equipment related costs of $0 and
$755,000, respectively, (vi) taxes and insurance costs of $0 and $421,000,
respectively, and (vii) all other costs of $92,000 and $540,000, respectively.
Included in professional services expenses for the year ended December 31,
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 year ended December 31, 1998 is approximately $508,000 for
compensation and legal expenses related to severance agreements for two former
employees.
Depreciation and amortization expense. Depreciation and amortization
expense increased $4.7 million from $579,000 to $5.3 million for the years
ended December 31, 1997 and 1998, respectively. The increase was primarily due
to the fact that VIALOG Corporation did not conduct operations prior to
November 12, 1997. Thus, depreciation and amortization expense in 1997
represents consolidated depreciation and amortization expense of the Company
including the Original Acquisitions for the period November 12, 1997 through
December 31, 1997, while depreciation and amortization expense in 1998
represents consolidated depreciation and amortization expense of the Company,
including the Original Acquisitions for the full year.
Non-recurring charge. The results for the year ended December 31, 1998
include a non-recurring charge of $1.2 million related to the consolidation of
the Atlanta and Montgomery Operating Centers. In connection with the
consolidation plan being implemented by the Company, the Atlanta Operating
Center remained staffed through January 31, 1999, after which time its traffic
has been managed by operators in the Montgomery Operating Center as well as
other Operating Centers. The Company anticipates relocating its Montgomery
Operating Center into a new leased facility by May, 1999. The Company believes
that, over the long term, the consolidation of the two Centers will provide
operational efficiencies as well as reduce operating costs. During the period
that the Atlanta Center remained staffed, the Company incurred a modest amount
of incremental costs associated with increased staffing in the Montgomery
Center in anticipation of the additional conferencing volume to be managed by
the Montgomery Operating Center as a result of the consolidation. The non-
recurring charge includes (i) $373,000 associated with personnel reductions of
approximately 45 operator, customer service, technical support and general and
administrative positions in the Atlanta Operating Center, (ii) $400,000
associated with lease costs for the Atlanta facility from the exit date
through the lease termination date (net of estimated sublease income), (iii)
$135,000 associated with legal fees and other exit costs, (iv) $77,000
associated with the disposal of furniture and equipment in both the Atlanta
and Montgomery Operating Centers, and (v) $215,000 associated with the
impairment of intangible assets (assembled workforce) in the Atlanta Operating
Center. As of December 31, 1998, approximately $324,000 of such costs had been
paid.
22
<PAGE>
Interest expense, net. Interest expense, net increased $10.8 million for
the year ended December 31, 1998 compared to the year ended December 31, 1997.
The increase was primarily due to (i) approximately $8.3 million of increased
interest expense on the $75.0 million of Senior Notes issued on November 12,
1997 and (ii) approximately $2.4 million of increased 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 $177,000 due to increased
cash balances.
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 Original Acquisitions. The 1997 net loss
included expenses incurred prior to the Original Acquisitions, as well as
consolidated net revenues and expenses of the Original Acquisitions from the
date of the Original 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, excluding depreciation from the date of the
Original 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
Original 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 Original Acquisitions 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 Original
Acquisitions. 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.
The failure of the Company to successfully complete the research and
development projects could have a material adverse effect on the Company's
future results of operations and financial condition.
VIALOG had net operating loss carryforwards of $0, $3.9 million and $13.1
million at December 31, 1996, 1997 and 1998, respectively, of which $3.9
million expires in 2013 and $13.1 million expires in 2018. 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
12 to VIALOG's Consolidated Financial Statements.
23
<PAGE>
Liquidity and Capital Resources
The Company generated negative cash flows of $178,000, $4.1 million and $5.3
million from operating activities for the years ended December 31, 1996 and
1997 and 1998, respectively. Cash flows used in investing activities of
$7,000, $53.8 million and $7.8 million for the years ended December 31, 1996,
1997 and 1998, respectively, represent cash paid in connection with the
Original Acquisitions of $0, $53.3 million and $0, respectively, purchases of
property and equipment of $7,000, $454,000 and $7.4 million, respectively, and
$493,000 related to deferred acquisition costs for the year ended December 31,
1998. Cash provided by financing activities of $522,000, $67.1 million and
$3.9 million for the years ended December 31, 1996, 1997, and 1998,
respectively, represent issuance of long-term debt and common stock, offset by
payments of previously issued debt and payments of indebtedness of the
Original Acquisitions.
On November 12, 1997, VIALOG completed a Private Placement of $75.0 million
of Senior Notes, Series A. The Senior Notes bear interest at 12 3/4% per
annum, payable semi-annually on May 15 and November 15 of each year,
commencing May 15, 1998. The Senior Notes are guaranteed by the Operating
Centers and mature on November 15, 2001. The Senior Notes are redeemable in
whole or in part at the option of VIALOG on or after November 15, 1999 at 110%
of the principal amount thereof, and on or after November 15, 2000 at 105% of
the principal amount thereof until maturity, in each case together with
accrued interest to the date of redemption. In addition, there are certain
other early redemption options available to VIALOG at any time on or prior to
November 15, 1999 at certain premiums, as specified in the Indenture. In the
event of a change in control, as defined in the Indenture, the Company may be
required to repurchase all of the outstanding Senior Notes at 101% of the
principal amount plus accrued interest and additional interest, if any. The
Indenture contains restrictive covenants with respect to the Company that
among other things, create limitations (subject to certain exceptions) on (i)
the incurrence of additional indebtedness, (ii) the ability of the Company to
purchase, redeem or otherwise 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.
On October 6, 1998, the Company closed a two year, $15.0 million credit
facility (the "Senior Credit Facility") with Coast Business Credit, a division
of Southern Pacific Bank. Subject to the meeting of certain conditions, the
Senior Credit Facility provides for (i) a term loan in the principal amount of
$1.5 million, (ii) a term loan of up to 80% of the purchase price of new and
used equipment, not to exceed $4.0 million, and (iii) a revolving loan based
on a percentage of eligible accounts receivable. Loans under the Senior Credit
Facility bear interest at the higher of 7% or the Prime Rate plus 1 1/2%, and
interest is based on a minimum outstanding principal balance of the greater of
$5.0 million or 33% of the available Senior Credit Facility. The Senior Credit
Facility includes certain early termination fees. The Senior Credit Facility
is secured by the assets of each of the Operating Centers and the assets of
VIALOG Corporation, excluding the ownership interest in each of the Operating
Centers. The Company is required to maintain compliance with certain financial
ratios and tests, consisting of a debt service coverage ratio of not less than
1.2:1 determined on a monthly basis and a minimum net worth level of not less
than $50.0 million determined on an ongoing basis. As of December 31, 1998,
the Company was in compliance with such financial ratios and tests. As of
December 31, 1998, the Company had borrowed $1.4 million on the term loan,
$1.6 million on the equipment term loan, and $2.0 million on the revolving
loan.
On February 10, 1999, the Company completed an initial public offering for
the sale of 4,600,000 shares of Common Stock. The net proceeds from this
offering, after deducting underwriting discounts and commissions and estimated
offering expenses, were approximately $32.7 million. Of the net proceeds,
approximately $29.1 million was used on February 10, 1999 to complete the
acquisitions, in separate transactions, of all of the
24
<PAGE>
outstanding capital stock of ABCC, CPI and ABCI. In addition, approximately
$305,000 of indebtedness was paid to the former stockholder of one of the
acquisitions. The remaining net proceeds of $3.3 million will be used for
working capital and general corporate purposes.
The Company anticipates that its cash flows from operations and remaining
net proceeds from the Company's initial public offering of Common Stock,
supplemented by borrowings under the Senior Credit Facility, will meet or
exceed its working capital needs, debt service requirements and planned
capital expenditures for property and equipment for the next twelve months.
The Company expects to meet its longer term liquidity requirements including
repayment of the Senior Notes, through a combination of working capital, cash
flow from operations, borrowings and future issuances of debt and/or equity
securities. However, no assurances can be given that such funds will be
available when required or on terms favorable to the Company.
The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition and the
associated potential capital commitments are unpredictable. The Company plans
to fund future acquisitions primarily through a combination of working
capital, cash flow from operations and borrowings, as well as issuances of
debt and/or equity securities. However, no assurances can be given that such
funds will be available when required or on terms favorable to the Company.
The acquisition agreements, pursuant to which the Acquired Companies were
acquired (except for the Oradell Center) limit through November 12, 1999 the
Company's ability to change the location of an Acquired Company's facilities
(except for the Montgomery Center), 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. The acquisition agreement pursuant to which
ABCC was acquired contains similar restrictions with respect to changes at
ABCC. These restrictions are in effect until February 10, 2001, unless such
restrictions are earlier waived by one of the former ABCC stockholders. 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. In connection with the consolidation of the Atlanta
and Montgomery Centers, the Company has obtained the approvals of a majority
in interest of the former stockholders of the Atlanta and Montgomery Centers.
The Company is highly leveraged and has a stockholders' deficit at December
31, 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.
Year 2000 Compliance
Many currently installed computer systems and software programs were
designed to use only a two digit date field. These date fields will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. Until the date fields are revised, the systems and programs could fail
or give erroneous results when referencing dates following December 31, 1999.
Such failure or errors could occur prior to the actual change in century.
The Company relies on computer applications to manage and monitor its
operations, accounting, sales and administrative functions. In addition, the
Company's suppliers and service providers (particularly telecommunications
companies) are reliant upon computer applications, some of which may contain
software that may fail as a result of the upcoming change in century. Failure
of the Company's systems or those of its suppliers or service providers could
have a material adverse impact on the Company's business, financial condition
and results of operations.
25
<PAGE>
State of readiness. The Company is in the process of assessing its Year
2000 readiness. The Company's current Year 2000 readiness project will cover
the following phases: (i) identification of internal systems and components
that will be in service in the 21st century, (ii) assessment of internal
system repair or replacement requirements, (iii) assessment of supplier and
service provider Year 2000 readiness, (iv) repair or replacement of both
internal and external systems or components, (v) testing, (vi) implementation,
and (vii) development of a contingency plan in the event of Year 2000
failures.
The Company has completed the identification phase of its Year 2000
readiness project. The Company has prepared a comprehensive inventory of all
systems and system components in use, and has identified which systems and
system components will be in use beyond the year 1999.
The Company has also completed the assessment of internal systems phase. For
each internal system and system component which will be in use beyond 1999,
the Company has determined its Year 2000 readiness. For each system and system
component which is not Year 2000 compliant, the Company has identified the
repair or replacement required to become Year 2000 compliant and has scheduled
such repair or replacement. Additionally, in connection with its plans to
integrate the Operating Centers, the Company is in the process of implementing
certain common systems in both the operations and financial management areas.
Such common systems are Year 2000 compliant, a criteria of the systems
integration plan. The Company expects all of its internal systems and system
components to be Year 2000 compliant by June 1999.
The Company has substantially completed the assessment of its supplier and
service provider Year 2000 readiness phase. The Company has contacted all
major suppliers and service providers and has received Year 2000
certifications from substantially all major suppliers and service providers.
However, there is no assurance that the Company's suppliers or service
providers will not suffer a Year 2000 business disruption which could have a
material adverse impact on the Company's business, financial condition and
results of operations.
Costs. To date, the Company has not incurred any material expenditures in
connection with its Year 2000 assessment and remediation efforts. Most of its
expenses have related to the opportunity cost of time spent by employees of
the Company evaluating Year 2000 compliance matters. As the Company continues
with the deployment of new systems related to its planned efforts to integrate
the Operating Centers, such new systems will be Year 2000 compliant. The cost
of purchasing, or developing, and deploying these new systems are not
considered Year 2000 costs as they were included in the Company's integration
plan and were not accelerated due to Year 2000 issues.
Risks. The Company relies heavily on the use of telecommunications systems
and services--both internally deployed and from multiple third party service
providers. Thus, the Company believes that telecommunications is the area most
sensitive to problems with Year 2000 readiness. Failure of one or more of the
Company's telecommunications service providers to become Year 2000 compliant
on a timely basis could, in a worst case scenario, render the Company unable
to schedule or conduct conference calls and other group communication
services, and could have a material adverse impact on the Company's business,
financial condition and results of operations. However, the Company believes
that its ability to redistribute certain of its telecommunications services
among its multiple third party service providers could lessen any potential
adverse impact.
Contingency plan. The Company has not yet developed a Year 2000-specific
contingency plan as the Company expects its systems and system components to
be Year 2000 compliant by June, 1999. The Company intends to prepare a
contingency plan as it becomes aware of Year 2000 problems or risks.
Combined Operating Centers and VIALOG Corporation
The combined Operating Centers' and VIALOG Corporation's Statements of
Operations data for the years ended December 31, 1996, 1997 and 1998 do not
purport to present the financial results or the financial condition of the
combined Operating Centers and VIALOG Corporation in accordance with generally
accepted accounting
26
<PAGE>
principles. Such data represents merely a summation of the net revenues and
cost of revenues, excluding depreciation of the individual Operating Centers
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 were not under common
control or management.
Results of Operations--Combined Operating Centers and VIALOG Corporation
The following unaudited combined data of the Operating Centers 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,
--------------------------------------------
1996 1997 1998
------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues................... $37,558 100.0% $45,583 100.0% $59,819 100.0%
Cost of revenues, excluding de-
preciation.................... 17,979 47.9% 22,296 48.9% 29,016 48.5%
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net revenues. All Operating Centers reflected an increase in net revenues
for the year ended December 31, 1998 compared to the year ended December 31,
1997. Net revenues increased $14.2 million, or 31.2%, from net revenues of
$45.6 million in 1997 to net revenues of $59.8 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 $5.8 million, or 46.0%, from
$12.6 million in 1997 to $18.4 million in 1998, which consisted of increased
sales of conferencing services of approximately $3.9 million and $1.9 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 $1.8 million, or 44.1%, which was primarily
attributable to increased audioconferencing services to existing customers and
new customers, (iii) an increase in the Chaska Center's net revenues of $1.8
million, or 31.1%, which was primarily attributable to increased
audioconferencing services to existing customers and new customers, (iv) an
increase in the Atlanta Center's net revenues of $1.2 million, or 18.1%, which
was primarily due to increased revenues from two significant customers, which
represented 71.6% and 69.4% of the Atlanta Center's net revenues for the years
ended December 31, 1997 and 1998, respectively, and (v) an increase in the
Montgomery Center's net revenues of $1.6 million, or 19.6%, which was
primarily due to increased revenues for audioconferencing services to existing
retail and financial services customers.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation for the year ended December 31, 1998 increased $6.7 million, or
30.1%, from $22.3 million in 1997 to $29.0 million in 1998, and remained flat
as a percentage of revenue. The dollar increase was primarily attributable to
(i) an increase in the Reston Center's cost of revenues, excluding
depreciation of $3.0 million, or 54.7%, resulting from increased
telecommunications costs and personnel and related costs associated with
increased call volumes, and equipment costs related to the introduction of
video equipment sales in the first quarter of 1998 (which generate a lower
gross margin than teleconferencing services), (ii) an increase in the Atlanta
Center's cost of revenues, excluding depreciation of $863,000, or 36.5%,
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, (iii) an increase in the
Montgomery Center's cost of revenues, excluding depreciation of $835,000, or
14.1%, resulting primarily from increased telecommunications costs associated
with increased call volumes and (iv) an increase in the Cambridge Center's
cost of revenues, excluding depreciation of $1.1 million, or 55.4%, 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.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net revenues. All Operating Centers reflected an increase in net revenues
during the year ended December 31, 1997 compared to the year ended December
31, 1996. Combined net revenues increased $8.0 million, or
27
<PAGE>
21.4%, from $37.6 million in 1996 to $45.6 million in 1997. Overall, the
increase was primarily due to increased call volumes for audio conferencing
services. The major components of this increase were (i) an increase in the
Reston 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
conferencing 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 conferencing services to
existing customers and sales to 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 Cambridge's business that was divested in
December, 1996.
Cost of revenues, excluding depreciation. Combined cost of revenues,
excluding depreciation increased $4.3 million, or 24.0%, from $18.0 million in
1996 to $22.3 million in 1997 and increased slightly as a percentage of net
revenues from 47.9% 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, excluding depreciation of $1.9 million, or 54.3%, from $3.6 million
in 1996 to $5.5 million in 1997 related to the substantial investment made in
personnel and related costs associated with video conferencing and increased
telecommunications and personnel expense associated with the growth in
revenues, (ii) an increase in the Oradell Center's cost of revenues, excluding
depreciation of $609,000, or 74.4%, from $818,000 in 1996 to $1.4 million in
1997 primarily due to telecommunications costs and personnel expenses to
support the current and expected call volume, and (iii) an increase in the
Montgomery Center's cost of revenues, excluding depreciation of $626,000, or
11.9%, from $5.3 million in 1996 to $5.9 million in 1997, which was primarily
attributable to increased telecommunications costs and personnel expenses to
support the increased call volume.
New Accounting Pronouncements
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
effective January 1, 1998 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. The Company operates in one segment. The
adoption of SFAS 131 effective January 1, 1998 did not impact the Company's
consolidated financial statements.
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 impact on the Company's consolidated financial
statements.
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. SFAS 133 is
28
<PAGE>
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. The Company does not anticipate the adoption of this standard will have
a material impact on the Company's consolidated 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, and VIALOG Corporation is included
elsewhere herein.
Access
Founded in 1987, Access specializes in providing conferencing services to
numerous organizations, including financial institutions, government agencies,
trade associations and professional service companies. Access is headquartered
and maintains its operations center in Reston, Virginia.
Results of Operations--Access
The following table sets forth certain historical financial data of Access
and such data as a percentage of net revenues for the periods presented:
<TABLE>
<CAPTION>
January 1, November 13,
Year Ended December 31, 1997 to 1997 to
---------------------------------------- November 12, December 31,
1994 1995 1996 1997 1997
------------ ------------ ------------ ------------- ---------------
(In thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $5,114 100.0% $6,508 100.0% $9,073 100.0% $10,945 100.0% $ 1,620 100.0%
Cost of revenues,
excluding
depreciation........... 2,608 51.0% 3,021 46.4% 3,564 39.3% 4,791 43.8% 709 43.8%
Selling, general and
administrative
Expenses............... 1,691 33.1% 2,484 38.2% 3,332 36.7% 4,124 37.7% 2,603 160.6%
Depreciation and
amortization expense... 269 5.2% 496 7.6% 630 6.9% 823 7.5% 183 11.3%
------ ----- ------ ----- ------ ----- ------- ----- ------- ------
Operating income
(loss)................. $ 546 10.7% $ 507 7.8% $1,547 17.1% $ 1,207 11.0% $(1,875) (115.7)%
====== ===== ====== ===== ====== ===== ======= ===== ======= ======
</TABLE>
Periods January 1 to November 12, 1997 and November 13 to December 31, 1997
compared to Year Ended December 31, 1996
Net revenues. Net revenues increased from $9.1 million for the year ended
December 31, 1996 to $10.9 million and $1.6 million for the periods January 1
to November 12, 1997 and November 13 to December 31, 1997, respectively. The
increase in net revenues consisted of additional sales of conferencing
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 conferencing 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, excluding
depreciation increased from $3.6 million for the year ended December 31, 1996
to $4.8 million and $709,000 for the periods January 1 to November 12, 1997
and November 13 to December 31, 1997, respectively. As a percentage of net
revenues, cost of revenues increased 4.5 percentage points, from 39.3% for the
year ended December 31, 1996 to 43.8%
29
<PAGE>
for each of the periods January 1 to November 12, 1997 and November 13 to
December 31, 1997. The percentage increase is primarily the result of the
substantial investment in personnel and related costs made in video
conferencing during the periods January 1 to November 12, 1997 and November 13
to December 31, 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased from $3.3 million for the year ended
December 31, 1996 to $4.1 million and $2.6 million for the periods January 1
to November 12, 1997 and November 13 to December 31, 1997, respectively. The
dollar increase was primarily the result of (i) a $2.2 million write-off of
in-process research and development costs during the period November 13 to
December 31, 1997, relating to the acquisition of Access by VIALOG
Corporation, (ii) a $481,000 charge related to acquisition consulting services
provided to the former stockholders of Access in connection with the sale of
Access to VIALOG Corporation and the write-off of a consulting agreement and
an agreement not to compete which were determined by Access to have no future
value as of November 12, 1997 and (iii) additional operating expenses
consistent with the increase in net revenues experienced by Access.
Depreciation and amortization expense. Depreciation and amortization
expense increased from $630,000 for the year ended December 31, 1996 to
$823,000 and $183,000 for the periods January 1 to November 12, 1997 and
November 13 to December 31, 1997, respectively. The dollar increase is the
result of additional property and equipment of $1.7 million and $380,000
acquired during the periods January 1 to November 12, 1997 and November 13 to
December 31, 1997, respectively, to support the growth in net revenues and the
amortization of goodwill and intangible assets since November 12, 1997,
related to the acquisition of Access by VIALOG Corporation.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Net revenues. Net revenues increased $2.6 million, or 39.4%, from $6.5
million for the year ended December 31, 1995 to $9.1 million for the year
ended December 31, 1996. The increase in net revenues consisted of additional
sales of audioconferencing services, due to increased call volumes, of $1.4
million and $1.2 million to existing and new customers, respectively.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation increased $543,000, or 18.0%, from $3.0 million for the year
ended December 31, 1995 to $3.6 million for the year ended December 31, 1996.
The dollar increase was primarily attributable to increased telecommunications
costs related to increased call volume and occupancy costs and the salaries
and benefits for 16 additional operators. As a percentage of net revenues,
cost of revenues, excluding depreciation decreased 7.1 percentage points, from
46.4% for the year ended December 31, 1995 to 39.3% for the year ended
December 31, 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $848,000, or 34.1%, from $2.5 million for
the year ended December 31, 1995 to $3.3 million for the year ended December
31, 1996. The dollar increase was primarily the result of increased occupancy
costs, non-recurring executive compensation and bad debt expense. As a
percentage of net revenues, selling, general and administrative expenses
decreased 1.5 percentage points from 38.2% for the year ended December 31,
1995 to 36.7% for the year ended December 31, 1996.
Depreciation and amortization expense. Depreciation and amortization
expense increased $134,000, or 27.0% from $496,000 for the year ended December
31, 1995 to $630,000 for the year ended December 31, 1996. The dollar increase
is the result of additional property and equipment of $783,000 acquired during
1996 to support the growth experienced in net revenues. As a percentage of net
revenues, depreciation expense decreased 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
30
<PAGE>
primarily of additional sales of conferencing services, due to increased call
volumes, of $730,000 and $664,000 to existing and new customers, respectively.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation increased $413,000, or 15.8%, from $2.6 million for the year
ended December 31, 1994 to $3.0 million for the year ended December 31, 1995.
The dollar increase was primarily attributable to salaries and benefits for 10
additional operators. As a percentage of net revenues, cost of revenues,
excluding depreciation decreased 4.6 percentage points, from 51.0% for the
year ended December 31, 1994 to 46.4% for the year ended December 31, 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $793,000, or 46.9%, from $1.7 million for
the year ended December 31, 1994 to $2.5 million for the year ended December
31, 1995. The dollar increase was primarily the result of moving expenses and
additional occupancy costs associated with relocating to a larger facility. As
a percentage of net revenues, selling, general and administrative expenses
increased 5.1 percentage points from 33.1% for the year ended December 31,
1994 to 38.2% for the year ended December 31, 1995.
Depreciation and amortization expense. Depreciation and amortization
expense increased $227,000, or 84.4% from $269,000 for the year ended December
31, 1994 to $496,000 for the year ended December 31, 1995. The dollar increase
is the result of $1.4 million in purchases of additional property and
equipment during the year ended December 31, 1995 to support the growth
experienced in net revenues and the relocation to a larger facility. As a
percentage of net revenues, depreciation expense increased 2.4 percentage
points from 5.2% for the year ended December 31, 1994 to 7.6% for the year
ended December 31, 1995.
Liquidity and Capital Resources--Access
The following table sets forth selected financial information from Access'
statements of cash flows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
January 1, 1997 to
1994 1995 1996 November 12, 1997
------- -------- ------- ------------------
(In thousands)
<S> <C> <C> <C> <C>
Net cash provided by (used in):
Operating activities.......... $ 592 $ 821 $ 2,048 $ 2,932
Investing activities.......... (557) (1,432) (795) (1,704)
Financing activities.......... 22 771 (839) (1,549)
------ -------- ------- -------
Net increase (decrease) in cash
and cash equivalents........... $ 57 $ 160 $ 414 $ (321)
====== ======== ======= =======
</TABLE>
Access had positive cash flow from operations in each year ended December
31, 1994, 1995 and 1996 and the period January 1, 1997 to November 12, 1997.
Cash used in investing activities related primarily to the acquisition of
property and equipment. Net cash provided by financing activities was
primarily the result of borrowings on notes payable to finance the acquisition
of property and equipment. Net cash used in financing activities consisted of
the repayment of notes payable, principal payments under capital lease
obligations, payments to a former stockholder and distributions to
stockholders. Distributions to stockholders totaled $39,000, $0, $475,000 and
$1,284,000 for the years ended December 31, 1994, 1995, and 1996 and the
period January 1, 1997 to November 12, 1997, respectively.
CSI
Founded in 1992, CSI specializes in providing audioconferencing 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.
31
<PAGE>
Results of Operations--CSI
The following table sets forth certain historical financial data of CSI and
such data as a percentage of net revenues for the periods presented:
<TABLE>
<CAPTION>
January 1, November 13,
Year Ended December 31, 1997 to 1997 to
---------------------------------------- November 12, December 31,
1994 1995 1996 1997 1997
------------ ------------ ------------ ------------ ----------------
(In thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $2,331 100.0% $3,808 100.0% $5,868 100.0% $5,579 100.0% $ 854 100.0 %
Cost of revenues,
excluding
depreciation........... 1,256 53.9% 1,617 42.5% 2,438 41.6% 2,052 36.8% 322 37.7 %
Selling, general and
administrative
expenses............... 707 30.3% 905 23.8% 998 17.0% 831 14.9% 3,493 409.0 %
Depreciation and
amortization expense... 235 10.1% 292 7.6% 393 6.7% 356 6.4% 168 19.7 %
------ ----- ------ ----- ------ ----- ------ ----- ------- -------
Operating income
(loss)................. $ 133 5.7% $ 994 26.1% $2,039 34.7% $2,340 41.9% $(3,129) (366.4)%
====== ===== ====== ===== ====== ===== ====== ===== ======= =======
</TABLE>
Periods January 1 to November 12, 1997 and November 13 to December 31, 1997
Compared to Year Ended December 31, 1996
Net Revenues. Net revenues increased from $5.9 million in 1996 to $5.6
million and $854,000 for the periods January 1 to November 12, 1997 and
November 13 to December 31, 1997, respectively. The increase is primarily due
to increased revenues from CSI's two significant customers. Net revenues from
such customers represented 70.0% of CSI's net revenues for the year ended
December 31, 1996 and approximately 71.6% and 71.4% of CSI's net revenues for
the periods January 1 to November 12, 1997 and November 13 to December 31,
1997, respectively.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation decreased slightly from $2.4 million in 1996 to $2.1 million and
$322,000 for the periods January 1 to November 12, 1997 and November 13 to
December 31, 1997, respectively. The decrease in cost of revenues, excluding
depreciation on increased call volumes was primarily the result of lower
telecommunications rates included in a contract which became effective in
November, 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased from $998,000 in 1996 to $831,000 and $3.5
million for the periods January 1 to November 12, 1997 and November 13 to
December 31, 1997, respectively. The increase was primarily the result of a
$3.4 million write-off of in-process research and development costs relating
to the acquisition of CSI by VIALOG Corporation.
Depreciation and amortization expense. Depreciation and amortization expense
increased from $393,000 for the year ended December 31, 1996 to $356,000 and
$168,000 for the periods January 1 to November 12, 1997 and November 13 to
December 31, 1997, respectively. The increase was the result of additional
property and equipment acquired to support the growth in net revenues and the
amortization of goodwill and intangible assets since November 12, 1997,
related to the acquisition of CSI by VIALOG Corporation.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net revenues. Net revenues increased $2.1 million, or 54.1%, from $3.8
million in 1995 to $5.9 million in 1996. Virtually all of this increase was
the result of a $2.2 million increase in net revenues from two significant
customers of CSI. Net revenues from such customers represented 54.0% and 70.0%
of CSI's net revenues for the years ended December 31, 1995 and 1996,
respectively.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation increased $821,000, or 50.8%, from $1.6 million in 1995 to $2.4
million in 1996. As a percentage of net revenues, cost of revenues,
32
<PAGE>
excluding depreciation decreased 0.9 percentage points from 42.5% in 1995 to
41.6% in 1996. The dollar increase was primarily attributable to increased
telecommunications expenses associated with increased call volumes and costs
associated with the addition of nine operators.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $93,000, or 10.3%, from $905,000 in 1995 to
$998,000 in 1996. As a percentage of net revenues, selling, general and
administrative expenses decreased 6.8 percentage points from 23.8% in 1995 to
17.0% in 1996. This percentage decrease was primarily attributable to
spreading fixed costs over a larger revenue base.
Depreciation and amortization expense. Depreciation and amortization expense
increased $101,000, or 34.6%, from $292,000 for the year ended December 31,
1995 to $393,000 for the year ended December 31, 1996. The increase was the
result of additional property and equipment acquired to support the growth in
net revenues.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net revenues. Net revenues increased $1.5 million, or 63.4%, from $2.3
million in 1994 to $3.8 million in 1995. Virtually all of this increase was
the result of a $1.4 million increase in net revenues from two significant
customers of CSI. Net revenues from such customers represented 28.0% and 54.0%
of total net revenues for the years ended December 31, 1994 and 1995,
respectively.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation increased $361,000, or 28.7%, from $1.3 million in 1994 to $1.6
million in 1995. As a percentage of net revenues, cost of revenues decreased
11.4 percentage points from 53.9% in 1994 to 42.5% in 1995. This percentage
decrease was primarily attributable to a reduction in local access charges,
telecommunications expenses and the termination of a lease for network access.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $198,000, or 28.0%, from $707,000 in 1994 to
$905,000 in 1995. As a percentage of net revenues, selling, general and
administrative expenses decreased 6.5 percentage points from 30.3% in 1994 to
23.8% in 1995. This percentage decrease was primarily attributable to
spreading such costs over a larger revenue base.
Depreciation and amortization expense. Depreciation and amortization
expense increased $57,000, or 24.3%, from $235,000 for the year ended December
31, 1994 to $292,000 for the year ended December 31, 1995. The increase was
the result of additional property and equipment acquired to support the growth
in net revenues.
Liquidity and Capital Resources--CSI
The following table sets forth selected financial information from CSI's
statements of cash flows:
<TABLE>
<CAPTION>
Year Ended
December 31, January 1, 1997
--------------------- to November 12,
1994 1995 1996 1997
----- ----- ------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Net cash provided by (used in):
Operating activities................. $ 53 $ 721 $ 2,128 $ 2,897
Investing activities................. (476) (225) (41) (311)
Financing activities................. 426 (144) (2,144) (2,801)
----- ----- ------- -------
Net increase (decrease) in cash and
cash equivalents...................... $ 3 $ 352 $ (57) $ (215)
===== ===== ======= =======
</TABLE>
CSI had a positive cash flow from operations in each year ended December 31,
1994, 1995, 1996 and the period January 1, 1997 to November 12, 1997. Cash
used in investing activities in 1994, 1995, 1996 and the period January 1,
1997 to November 12, 1997 related solely to the acquisition of property and
equipment. Cash provided by financing activities consisted of the proceeds of
borrowings on long-term debt and from the
33
<PAGE>
refinancing of capital lease obligations. Cash used in financing activities
consisted of repayments of long-term debt and capital lease obligations and
distributions to stockholders. Stockholder distributions totaled $1.6 million
and $2.6 million for the year ended December 31, 1996 and the period January
1, 1997 through November 12, 1997, respectively. There were no stockholder
distributions in 1994 and 1995. As of November 12, 1997, CSI had a working
capital deficit of $23,000.
Safe Harbor for Forward Looking Statements
The Company is including the following cautionary statements to make
applicable and take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements
made by, or on behalf of, the Company in this Annual Report on Form 10-K.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts. Such
forward-looking statements may be identified, without limitation, by the use
of the words "anticipates," "estimates," "expects," "intends," "plans,"
"predicts," "projects," and similar expressions. From time to time, the
Company may publish or otherwise make available forward-looking statements of
this nature. All such forward-looking statements, whether written or oral, and
whether made by or on behalf of the Company, are expressly qualified by these
cautionary statements and any other cautionary statements which may accompany
the forward-looking statements. In addition, the Company disclaims any
obligation to update any forward-looking statements to reflect events or
circumstances after the date hereof.
Forward-looking statements involve risks and uncertainties which could cause
actual results or outcomes to differ materially from those expressed in the
forward-looking statements. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to
have a reasonable basis, including without limitation, management's
examination of historical operating trends, data contained in the Company's
records and other data available from third parties, but there can be no
assurance that management's expectations, beliefs or projections will result
or be achieved or accomplished. In addition to other factors and matters
discussed elsewhere herein, some of the important factors that, in the view of
the Company, could cause actual results to differ materially from those
discussed in the forward-looking statements include the following:
Absence of Consolidated Operating History. VIALOG Corporation was founded
on January 1, 1996 and has only conducted operations and generated revenues
since November 12, 1997, the date of the Original 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 Report 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 completes the centralization of the accounting and
other administration systems, it will rely on the separate systems of the
Operating Centers. The continued 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 continue to establish and integrate themselves into the Company's
daily operations as well as to continue 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 has
deployed a nationwide sales organization, which is more costly and may prove
to be ineffective at increasing net revenues. There can be no assurance that
the Company will be successful in completing the integration of any of the
operations of the Operating Centers or, if completed, 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
34
<PAGE>
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 Acquired Companies were
acquired (except for the Oradell Center) limit until November 12, 1999 the
Company's ability to change the location of an Acquired Company's facilities
(except for the Montgomery Center), 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. The acquisition agreement pursuant to which
ABCC was acquired contains similar restrictions with respect to changes at
ABCC. These restrictions are in effect until February 10, 2001, unless such
restrictions are earlier waived by one of the former ABCC stockholders. Such
limitations could restrict the Company's ability to integrate the operations
of the Acquired Companies 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 "Business--Properties" and
"Certain Relationships and Related Transactions--Organization of the Company."
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 going forward. 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 December 31, 1998, the total indebtedness of
the Company was approximately $75.7 million, net of unamortized original issue
discount of $3.1 million. In October 1998, the Company closed a senior credit
facility for a principal amount of up to $15.0 million (the "Senior Credit
Facility"). As of December 31, 1998, the Company had approximately $5.0
million of borrowings outstanding under the Senior Credit Facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 and the Senior Credit Facility require the Company
to meet certain financial tests, and other restrictions contained in the
Indenture and the Senior Credit Facility 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
35
<PAGE>
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 and the Senior Credit
Facility 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 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 the Senior Credit
Facility, which would permit the holders of the Senior Notes and/or the lender
under the 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 the Senior Credit
Facility, such lender could 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 conferencing 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, MCI, Sprint, Frontier and
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 currently serve approximately 80% of the audio conferencing market. 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 conferencing market. If the
Company is able to expand its video and Internet conferencing service
offerings, it will encounter additional competition, not only from existing
providers of audioconferencing, but also from competitors dedicated to video
and/or Internet 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 10% of its 1998 consolidated 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
36
<PAGE>
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 acquired or merged
with competitors of the Company. Collectively, these customers accounted for
approximately 12% of the Company's 1998 consolidated net revenues. Although
one of these customers, representing approximately 9% of the Company's 1998
consolidated net revenues, has verbally informed the Company that it will
honor its current outsourcing contract with the Company, which expires in
August, 1999, there can be no assurance that such customer will continue to
use the Company's services going forward. The second customer, representing
approximately 3% of the Company's 1998 consolidated net revenues, has moved
its conferencing business to a conferencing 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 recently 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. There can be no
assurance that the Company will be able to 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" and "Business--Growth Strategy".
Recent Entry into Video and Internet 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. Only
two of the Operating Centers offered Internet conferencing services in 1998,
and to date no material revenues have been generated from Internet
conferencing services, since these services were first offered on a commercial
basis in November, 1998. The Company has limited capacity and experience to
handle video and Internet conferencing. Furthermore, few sales people,
reservationists, operators and technical support people are trained in video
and Internet conferencing. There can be no assurance that the Company will be
able to obtain significant business from video and Internet 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
37
<PAGE>
improved, cost-effective PBX capabilities for handling teleconferencing calls
with the quality and functionality of existing MCUs used in the
teleconferencing business, the Company's customers could choose to purchase
such equipment and hire the personnel necessary to service their
teleconferencing needs through internal telephone systems. The loss of such
customers could have a material adverse effect on the Company's business,
financial condition, 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 "Busines--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 prepared a Year 2000
readiness project plan. In connection with this plan, the Company has
determined the Year 2000 readiness of all internal systems expected to be used
beyond the year 1999. Based on its assessment to date, the Company believes
that the Year 2000 issue will not have a significant impact on the operations
or the financial results of the Company. 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
conferencing 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 conferencing 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 conferencing 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
38
<PAGE>
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 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."
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."
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.
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
Senior Credit Facility. See "Market for Company's Common Equity and Related
Stockholder Matters--Dividends" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
39
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
Set forth below is a listing of the Consolidated Financial Statements of the
Company with reference to the page numbers in this Form 10-K at which such
Statements are disclosed.
<TABLE>
<CAPTION>
Page
Numbers
-------
<S> <C>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation................................................. 41
Pro Forma Consolidated Balance Sheet at December 31, 1998............. 42
Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1998.................................................... 43
Notes to Unaudited Pro Forma Consolidated Financial Statements........ 44
HISTORICAL FINANCIAL STATEMENTS
VIALOG Corporation
Report of Management.................................................. 48
Independent Auditors' Report.......................................... 49
Consolidated Balance Sheets........................................... 50
Consolidated Statements of Operations................................. 51
Consolidated Statements of Stockholders' Equity (Deficit)............. 52
Consolidated Statements of Cash Flows................................. 53
Notes to Consolidated Financial Statements............................ 54
Telephone Business Meetings, Inc. ("Access") -- The Reston Center
Independent Auditors' Report.......................................... 72
Balance Sheets........................................................ 73
Statements of Operations.............................................. 74
Statements of Stockholders' Equity.................................... 75
Statements of Cash Flows.............................................. 76
Notes to Financial Statements......................................... 77
Conference Source International, Inc. ("CSI") -- The Atlanta Center
Independent Auditors' Report.......................................... 83
Balance Sheets........................................................ 84
Statements of Operations.............................................. 85
Statements of Stockholders' Equity.................................... 86
Statements of Cash Flows.............................................. 87
Notes to Financial Statements......................................... 88
A Business Conference Call, Inc. ("ABCC") -- The Chaska Center
Independent Auditors' Report.......................................... 93
Balance Sheets........................................................ 94
Statements of Income and Retained Earnings............................ 95
Statements of Cash Flows.............................................. 96
Notes to Financial Statements......................................... 97
</TABLE>
40
<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 February 10, 1999 of
all of the stock of A Business Conference-Call, Inc. ("ABCC"), Conference Pros
International, Inc. ("CPI"), and A Better Conference, Inc. ("ABCI"), which
will be accounted for using the purchase method of accounting, and (ii) the
consummation of an initial public offering of common stock. The unaudited pro
forma consolidated statement of operations gives effect to the acquisitions of
ABCC, CPI and ABCI, and the consummation of the initial public offering as if
they had occurred on January 1, 1998. The unaudited pro forma consolidated
balance sheet gives effect to the acquisitions of ABCC, CPI and ABCI, and the
consummation of the initial public offering as if they had occurred on
December 31, 1998. The pro forma statements are based on the historical
financial statements of VIALOG Corporation, ABCC, CPI and ABCI 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, 1998, 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 Report.
41
<PAGE>
VIALOG CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Pro Forma
VIALOG ---------------------------- Offering As
Corp. ABCC CPI ABCI Adjustments (1) Consolidated Adjustment (1) Adjusted
-------- ------ ---- ---- --------------- ------------ -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 232 $ 153 $ 10 $ 12 $ (103)(a) $ 294 $33,015(e) $ 4,216
(10)(a) (29,093)(f)
Accounts receivable,
net................... 7,391 740 203 329 -- 8,663 -- 8,663
Prepaid expenses....... 425 184 -- -- -- 609 -- 609
Deferred offering
costs................. 596 -- -- -- -- 596 (596)(e) --
Other current assets... 165 -- 2 29 -- 196 -- 196
-------- ------ ---- ---- ------- -------- ------- --------
Total current
assets.............. 8,809 1,077 215 370 (113) 10,358 3,326 13,684
Property and equipment,
net.................... 11,987 864 382 471 -- 13,704 -- 13,704
Deferred debt issuance
costs.................. 5,429 -- -- -- -- 5,429 -- 5,429
Goodwill and intangible
assets, net............ 41,679 -- -- -- 15,273(b) 69,234 -- 69,234
6,185(c)
6,097(d)
Other assets............ 1,362 3 -- 75 -- 1,440 -- 1,440
-------- ------ ---- ---- ------- -------- ------- --------
Total assets......... $ 69,266 $1,944 $597 $916 $27,442 $100,165 $ 3,326 $103,491
======== ====== ==== ==== ======= ======== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Revolving line of
credit................ $ 2,057 $ -- $-- $-- $ -- $ 2,057 $ -- $ 2,057
Current portion of
long-term debt........ 1,465 6 145 318 -- 1,934 -- 1,934
Accounts payable....... 3,064 152 164 102 -- 3,482 -- 3,482
Pro forma considera-
tion due
stockholders.......... -- -- -- -- 16,643(b) 29,093 (29,093)(f) --
6,150(c)
6,300(d)
Accrued interest
expense............... 1,215 -- 34 -- (34)(a) 1,215 -- 1,215
Accrued expenses and
other
liabilities........... 3,386 302 8 123 -- 3,819 -- 3,819
-------- ------ ---- ---- ------- -------- ------- --------
Total current
liabilities......... 11,187 460 351 543 29,059 41,600 (29,093) 12,507
Long-term debt, less
current portion........ 74,189 11 305 85 -- 74,590 (305)(f) 74,285
Other long-term
liabilities............ 482 -- -- 85 -- 567 -- 567
Commitments and
contingencies..........
Stockholders' equity
(deficit):
Preferred stock........ -- -- -- -- -- -- -- --
Common stock........... 37 -- -- -- -- 37 46(e) 83
Additional paid-in
capital............... 11,854 10 1 -- (11)(a) 11,854 32,678(e) 44,532
Retained earnings
(deficit)............. (28,483) 1,463 (60) 203 (1,503)(a) (28,483) -- (28,483)
(103)(a)
-------- ------ ---- ---- ------- -------- ------- --------
Total stockholders'
equity
(deficit)........... (16,592) 1,473 (59) 203 (1,617) (16,592) 32,724 16,132
-------- ------ ---- ---- ------- -------- ------- --------
Total liabilities and
stockholders' equity
(deficit)........... $ 69,266 $1,944 $597 $916 $27,442 $100,165 $ 3,326 $103,491
======== ====== ==== ==== ======= ======== ======= ========
</TABLE>
- --------
(1) See Note 3 to unaudited pro forma consolidated financial statements.
42
<PAGE>
VIALOG CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share data)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Pro Forma
VIALOG ------------------------------
Corp. ABCC CPI ABCI Adjustments(1) Consolidated(1)
---------- ------ ------ ------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 46,820 $7,485 $2,522 $2,992 $ -- $ 59,819
Cost of revenues,
excluding
depreciation........... 24,321 2,379 1,292 1,024 -- 29,016
Selling, general and
administrative
expense................ 15,196 1,816 990 1,322 (460)(a) 18,864
Depreciation expense.... 2,835 154 180 206 -- 3,375
Amortization of goodwill
and intangibles........ 2,490 -- -- -- 1,383 (b) 3,873
Non-recurring charge.... 1,200 -- -- -- -- 1,200
---------- ------ ------ ------ ------ ----------
Operating (loss)
income................ 778 3,136 60 440 (923) 3,491
Interest expense, net... (12,629) 9 (36) (109) -- (12,765)
---------- ------ ------ ------ ------ ----------
Loss before income tax
expense............... (11,851) 3,145 24 331 (923) (9,274)
Income tax expense...... (26) -- -- (125) 125 (c) (26)
---------- ------ ------ ------ ------ ----------
Net loss............... $ (11,877) $3,145 $ 24 $ 206 $ (798) $ (9,300)
========== ====== ====== ====== ====== ==========
Net loss per share--
basic and diluted...... $ (3.27) $ (1.13)(d)
========== ==========
Weighted average shares
outstanding............ 3,632,311 8,232,311 (d)
========== ==========
</TABLE>
- --------
(1) See Note 4 to unaudited pro forma consolidated financial statements.
43
<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 conferencing services, consisting primarily of
operator-assisted and operator-on-demand audioconferencing, as well as video
and Internet conferencing services. On February 10, 1999, VIALOG Corporation
completed an initial public offering of its common stock and on that date
consummated agreements to acquire three private conference service bureaus.
(2) ACQUISITIONS
Concurrent with the closing of the initial public offering, VIALOG
Corporation acquired all of the issued and outstanding stock of A Business
Conference-Call, Inc. ("ABCC"), Conference Pros International, Inc. ("CPI")
and A Better Conference, Inc. ("ABCI"). The acquisitions will be accounted for
using the purchase method of accounting.
The following table sets forth for each acquired company the consideration
paid its common stockholders.
<TABLE>
<CAPTION>
Cash(1)
(in thousands)
--------------
<S> <C>
ABCC....................................................... $16,226
CPI........................................................ 6,000
ABCI....................................................... 6,200
-------
Total Consideration........................................ $28,426
=======
</TABLE>
- --------
(1) Excludes tax reimbursements of approximately $267,000 to
certain stockholders of certain of the acquired companies.
The total purchase price of the acquired companies is estimated to be $29.1
million and consists of $28.4 million in cash paid to the stockholders of the
acquired companies, approximately $400,000 of acquisition costs and
approximately $267,000 related to tax reimbursements. Of the estimated
purchase price, $1.5 million has been allocated to the identifiable assets
acquired and liabilities assumed and the balance (currently estimated at $27.6
million) has been allocated to intangible assets. In management's opinion, the
preliminary estimates regarding allocation of the purchase price are not
expected to differ materially from the final adjustments.
44
<PAGE>
VIALOG CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS
(a) Represents a capital distribution to ABCC shareholders, an interest
distribution to the CPI shareholder, and elimination of historical equity
balances of ABCC, CPI and ABCI.
(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.............................................. $16,226
Tax reimbursements to stockholders of ABCC.......................... 217
Direct acquisition costs............................................ 200
-------
Total purchase price.............................................. 16,643
Less: Tangible assets and liabilities of ABCC
Accounts receivable............................................... 740
Property and equipment............................................ 864
Other assets...................................................... 237
Accounts payable.................................................. (152)
Accrued expenses.................................................. (302)
Other liabilities................................................. (17)
-------
Intangible assets............................................... $15,273
=======
</TABLE>
Intangible assets are expected to include goodwill, developed technology and
assembled workforce, which will be amortized on a straight-line basis over
their useful lives. The useful lives that are currently being used by the
Company relating to intangible assets for similar acquisitions made by the
Company are 6 years for developed technology, 13 years for assembled workforce
and 20 years for goodwill. For purposes of determining the amortization of
goodwill and intangible assets, the Company has used a range of useful lives
of 5 to 25 years, which includes the full range of lives currently being used
by the Company for similar intangible assets. The Company expects to complete
a full valuation of the tangible and intangible assets. In management's
opinion, the preliminary estimates regarding allocation of the purchase price
and amortization periods are not expected to differ materially from the final
allocation.
(c) The excess of the total purchase price for CPI 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............................................... $6,000
Tax reimbursements to stockholder.................................... 50
Direct acquisition costs............................................. 100
------
Total purchase price............................................... 6,150
Less: Tangible assets and liabilities
Accounts receivable................................................ 205
Property and equipment............................................. 382
Accounts payable................................................... (164)
Other liabilities.................................................. (458)
------
Intangible assets................................................ $6,185
======
</TABLE>
Intangible assets are expected to include goodwill, developed technology and
assembled workforce, which will be amortized on a straight-line basis over
their useful lives. The useful lives that are currently being used by
45
<PAGE>
VIALOG CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Company relating to intangible assets for similar acquisitions made by the
Company are 6 years for developed technology, 13 years for assembled workforce
and 20 years for goodwill. For purposes of determining the amortization of
goodwill and intangible assets, the Company has used a range of useful lives
of 5 to 25 years, which includes the full range of lives currently being used
by the Company for similar intangible assets. The Company expects to complete
a full valuation of the tangible and intangible assets. In management's
opinion, the preliminary estimates regarding allocation of the purchase price
and amortization periods are not expected to differ materially from the final
allocation.
(d) The excess of the total purchase price for ABCI 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............................................... $6,200
Direct acquisition costs............................................. 100
------
Total purchase price............................................. 6,300
Less: Tangible assets and liabilities
Accounts receivable................................................ 329
Property and equipment............................................. 471
Other assets....................................................... 116
Accounts payable................................................... (102)
Accrued expenses................................................... (123)
Debt and other liabilities......................................... (488)
------
Intangible assets................................................ $6,097
======
</TABLE>
Intangible assets are expected to include goodwill, developed technology and
assembled workforce, which will be amortized on a straight-line basis over
their useful lives. The useful lives that are currently being used by the
Company relating to intangible assets for similar acquisitions made by the
Company are 6 years for developed technology, 13 years for assembled workforce
and 20 years for goodwill. For purposes of determining the amortization of
goodwill and intangible assets, the Company has used a range of useful lives
of 5 to 25 years, which includes the full range of lives currently being used
by the Company for similar intangible assets. The Company expects to complete
a full valuation of the tangible and intangible assets. In management's
opinion the preliminary estimates regarding allocation of the purchase price
and amortization periods are not expected to differ materially from the final
allocation.
(e) Records the cash proceeds of $32.7 million from the issuance of shares
of common stock, net of the underwriting discount of $2.6 million, estimated
offering costs of $1.5 million ($596,000 of such offering costs have been
paid) and the repayment of debt totaling $305,000. Offering costs primarily
consist of legal fees, accounting fees, underwriters' out-of-pocket expenses
and printing expenses.
(f) Represents payment of purchase price to former stockholders of ABCC, CPI
and ABCI and payment of indebtedness to the former stockholder of CPI.
(4) UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS
(a) As a condition to closing the acquisitions, certain officers and
employees agreed to accept reduced compensation and benefits subsequent to the
acquisitions. The adjustment reflects the difference between the historical
compensation and benefits of officers and employees of ABCC, CPI and ABCI and
the compensation and benefits they agreed to accept subsequent to the
acquisitions.
46
<PAGE>
VIALOG CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Adjustment reflects the amortization of goodwill and intangible assets,
which are amortized over periods ranging from 5 to 25 years. See Notes (3)
(b), (c) and (d).
(c) The pro forma income tax provision has been calculated as if each of
ABCC, CPI and ABCI had been included in the Company's consolidated income tax
return and, therefore, was subject to corporate income taxation.
(d) 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 4,600,000 shares of the
Company's common stock issued in connection with the initial public offering
were outstanding for the entire period.
47
<PAGE>
REPORT OF MANAGEMENT
The accompanying consolidated financial statements and related information
of VIALOG Corporation and subsidiaries (the "Company") have been prepared by
management, which is responsible for their integrity and objectivity. The
statements have been prepared in conformity with generally accepted accounting
principles and necessarily include some amounts based on management's best
estimates and judgments.
Management is also responsible for maintaining a system of internal controls
as a fundamental requirement for the operational and financial integrity of
results. The Company has established and maintains a system of internal
controls designed to provide reasonable assurance that the books and records
reflect the transactions of the Company and that its established policies and
procedures are carefully followed. The Company's internal control system is
based upon standard procedures, policies and guidelines and organizational
structures that provide an appropriate division of responsibility and the
careful selection and training of qualified personnel.
The Company's accompanying consolidated financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants,
whose audit was made in accordance with generally accepted auditing standards.
Management has made available to KPMG Peat Marwick LLP all of the Company's
financial records and related data, as well as the minutes of stockholders'
and directors' meetings. Furthermore, management believes that all
representations made to KPMG Peat Marwick LLP during its audit were valid and
appropriate. The Report of Independent Auditors appears below.
Glenn D. Bolduc John J. Dion
Chief Executive Officer Vice President--Finance and
and President Treasurer
48
<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 1998, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the years in the three-year period ended December 31, 1998.
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 1998, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 10, 1999
49
<PAGE>
VIALOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 9,567 $ 232
Accounts receivable, net of allowance for doubtful
accounts of $32 and $164, respectively............ 5,686 7,391
Prepaid expenses................................... 156 425
Deferred offering costs............................ -- 596
Other current assets............................... 101 165
-------- --------
Total current assets............................. 15,510 8,809
Property and equipment, net.......................... 7,544 11,987
Deferred debt issuance costs......................... 7,324 5,429
Goodwill and intangible assets, net.................. 44,391 41,679
Other assets......................................... 314 1,362
-------- --------
Total assets..................................... $ 75,083 $ 69,266
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving line of credit........................... $ -- $ 2,057
Current portion of long-term debt.................. 397 1,465
Accounts payable................................... 2,129 3,064
Accrued interest expense........................... 1,310 1,215
Accrued expenses and other liabilities............. 4,415 3,386
-------- --------
Total current liabilities........................ 8,251 11,187
Long-term debt, less current portion................. 71,539 74,189
Other long-term liabilities.......................... 175 482
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; none issued and outstanding........... -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized; 3,486,380 and 3,693,672 shares,
respectively, issued and outstanding.............. 35 37
Additional paid-in capital......................... 11,689 11,854
Accumulated deficit................................ (16,606) (28,483)
-------- --------
Total stockholders' deficit...................... (4,882) (16,592)
-------- --------
Total liabilities and stockholders' deficit...... $ 75,083 $ 69,266
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net revenues................................. $ -- $ 4,816 $ 46,820
Cost of revenues, excluding depreciation..... -- 2,492 24,321
Selling, general and administrative
expenses.................................... 1,308 7,178 15,196
Depreciation expense......................... -- 273 2,835
Amortization of goodwill and intangibles..... -- 306 2,490
Non-recurring charge......................... -- 8,000 1,200
--------- --------- ---------
Operating income (loss).................... (1,308) (13,433) 778
Interest income (expense) net................ 1 (1,866) (12,629)
--------- --------- ---------
Loss before income tax expense............. (1,307) (15,299) (11,851)
Income tax benefit (expense)................. 522 (522) (26)
--------- --------- ---------
Net loss................................... $ (785) $ (15,821) $ (11,877)
========= ========= =========
Net loss per share--basic and diluted........ $ (0.38) $ (5.48) $ (3.27)
========= ========= =========
Weighted average shares outstanding.......... 2,088,146 2,889,005 3,632,311
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders'
-------------------- Paid-in Accumulated Equity
Shares Par Value Capital Deficit (Deficit)
--------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Initial investment at
incorporation on
January 1, 1996........ 1,332,800 $14 $ (7) $ -- $ 7
Additional shares issued
in connection with
initial
capitalization......... 360,000 4 21 -- 25
Issuance of common
stock:
Contribution of common
stock to capital..... (250,000) (2) 2 -- --
Outsiders by private
placement dated May
8, 1996.............. 378,000 4 101 -- 105
Outsiders by private
placement dated
October 22, 1996..... 380,000 4 756 -- 760
Employees in lieu of
payment for
services............. 242,500 2 91 -- 93
Consultants in lieu of
payment for
services............. 177,000 2 28 -- 30
Options exercised..... 75,000 -- 2 -- 2
Options granted to
consultants............ -- -- 50 -- 50
Net loss................ -- -- -- (785) (785)
--------- --- ------- -------- --------
Balance at December 31,
1996................... 2,695,300 28 1,044 (785) 287
Options exercised....... 104,000 -- 2 -- 2
Conversion of 10%
Subordinated
Convertible Notes
Payable................ 127,750 1 254 -- 255
Issuance of common stock
in connection with
acquisitions........... 559,330 6 3,211 -- 3,217
Warrants related to 8%
Notes Payable dated
February 24, 1997...... -- -- 129 -- 129
Warrants related to 12
3/4% Senior Notes
Payable dated November
12, 1997............... -- -- 6,091 -- 6,091
Options granted to
consultants............ -- -- 180 -- 180
Options granted to
employees.............. -- -- 778 -- 778
Net loss................ -- -- -- (15,821) (15,821)
--------- --- ------- -------- --------
Balance at December 31,
1997................... 3,486,380 35 11,689 (16,606) (4,882)
Options exercised....... 204,792 2 104 -- 106
Options granted to
employees.............. -- -- 47 -- 47
Issuance of common stock
to consultant in lieu
of payment for
services............... 2,500 -- 14 -- 14
Net loss................ -- -- -- (11,877) (11,877)
--------- --- ------- -------- --------
Balance at December 31,
1998................... 3,693,672 $37 $11,854 $(28,483) $(16,592)
========= === ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
----- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(785) $(15,821) $(11,877)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation...................................... -- 273 2,835
Amortization of goodwill and intangibles.......... -- 306 2,490
Amortization of debt issuance costs and debt
discount......................................... -- 545 2,994
Provision for doubtful accounts................... -- 32 216
Deferred income taxes............................. (522) 522 --
Write-off of deferred offering costs.............. -- 377 --
Compensation expense for issuance of common stock
and options...................................... 173 958 47
Non-cash portion of non-recurring charges......... -- 8,000 292
Changes in operating assets and liabilities, net of
effects from acquisitions of businesses:
Accounts receivable............................... -- (576) (1,921)
Prepaid expenses and other current assets......... (13) (68) (333)
Other assets...................................... (7) (64) (293)
Accounts payable.................................. 313 (351) 949
Accrued expenses.................................. 663 1,716 (1,124)
Other long-term liabilities....................... -- 3 307
----- -------- --------
Cash flows used in operating activities........... (178) (4,148) (5,346)
----- -------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired.... -- (53,308) --
Additions to property and equipment................. (7) (454) (7,355)
Deferred acquisition costs.......................... -- -- (493)
----- -------- --------
Cash flows used in investing activities........... (7) (53,762) (7,848)
----- -------- --------
Cash flows from financing activities:
Advances on line of credit, net..................... -- -- 2,057
Proceeds from issuance of long-term debt and
warrants........................................... -- 75,755 3,306
Payments of long-term debt.......................... -- (2,772) (676)
Proceeds from issuance of common stock.............. 899 2 106
Deferred offering costs............................. (377) -- (596)
Deferred debt issuance costs........................ -- (5,845) (266)
----- -------- --------
Cash flows provided by financing activities....... 522 67,140 3,931
----- -------- --------
Net increase (decrease) in cash and cash
equivalents......................................... 337 9,230 (9,335)
Cash and cash equivalents at beginning of period..... -- 337 9,567
----- -------- --------
Cash and cash equivalents at end of period........... $ 337 $ 9,567 $ 232
===== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.......................................... $ -- $ 72 $ 9,917
===== ======== ========
Taxes............................................. $ -- $ 1 $ 8
===== ======== ========
Non-cash investing and financing transactions:
Conversion of 10% Subordinated Convertible Notes
Payable............................................ $ -- $ 256 $ --
===== ======== ========
Issuance of common stock in connection with
acquisitions....................................... $ -- $ 3,217 $ --
===== ======== ========
Issuance of warrants to the initial purchaser of
the Senior Notes and included in deferred debt
issuance costs..................................... $ -- $ 1,740 $ --
===== ======== ========
Acquisitions of businesses:
Assets acquired................................... $ -- $ 66,523 $ --
Liabilities assumed and issued.................... -- (9,096) --
Common stock issued............................... -- (3,217) --
----- -------- --------
Cash paid......................................... -- 54,210 --
Less cash acquired................................ -- (902) --
----- -------- --------
Net cash paid for acquisitions of businesses.... $ -- $ 53,308 $ --
===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
1996, 1997 AND 1998
(Amounts in Thousands, Except Share and Per Share Data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
VIALOG Corporation ("VIALOG") was incorporated in Massachusetts on January
1, 1996 as Interplay Corporation. In January 1997, the Company changed its
name to VIALOG Corporation. For purposes of these Notes to Consolidated
Financial Statements, "VIALOG" means VIALOG Corporation on a stand alone basis
prior to November 12, 1997 and VIALOG Corporation and its consolidated
subsidiaries on and after November 12, 1997. VIALOG was formed to create a
national provider of conferencing services, consisting primarily of operator-
attended and operator-on-demand audioconferencing, as well as video and
Internet 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
The consolidated financial statements include the accounts of VIALOG and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(c) Management Estimates
Management of VIALOG has made a number of estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
(d) Revenue Recognition
Revenue from conference calls is recognized upon completion of the call.
Revenue from services is recognized upon performance of the service.
(e) Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and short-term investments
with original maturities of three months or less.
(f) Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment is provided on a straight-line basis over the estimated useful lives
of the respective assets. The estimated useful lives are as follows: three to
ten years for office furniture, fixtures and equipment, five to ten years for
conferencing equipment, and three to seven years for computer equipment.
Capitalized lease equipment and leasehold improvements are amortized over the
lives of the leases, ranging from three to ten years.
VIALOG capitalizes costs related to software obtained for internal use.
These costs are included in computer equipment and amortized accordingly.
During 1996, 1997 and 1998, these costs were not significant.
54
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(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.
(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. Research and development costs for the year
ended December 31, 1998 were approximately $961,000.
(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 14 "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 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
55
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
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, 1997 and 1998, common stock equivalents of 249,813,
896,900 and 1,994,209 for the years ended December 31, 1996, 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 impact 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 8 "Long-Term Debt").
The acquisitions were accounted for using the purchase method.
The following table sets forth for each Acquired Company the consideration
paid its common stockholders in cash and in shares of common stock of VIALOG.
<TABLE>
<CAPTION>
Cash(1) Shares of
($000's) Common Stock
-------- ------------
<S> <C> <C>
Access................................................. $19,000 --
CSI.................................................... 18,675 --
Call Points............................................ 8,000 21,000
TCC.................................................... 3,645 166,156
Americo................................................ 1,260 267,826
CDC.................................................... 2,400 104,348
------- -------
Total Consideration.................................... $52,980 559,330
======= =======
</TABLE>
- --------
(1) Excludes tax reimbursements of approximately $925,000 to certain
stockholders of certain of the Acquired Companies.
56
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
The total purchase price of the Acquired Companies was $57.6 million and
consisted of approximately $53.0 million in cash paid to the stockholders of
the Acquired Companies (the "Sellers"), $500,000 of acquisition costs, the
issuance of 559,330 shares of common stock to the Sellers and approximately
$925,000 related to tax reimbursements. The shares of common stock were valued
at $5.75 per share which represents the estimated fair market value based on
arms-length negotiations with the former stockholders of the Acquired
Companies. The total purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Working capital deficit.......................................... $ (618)
Property and equipment, net...................................... 7,356
Goodwill and intangible assets................................... 44,697
Purchased in-process research and development.................... 8,000
Other assets..................................................... 200
Long-term liabilities............................................ (2,014)
-------
$57,621
=======
</TABLE>
The purchase price exceeded the fair value of the net assets acquired by
$52.7 million. The excess was allocated to goodwill and other intangibles
which are being amortized over periods from 6 to 20 years. In addition, at the
time of the acquisitions, VIALOG repaid $2.2 million of long-term debt of the
Acquired Companies.
In connection with the acquisitions, VIALOG recorded a non-recurring charge
of $8.0 million related to the fair value of purchased in-process research and
development. The $8.0 million write-off of purchased research and development
noted above represents the amount of the purchase price of the acquisitions
allocated to incomplete research and development projects. This allocation
represents the estimated fair value based on risk-adjusted cash flows related
to the incomplete products. The acquired in-process research and development
represents engineering and test activities associated with the introduction of
new enhanced services and information systems. The Acquired Companies are
working on projects that are essential to offering high quality, secure and
reliable products including unattended audioconferencing, video and Internet
conferencing, integrated voice response and broadcast fax services. Since
these had not yet reached technological feasibility and have no alternative
future uses, there can be no guarantee as to the achievability of the projects
or the ascribed values. Accordingly, these costs were expensed as of the date
of the acquisition.
The operating results of the Acquired Companies have been included in the
Consolidated Statements 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
57
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
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, except for Americo, 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, 1998 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 Net
at Provision Deductions Balance
Beginning Charged to From at End
of Period Operations Allowance of Period
--------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1998......... $ 32 $216 $(84) $164
Year Ended December 31, 1997......... $ -- $ 32 $ -- $ 32
Year Ended December 31, 1996......... $ -- $ -- $ -- $ --
</TABLE>
58
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
------ -------
<S> <C> <C> <C>
Office furniture and equipment............................. $ 869 $ 1,392
Conferencing equipment..................................... 5,163 9,926
Computer equipment......................................... 697 2,672
Capitalized lease equipment................................ 898 747
Leasehold improvements..................................... 190 343
------ -------
7,817 15,080
Less: accumulated depreciation............................. (273) (3,093)
------ -------
$7,544 $11,987
====== =======
</TABLE>
(6) GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
------- -------
<S> <C> <C> <C>
Goodwill.................................................. $41,457 $41,457
Developed technology...................................... 1,930 1,930
Assembled workforce....................................... 1,310 1,088
------- -------
44,697 44,475
Less: accumulated amortization............................ (306) (2,796)
------- -------
$44,391 $41,679
======= =======
</TABLE>
(7) REVOLVING LINE OF CREDIT
On October 6, 1998, VIALOG executed a two year, $15.0 million credit
facility (the "Credit Facility") with Coast Business Credit, a division of
Southern Pacific Bank. The Credit Facility provides for (i) a term loan in the
principal amount of $1.5 million, (ii) a term loan of up to 80% of the
purchase price of new and used equipment, not to exceed $4.0 million, and
(iii) a revolving loan based on a percentage of eligible accounts receivable.
Loans under the Credit Facility bear interest at the higher of 7% or the Prime
Rate plus 1 1/2%, and interest is based on a minimum outstanding principal
balance of the greater of $5.0 million or 33% of the available Credit
Facility. The Credit Facility includes certain early termination fees. The
Credit Facility is secured by the assets of each of the Acquired Companies and
the assets of VIALOG Corporation, excluding the ownership interest in each of
the Acquired Companies. VIALOG is required to maintain compliance with certain
financial ratios and tests, including a debt service coverage ratio and
minimum net worth level. VIALOG is in compliance with all covenants contained
in the Credit Facility at December 31, 1998.
The average amount of short-term borrowings outstanding during 1998 was
approximately $2.1 million with a maximum outstanding of approximately $2.7
million. The weighted average interest rate on December 31, 1998 and for the
year then ended was 7.98%.
59
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
(8) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
------- -------
(In thousands)
<S> <C> <C> <C>
12 3/4% Senior Notes Payable, due 2001, net of unamortized
discount of $4,203 and $3,115, respectively ............. $70,797 $71,885
Term loans................................................ -- 3,030
Capitalized lease obligations............................. 1,044 669
Other long-term debt...................................... 95 70
------- -------
Total long-term debt...................................... 71,936 75,654
Less current portion...................................... 397 1,465
------- -------
Total long-term debt, less current portion................ $71,539 $74,189
======= =======
</TABLE>
Notes Payable
On February 24, 1997, VIALOG issued $500,000 of 8% promissory notes due on
the earlier of (a) ten days following the closing of an initial public
offering or (b) one year from their issue date. Warrants to purchase 111,118
common shares at an exercise price of $4.50 were issued in conjunction with
the promissory notes. The value of the warrants was determined using the
minimum value method. The value of the warrants at the date of issuance
totaled $129,000 and was amortized as interest expense. The warrants may be
exercised between November, 1997 and February, 1999. In November, 1997, the
promissory notes were repaid, including accrued interest, from the proceeds of
the Private Placement, which was completed on November 12, 1997. In
conjunction with the Private Placement, the warrants issued to the note
holders were increased to a total of 153,378 in accordance with anti-dilution
provisions contained in the promissory notes.
Convertible Bridge Facility
In October, 1997, VIALOG completed a private placement to certain of its
existing investors of $255,500 of 10% subordinated convertible promissory
notes due on the earlier of (a) five days after the closing of a sale of
VIALOG's equity securities or debt securities for an aggregate price of $50.0
million or more, or (b) January 1, 1998. The notes were convertible at the
option of the holders at any time prior to and including the due date into
such number of shares of VIALOG's common stock as determined by dividing the
aggregate unpaid principal amount of the notes by the conversion price of
$2.00 per share, subject to adjustment pursuant to the terms of the notes. The
conversion price of $2.00 per share was equal to the estimated fair market
value of VIALOG's common stock on the date of issuance. In November, 1997, the
notes were converted into 127,750 shares of VIALOG's common stock.
Senior Notes Payable
On November 12, 1997, VIALOG completed a Private Placement of $75.0 million
of Senior Notes, Series A. The Senior Notes bear interest at 12 3/4% per
annum, payable semi-annually on May 15 and November 15 of each year,
commencing May 15, 1998. The Senior Notes are guaranteed by the Acquired
Companies (see Note 18) 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
60
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
"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, 1998. 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 (the "Exchange Offer") Senior Notes,
Series B for Senior Notes, Series A. The form and terms of the Senior Notes,
Series B are identical in all material respects to the form and terms of the
Senior Notes, Series A except for certain transfer restrictions and
registration rights relating to the Senior Notes, Series A. The Exchange Offer
terminated on March 26, 1998 with all of the Senior Notes, Series A being
exchanged by investors for Senior Notes, Series B.
Interest Income (Expense), Net
Interest income (expense), net consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
-------------- ---------
(In thousands)
<S> <C> <C> <C>
Interest income.................................. $ 1 $ 56 $ 233
Interest expense................................. -- (1,922) (12,862)
---- -------- ---------
Interest income (expense), net................. $ 1 $ (1,866) $ (12,629)
==== ======== =========
</TABLE>
61
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
(9) ACCRUED EXPENSES
Accrued expenses consist primarily of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Accrued interest.............................................. $1,310 $1,215
Accrued payroll and related costs............................. 1,119 692
Accrued acquisition and financing related costs............... 1,550 1,122
Accrued other................................................. 1,746 1,572
------ ------
$5,725 $4,601
====== ======
</TABLE>
(10) 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
------------------------ -------------- ----------------
(in thousands)
<S> <C> <C>
1999....................................... $430 $1,170
2000....................................... 236 1,199
2001....................................... 92 1,054
2002....................................... 1 1,127
2003....................................... -- 1,137
Thereafter................................. -- 1,469
---- ------
Total minimum lease payments............... 759 $7,156
======
Less: Amount representing interest on
capital leases............................ 90
----
Present value of minimum lease payments at
December 31, 1998......................... $669
====
</TABLE>
Total operating lease rental expense for VIALOG for the years ended December
31, 1996, 1997 and 1998 were $0, $198,000 and $1.5 million, respectively.
(11) NON-RECURRING CHARGE
The results for the year ended December 31, 1998 include a non-recurring
charge of $1.2 million related to the consolidation of the Atlanta and
Montgomery Operating Centers. The consolidation plan calls for the Atlanta
Center to remain staffed through the early part of the first quarter of 1999,
after which time the Atlanta facility will be vacated and its traffic managed
by operators in the Montgomery Center as well as other Operating Centers. The
Company anticipates relocating its Montgomery Center into a new leased
facility by March, 1999. The non-recurring charge includes (i) $373,000
associated with personnel reductions of approximately 45 operator, customer
service, technical support and general and administrative positions in the
Atlanta Center, (ii) $400,000 associated with lease costs for the Atlanta
facility from the exit date through the lease termination date (net of
estimated sublease income), (iii) $135,000 associated with legal fees and
other exit costs, (iv) $77,000 associated with the disposal of furniture and
equipment in both the Atlanta and Montgomery Centers, and (v) $215,000
associated with the impairment of intangible assets (assembled workforce) in
the Atlanta Center. Approximately $324,000 had been paid as of December 31,
1998.
62
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
(12) PROVISION FOR INCOME TAXES
Income tax (expense) benefit for the years ended December 31, 1996, 1997 and
1998 consists of the following:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
(In thousands)
<S> <C> <C> <C>
December 31, 1996:
Federal............................................... $ -- $ 398 $ 398
State................................................. -- 124 124
----- ----- -----
$ -- $ 522 $ 522
===== ===== =====
December 31, 1997:
Federal............................................... $ -- $(398) $(398)
State................................................. -- (124) (124)
----- ----- -----
$ -- $(522) $(522)
===== ===== =====
December 31, 1998:
Federal............................................... $ -- $ -- $ --
State................................................. (125) 99 (26)
----- ----- -----
$(125) $ 99 $ (26)
===== ===== =====
</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>
Year Ended December 31,
-------------------------
1996 1997 1998
--------------- --------
<S> <C> <C> <C>
Computed "expected" tax benefit.................... $ 445 $ 5,202 $ 4,029
State and local income taxes, net of federal tax
benefit........................................... 82 918 754
Nondeductible amounts and other differences........ (5) (167) (186)
Change in valuation allowance for deferred taxes
allocated to income tax expense................... -- (6,469) (4,772)
Other.............................................. -- (6) 149
----- -------- --------
Tax benefit (expense)............................ $ 522 $ (522) $ (26)
===== ======== ========
</TABLE>
63
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
The tax effects of temporary differences that give rise to significant
portion of deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
--------------- ---------
(In thousands)
<S> <C> <C> <C>
Deferred tax asset:
Organizational expenditures and start-up costs... $ 522 $ 2,029 1,795
Accrual to cash accounting adjustment............ -- (162) (126)
Purchased in-process research and development
amortized for tax purposes over 15 years........ -- 3,040 3,031
Net operating loss carry forwards................ -- 1,563 6,198
Capital loss and charitable contribution carry
forwards........................................ -- 2 3
Property and equipment........................... -- (92) (441)
Bad debts........................................ -- 24 66
Original issue discount amortization............. -- 13 96
Non-recurring charge............................. -- -- 246
Deferred compensation............................ -- -- 409
Other............................................ -- 52 63
Valuation allowance.............................. -- (6,469) (11,241)
------ -------- ---------
Net deferred tax asset......................... $ 522 $ -- $ 99
====== ======== =========
</TABLE>
VIALOG had net operating loss carryforwards of $0, $3.9 million and $13.1
million at December 31, 1996, 1997 and 1998, respectively, of which $3.9
million expires in 2013 and $13.1 million expires in 2018. Utilization of the
net operating losses may be subject to an annual limitation provided by change
in ownership provisions of Section 382 of the Internal Revenue Code of 1986
and similar state provisions.
In assessing the realizability of deferred tax assets, VIALOG considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Based on management's projections for future
taxable income, a valuation allowance has been established for the deferred
tax assets.
In accordance with FAS 109, the accounting for the tax benefits of acquired
deductible temporary differences, which are not recognized at the acquisition
date because a valuation allowance is established, and are recognized
subsequent to the Acquisitions will be applied first to reduce to zero any
goodwill and other noncurrent intangible assets related to the acquisitions.
Any remaining benefits would be recognized as a reduction of income tax
expense. As of December 31, 1998, $144,000 of the Company's net operating loss
carryforward deferred tax asset of $6.2 million pertains to the Acquired
Companies and $2,000 of the Company's $3,000 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.
(13) 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.
64
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
(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 8 "Long-Term Debt").
(14) 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 3,250,000 shares as of December 31, 1997 and 1998. Shares of common
stock attributable to awards which have expired, terminated or been canceled
or forfeited are available for issuance or use in connection with future
awards.
The Plan will remain in effect until February 14, 2006 unless terminated
earlier by the Board of Directors. The Plan may be amended by the Board of
Directors without the consent of the stockholders of VIALOG, except that any
amendment, although effective when made, will be subject to stockholder
approval if required by any Federal or state law or regulation by the rules of
any stock exchange or automated quotation system on which the common stock may
then be listed or quoted.
65
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
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
Cancelled........................................ (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
Cancelled........................................ (412,580) 1.06
---------- -----
Options outstanding at December 31, 1997........... 1,342,401 $2.40
Granted.......................................... 823,175 6.60
Exercised........................................ (215,334) 0.98
Cancelled........................................ (354,680) 4.96
---------- -----
Options outstanding at December 31, 1998........... $1,595,562 $4.19
========== =====
</TABLE>
The options generally vest in equal quarterly installments over 3 years and
have a 10 year term. At December 31, 1996, 1997 and 1998, 75,000, 467,771, and
551,704 options, respectively, were exercisable at weighted average exercise
prices of $.2775, $1.03, and $1.79 per share, respectively. At December 31,
1998, there were 835,606 additional shares available for grant under the Plan.
The following is a summary of options outstanding and exercisable at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Number Weighted Average Number
Range of Outstanding Weighted Average Remaining Exercisable Weighted Average
Exercise Prices At 12/31/98 Exercise Price Contractual Life At 12/31/98 Exercise Price
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.025-$0.278 319,330 $0.15 7.2 years 272,740 $0.13
$2.00 375,000 2.00 8.6 188,448 2.00
$5.75 655,182 5.75 8.9 68,616 5.75
$7.00-$10.00 246,050 8.60 9.4 21,900 8.20
--------- -------
1,595,562 4.19 551,704 1.79
========= =======
</TABLE>
In 1996, VIALOG granted a total of 111,112 options to consultants.
Compensation expense of $50,000 has been recorded in connection with these
transactions in 1996. During 1997, modifications were made to the vesting and
expiration periods of certain outstanding options. Compensation expense of
$958,000 has been recorded in 1997 in connection with these modifications.
VIALOG applies APB Opinion No. 25 accounting for stock issued to employees
in accounting for its Plan and, accordingly, compensation cost is only
recognized in the financial statements for stock options granted to employees
when the fair value on the grant date exceeds the exercise price. Had VIALOG
determined compensation cost based on the fair value at grant date for its
stock options under SFAS No. 123, its net loss would have been increased to
the pro forma amounts indicated below:
66
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1996 1997 1998
------ -------- --------
<S> <C> <C> <C>
Net loss
As reported.................................... $ (785) $(15,821) $(11,877)
Pro forma...................................... $ (800) $(15,901) $(12,588)
Loss per share
As reported.................................... $(0.38) $ (5.48) $ (3.27)
Pro forma...................................... $(0.38) $ (5.50) $ (3.47)
</TABLE>
The per share weighted-average fair value of stock options granted during
1996, 1997 and 1998, respectively, were $.135, $1.00, and $4.40 for ISOs and
$.37, $1.30, and $6.42 for NQSOs on the date of grant. The pro forma amounts
were determined using the Black-Scholes Valuation Model with the following key
assumptions; (i) a 75% volatility factor for all periods initially based on
the Company's average trading price since the IPO, as well as those of
comparable companies; (ii) no dividend yield; (iii) a discount rate equal to
the rates available on U.S. Treasury Strip (zero coupon) bonds on the grant
dates of 6.1%, 5.88% and 4.45% in 1996, 1997 and 1998, respectively, and (iv)
an average option life of five years for all periods.
(b) VIALOG Retirement Plan
VIALOG maintains a defined contribution retirement plan (the "VIALOG Plan")
under Section 401(k) of the Internal Revenue Code which is available to all
eligible employees. The VIALOG Plan provides various alternative investment
funds in which the employee may elect to contribute pre-tax savings on a tax
deferred basis. Employee contributions to the VIALOG Plan vest with the
employee immediately.
(c) Access Retirement Plan
Until December 31, 1997, Access, one of the Acquired Companies, maintained a
defined contribution retirement plan (the "Access Plan") under Section 401(k)
of the Internal Revenue Code which covered all eligible employees. On January
1, 1998, the Access Plan merged with the VIALOG Plan.
(d) 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.
(15) RELATED PARTY TRANSACTIONS
The following summarizes the significant related party transactions:
(a) During 1997 and 1998, VIALOG paid approximately $1.8 million and
$845,000, respectively, for legal fees to a firm having a member who is
also a director of VIALOG.
(b) For certain months during the years ended December 31, 1997 and 1998,
one of VIALOG's stockholders provided consulting services to VIALOG for a
monthly fee of $10,000.
(c) TCC provides teleconferencing services to customers of a company
owned by the spouse of a stockholder of VIALOG.
(d) VIALOG has implemented a policy whereby neither VIALOG nor any
subsidiary (which includes the Acquired Companies) will enter into
contracts or business arrangements with persons or entities owned in whole
or in part by officers or directors of VIALOG or any subsidiary except on
an arms-length basis and with the approval of VIALOG's Board of Directors.
VIALOG's bylaws require that any approval must be by a majority of the
independent directors then in office who have no interest in such contract
or transaction.
67
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
(16) LITIGATION
A former employee of CSI, one of the Acquired Companies, has claimed in
writing that he may be entitled to up to five percent of the stock of CSI,
based on an unsigned paper outlining possible employment terms. Based on the
$18.7 million consideration paid to CSI's stockholders upon the consummation
of the acquisition of CSI by VIALOG Corporation, the value of a five percent
equity interest in CSI would be approximately $934,000. CSI's position is that
the only agreements with such employee were set forth in two successive
executed employment agreements, each of which had a specific provision that
such agreement was inclusive as to the terms of employment. VIALOG and the
former stockholders of CSI believe that such claim is without merit.
(17) SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION
The 12 3/4% Senior Notes due November 15, 2001, in the aggregate principal
amount of $75.0 million, are fully and unconditionally guaranteed, on a joint
and several basis, by all of the Company's subsidiaries. Each of the
guarantors is a wholly-owned subsidiary of the Company. Summarized financial
information of the Company and its subsidiaries is presented below as of and
for the years ended December 31, 1997 and 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.
68
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
<TABLE>
<CAPTION>
VIALOG Call
Corp. Access CSI Points TCC Americo CDC Eliminations Consolidated
------- ------- ------- ------- ------ ------- ------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet
Information as of
December 31, 1997
Total current assets.... $11,799 $ 725 $ 431 $ 1,506 $ 556 $ 5 $ 488 $ -- $ 15,510
Property and equipment,
net.................... 70 3,306 961 1,617 883 611 96 -- 7,544
Investment in
subsidiaries........... 57,121 -- -- -- -- -- -- (57,121) --
Goodwill and intangible
assets, net............ -- 15,899 15,202 3,872 3,945 2,970 2,503 44,391
Other assets............ 7,430 34 86 -- 12 73 3 -- 7,638
------- ------- ------- ------- ------ ------ ------ -------- --------
Total assets........... $76,420 $19,964 $16,680 $ 6,995 $5,396 $3,659 $3,090 $(57,121) $ 75,083
======= ======= ======= ======= ====== ====== ====== ======== ========
Current liabilities..... $ 3,145 $ 1,976 $ 471 $ 824 $ 680 $1,038 $ 117 $ -- $ 8,251
Long-term debt.......... 70,797 24 449 -- 195 74 -- -- 71,539
Other liabilities....... -- 155 -- -- -- -- 20 -- 175
Stockholders' equity
(deficit).............. 2,478 17,809 15,760 6,171 4,521 2,547 2,953 (57,121) (4,882)
------- ------- ------- ------- ------ ------ ------ -------- --------
Total liabilities and
stockholders' equity
(deficit)............. $76,420 $19,964 $16,680 $ 6,995 $5,396 $3,659 $3,090 $(57,121) $ 75,083
======= ======= ======= ======= ====== ====== ====== ======== ========
Statement of Operations
Information
for the Year Ended
December 31, 1997(1)
Net revenues............ $ -- $ 1,620 $ 854 $ 1,142 $ 567 $ 290 $ 353 $ (10) $ 4,816
Cost of revenues,
excluding
Depreciation........... -- 709 322 806 279 212 174 (10) 2,492
Selling, general and
administrative
Expenses............... 6,117 403 93 159 190 134 82 -- 7,178
Depreciation expense.... 10 80 60 79 27 9 8 -- 273
Amortization of goodwill
and Intangibles........ -- 103 108 33 26 20 16 -- 306
Write-off of in-process
research and
Development............ -- 2,200 3,400 2,000 120 160 120 -- 8,000
------- ------- ------- ------- ------ ------ ------ -------- --------
Operating loss......... (6,127) (1,875) (3,129) (1,935) (75) (245) (47) -- (13,433)
Interest income
(expense), net......... (1,828) (16) (12) 2 (4) (8) -- -- (1,866)
------- ------- ------- ------- ------ ------ ------ -------- --------
Loss before taxes...... (7,955) (1,891) (3,141) (1,933) (79) (253) (47) -- (15,299)
Income tax expense...... (522) -- -- -- -- -- -- -- (522)
------- ------- ------- ------- ------ ------ ------ -------- --------
Net loss............... $(8,477) $(1,891) $(3,141) $(1,933) $ (79) $ (253) $ (47) $ -- $(15,821)
======= ======= ======= ======= ====== ====== ====== ======== ========
Cash Flow Information
for the
Year Ended December 31,
1997(1)
Cash flows provided by
(used in) operating
activities............. $(7,072) $ 1,663 $ 407 $ 320 $ 65 $ 264 $ 205 $ -- $ (4,148)
Cash flows provided by
(used in) investing
activities............. (54,281) 192 90 169 56 (8) 20 -- (53,762)
Cash flows provided by
(used in) financing
activities............. 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
======= ======= ======= ======= ====== ====== ====== ======== ========
Balance Sheet
Information as of
December 31, 1998
Total current assets.... $(3,873) $ 4,845 $ 2,492 $ 3,843 $1,620 $ (746) $ 628 $ -- $ 8,809
Property and equipment,
net.................... 561 5,914 1,642 2,054 994 605 217 -- 11,987
Investment in
subsidiaries........... 57,121 -- -- -- -- -- -- (57,121) --
Goodwill and intangible
assets, net............ -- 15,021 14,120 3,617 3,738 2,812 2,371 -- 41,679
Other assets............ 6,351 260 79 -- 27 66 8 -- 6,791
------- ------- ------- ------- ------ ------ ------ -------- --------
Total assets............ $60,160 $26,040 $18,333 $ 9,514 $6,379 $2,737 $3,224 $(57,121) $ 69,266
======= ======= ======= ======= ====== ====== ====== ======== ========
Current liabilities..... $ 5,695 $ 2,052 $ 1,055 $ 1,416 $ 550 $ 337 $ 82 $ -- $ 11,187
Long-term debt,
excluding current
portion................ 73,814 8 209 -- 88 70 -- -- 74,189
Other liabilities....... -- 187 264 -- -- -- 31 -- 482
Stockholders' equity
(deficit).............. (19,349) 23,793 16,805 8,098 5,741 2,330 3,111 (57,121) (16,592)
------- ------- ------- ------- ------ ------ ------ -------- --------
Total liabilities and
stockholders' equity
(deficit).............. $60,160 $26,040 $18,333 $ 9,514 $6,379 $2,737 $3,224 $(57,121) $ 69,266
======= ======= ======= ======= ====== ====== ====== ======== ========
</TABLE>
- -------
1) Represents operating results of the Acquired Companies from the date of
Acquisition on November 12, 1997
69
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
<TABLE>
<CAPTION>
VIALOG Call
Corp. Access CSI Points TCC Americo CDC Eliminations Consolidated
-------- ------- ------ ------- ------ ------- ------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Information for the Year
Ended December 31, 1998
Net revenues............. $ -- $18,361 $7,594 $10,144 $5,936 $2,824 $2,682 $(721) $ 46,820
Cost of revenues,
excluding depreciation.. 3 8,506 3,225 6,749 3,189 1,712 1,658 (721) 24,321
Selling, general and
administrative
expenses................ 9,972 1,318 679 626 967 1,001 633 -- 15,196
Depreciation expense..... 81 1,458 413 450 252 115 66 -- 2,835
Amortization of goodwill
and intangibles......... -- 881 865 253 204 156 131 -- 2,490
Non-recurring charge..... -- -- 1,200 -- -- -- -- -- 1,200
-------- ------- ------ ------- ------ ------ ------ ----- --------
Operating income
(loss)................. (10,056) 6,198 1,212 2,066 1,324 (160) 194 -- 778
Interest income
(expense), net.......... (12,521) 8 (63) -- (35) (25) 7 -- (12,629)
-------- ------- ------ ------- ------ ------ ------ ----- --------
Income (loss) before
income taxes........... (22,577) 6,206 1,149 2,066 1,289 (185) 201 -- (11,851)
Income tax expense -- (26) -- -- -- -- -- -- (26)
-------- ------- ------ ------- ------ ------ ------ ----- --------
Net income (loss) $(22,577) $ 6,180 $1,149 $ 2,066 $1,289 $ (185) $ 201 $ -- $(11,877)
======== ======= ====== ======= ====== ====== ====== ===== ========
Cash Flow Information for
the Year Ended December
31, 1998
Cash flows provided by
(used in) operating
activities.............. $(11,980) $ 3,992 $1,525 $ 459 $ 459 $ 98 $ 29 $ -- $ (5,346)
Cash flows used in
investing activities.... (1,065) (4,066) (1,171) (887) (363) (109) (187) -- (7,848)
Cash flows used in
financing activities.... 4,739 (366) (244) -- (142) (56) -- -- 3,931
-------- ------- ------ ------- ------ ------ ------ ----- --------
Net increase (decrease)
in cash and cash
equivalents............. (8,306) (440) 110 (428) (46) (67) (158) -- (9,335)
Cash and cash equivalents
at the beginning of
period.................. 8,396 440 (49) 489 46 67 178 -- 9,567
-------- ------- ------ ------- ------ ------ ------ ----- --------
Cash and cash equivalents
at the end of period.... $ 90 $ -- $ 61 $ 61 $ -- $ -- $ 20 $ -- $ 232
======== ======= ====== ======= ====== ====== ====== ===== ========
</TABLE>
(18) SUBSEQUENT EVENTS
(a) Initial Public Offering
On February 10, 1999, the Company completed an initial public offering for
the sale of 4,600,000 shares of common stock. The net proceeds from this
offering, after deducting underwriting discounts and commissions and estimated
offering expenses were approximately $32.7 million. Of the net proceeds,
approximately $29.1 million was used to acquire three private conference
service bureaus (discussed below). In addition, approximately $305,000 of
indebtedness was paid to the former stockholder of one of the acquisitions.
The remaining net proceeds of $3.3 million will be used for working capital
and general corporate purposes.
(b) Acquisitions
On February 10, 1999, VIALOG acquired all of the issued and outstanding
stock of A Business Conference-Call, Inc. ("ABCC"), Conference Pros
International, Inc. ("CPI") and A Better Conference, Inc. ("ABCI"). These
acquisitions occurred contemporaneously with the closing of an initial public
offering of common stock of VIALOG. The acquisitions will be accounted for
using the purchase method of accounting.
70
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued)
The following table sets forth for each acquired company the consideration
paid its common stockholders.
<TABLE>
<CAPTION>
Cash(1)
(in thousands)
--------------
<S> <C>
ABCC....................................................... $16,226
CPI........................................................ 6,000
ABCI....................................................... 6,200
-------
Total Consideration........................................ $28,426
=======
</TABLE>
- --------
(1) Excludes tax reimbursements of approximately $267,000 to
certain stockholders of certain of the acquired companies.
The total purchase price of the acquired companies is estimated to be $29.1
million and consists of $28.4 million in cash paid to the stockholders of the
acquired companies, approximately $400,000 of acquisition costs and
approximately $267,000 related to tax reimbursements.
The operating results of the acquired companies have not been included in the
Consolidated Statement of Operations for the year ended December 31, 1998. The
unaudited pro forma consolidated historical results for the year ended December
31, 1998 assuming the acquisitions occurred at the beginning of fiscal 1998 are
as follows:
<TABLE>
<CAPTION>
Dollars in thousands
except per share data
---------------------
<S> <C>
Net revenues........................................ $59,819
Net loss............................................ $(9,300)
Net loss per share.................................. $ (1.13)
</TABLE>
The pro forma results include amortization of goodwill and intangible assets
and reductions to selling, general and administrative expenses related to
compensation and benefits that were eliminated or reduced as a result of the
acquisitions. 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 period presented, nor are they necessarily indicative of
future consolidated results.
71
<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 LLP
Washington, D.C.
July 2, 1998
72
<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.
73
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Period Period from
January 1, Period January 1,
Year Ended to April April 10, to Year Ended 1997 to
December 31, 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.
74
<PAGE>
TELEPHONE BUSINESS MEETINGS, 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 $-- $ 4 $ 715 $ 719
Disbursements........... -- -- -- (39) (39)
Net income.............. -- -- -- 445 445
----- ---- ---- ------ ------
Balance at December 31,
1994................... 1,000 -- 4 1,121 1,125
Net income.............. -- -- -- 191 191
----- ---- ---- ------ ------
Balance at April 9,
1995................... 1,000 $-- $ 4 $1,312 $1,316
===== ==== ==== ====== ======
Balance subsequent to
repurchase of 50%
interest (note 4)...... 500 $-- $660 $ -- $ 660
Net income.............. -- -- -- 212 212
----- ---- ---- ------ ------
Balance at December 31,
1995................... 500 -- 660 212 872
Distributions........... -- -- -- (475) (475)
Net income.............. -- -- -- 1,373 1,373
----- ---- ---- ------ ------
Balance at December 31,
1996................... 500 -- 660 1,110 1,770
Distributions........... -- -- -- (1,284) (1,284)
Net income.............. -- -- -- 1,075 1,075
----- ---- ---- ------ ------
Balance at November 12,
1997................... 500 $-- $660 $ 901 $1,561
===== ==== ==== ====== ======
</TABLE>
See accompanying notes to financial statements.
75
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Period Period from
January 1, Period January 1,
Year Ended to April April 10, 1995 Year Ended 1997 to
December 31, 9, to December 31, December 31, November 12,
1994 1995 1995 1996 1997
------------ ---------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ $445 $ 191 $ 212 $1,373 $ 1,075
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 269 121 375 630 823
Deferred income
taxes................ 24 -- (62) -- --
Compensation expense
for issuance of
common stock......... -- -- -- 148 402
Changes in operating
assets and
liabilities:
Trade accounts
receivable, net..... (71) (170) (108) (301) (589)
Prepaid expenses and
other current
assets.............. (58) 62 (5) (53) 146
Accounts payable and
accrued expenses.... (17) 90 22 227 711
Income taxes
payable............. -- -- -- (10) --
Deferred rent........ -- -- 93 34 --
Other non current
liabilities......... -- -- -- -- 364
---- ------ ------- ------ -------
Net cash provided by
operating
activities......... 592 294 527 2,048 2,932
---- ------ ------- ------ -------
Cash flows from
investing activities:
Additions to property
and equipment........ (560) (123) (1,227) (783) (1,704)
Restricted cash....... -- -- (105) (5) --
Other assets.......... 3 (40) 63 (7) --
---- ------ ------- ------ -------
Net cash used in
investing
activities......... (557) (163) (1,269) (795) (1,704)
---- ------ ------- ------ -------
Cash flows from
financing activities:
Proceeds from long-
term debt............ 484 2,149 -- 587 (765)
Principal repayments
of long-term debt.... (338) (626) (389) (814)
Principal repayments
of notes payable to
stockholders......... (85) -- (51) (109) 500
Principal payments
under capital lease
obligations.......... -- -- (12) (28) --
Cash portion of
consideration paid to
former stockholder... -- -- (300) -- --
Distributions to
stockholders......... (39) -- -- (475) (1,284)
---- ------ ------- ------ -------
Net cash provided by
(used in) financing
activities......... 22 1,523 (752) (839) (1,549)
---- ------ ------- ------ -------
Net increase
(decrease) in cash
and cash
equivalents.......... 57 1,654 (1,494) 414 (321)
Cash and cash
equivalents at
beginning of period.. 173 230 1,884 390 804
---- ------ ------- ------ -------
Cash and cash
equivalents at end of
period............... $230 $1,884 $ 390 $ 804 $ 483
==== ====== ======= ====== =======
Supplemental
disclosures of cash
flow information:
Cash paid during the
period for:
Interest.............. $ 49 $ 18 $ 169 $ 191 $ 108
==== ====== ======= ====== =======
Income taxes.......... $ 22 $ -- $ -- $ 10 $ --
==== ====== ======= ====== =======
Supplemental disclosure
of noncash investing
and financing
activities:
Capital lease
obligations.......... $ -- $ -- $ 120 $ -- $ --
==== ====== ======= ====== =======
Issuance of note
payable in partial
consideration to
former stockholder... $ -- $ -- $ 599 $ -- $ --
==== ====== ======= ====== =======
</TABLE>
See accompanying notes to financial statements.
76
<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.
(b) 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.
(c) Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and short-term investments
with original maturities of three months or less.
(d) 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.
(e) 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.
(f) 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.
77
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(g) 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 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.
(h) 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.
(i) Revenue Recognition
Revenue for conference calls is recognized upon completion of the call.
Revenue for services is recognized upon performance of the service.
(j) 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.
(k) 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>
78
<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
79
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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
80
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
(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%.
81
<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>
82
<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
83
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------
1995 1996
------ ------
<S> <C> <C>
ASSETS (note 3)
Current assets:
Cash and cash equivalents...................................... $ 375 $ 318
Trade account receivables, less allowance for doubtful accounts
of $5 and $10 at December 31, 1995 and December 31, 1996,
respectively (note 6)......................................... 692 801
Due from stockholder (note 4).................................. 72 --
Prepaid expenses and other current assets...................... -- 24
------ ------
Total current assets......................................... 1,139 1,143
------ ------
Property and equipment, net (notes 2 and 5)...................... 866 1,059
Other assets..................................................... 32 91
------ ------
Total assets................................................. $2,037 $2,293
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 3)................ $1,089 $ 111
Current installments of obligations under capital leases (note
5)............................................................ 141 375
Accounts payable............................................... 201 121
Accrued expenses............................................... 30 91
------ ------
Total current liabilities.................................... 1,461 698
------ ------
Long-term debt, excluding current installments (note 3).......... 43 219
Obligations under capital leases, excluding current installments
(note 5)........................................................ 173 700
------ ------
Total liabilities............................................ 1,677 1,617
------ ------
Stockholders' equity:
Common stock, $1.00 par value. Authorized 100,000 shares;
issued and outstanding 1,000 shares........................... 1 1
Additional paid-in capital..................................... 349 349
Retained earnings.............................................. 10 326
------ ------
Total stockholders' equity................................... 360 676
------ ------
Commitments and contingencies (notes 5 and 7)
Total liabilities and stockholders' equity................... $2,037 $2,293
====== ======
</TABLE>
See accompanying notes to financial statements.
84
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended December 31, Period From January 1,
------------------------ 1997 to November 12,
1994 1995 1996 1997
------ ------- --------- ----------------------
<S> <C> <C> <C> <C>
Net revenues (note 6)......... $2,331 $ 3,808 $ 5,868 $ 5,579
Cost of revenues, excluding
depreciation................. 1,256 1,617 2,438 2,052
Selling, general and
administrative expenses...... 707 905 998 831
Depreciation expense.......... 235 292 393 356
------ ------- --------- ---------
Income from operations...... 133 994 2,039 2,340
Interest expense, net......... 124 160 165 120
------ ------- --------- ---------
Net income.................. $ 9 $ 834 $ 1,874 $ 2,220
====== ======= ========= =========
Net income per share - basic
and diluted................ $ 9.00 $834.00 $1,874.00 $2,220.00
====== ======= ========= =========
Weighted average shares
outstanding................ 1,000 1,000 1,000 1,000
====== ======= ========= =========
</TABLE>
See accompanying notes to financial statements.
85
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
------------
Number Additional Total
of Par Paid-in Retained Stockholders'
Shares 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.
86
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended Period from
December 31, January 1, 1997
--------------------- to November 12,
1994 1995 1996 1997
----- ----- ------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 9 $ 834 $ 1,874 $ 2,220
Adjustments to reconcile net income to
net cash provided by operating
activities:
Loss on sale of property and
equipment........................... -- -- -- 5
Depreciation and amortization........ 235 292 393 356
Changes in operating assets and
liabilities:
Trade accounts receivable, net...... (205) (312) (109) 5
Due from stockholder................ (6) (66) 72 --
Prepaid expenses and other assets... (35) 4 (83) 36
Accounts payable and accrued
expenses........................... 55 (31) (19) 275
----- ----- ------- -------
Net cash provided by operating
activities........................ 53 721 2,128 2,897
----- ----- ------- -------
Cash flows from investing activities:
Additions to property and equipment.... (476) (225) (41) (317)
Cash proceeds from disposal of property
and equipment......................... -- -- -- 6
----- ----- ------- -------
Net cash used in investing activities.. (476) (225) (41) (311)
----- ----- ------- -------
Cash flows from financing activities:
Proceeds from borrowings on long-term
debt.................................. 652 201 -- 573
Principal repayment of long-term debt.. (100) (197) (438) (400)
Proceeds from refinancing of
obligations under capital leases...... -- -- 142 --
Principal repayment of obligations
under capital leases.................. (126) (148) (290) (338)
Distributions to stockholder........... -- -- (1,558) (2,636)
----- ----- ------- -------
Net cash provided by (used in)
financing activities............... 426 (144) (2,144) (2,801)
----- ----- ------- -------
Net increase (decrease) in cash and cash
equivalents............................ 3 352 (57) (215)
Cash and cash equivalents at beginning
of period.............................. 20 23 375 318
----- ----- ------- -------
Cash and cash equivalents at end of
period................................. $ 23 $ 375 $ 318 $ 103
===== ===== ======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest............................. $ 119 $ 162 $ 169 $ 127
===== ===== ======= =======
Noncash transaction:
Equipment purchased under capital
lease obligations................... $ 296 $ -- $ 545 $ --
===== ===== ======= =======
</TABLE>
See accompanying notes to financial statements.
87
<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.
88
<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>
89
<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.
90
<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.
91
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(c) Consulting Agreement
CSI has entered into a consulting agreement with a stockholder and former
officer of CSI. Total payments under the agreement amount to $120,000, payable
in equal monthly payments through December 1997.
(d) Dispute
A former employee of CSI has claimed that he may be entitled to 5% of the
stock of CSI based on an unsigned paper outlining possible employment terms.
CSI's position is that the only agreements with such employee were set forth
in two successive executed employment agreements, each of which had a specific
provision that such agreement was inclusive as to the terms of employment. CSI
believes that such claim is without merit.
(6) SIGNIFICANT CUSTOMERS
Two customers accounted for the following percentages of revenues and
accounts receivable:
<TABLE>
<CAPTION>
Percentage of Accounts
Percentage of Net Revenues Receivable
------------------------------ -------------------------
Period
January 1,
Year Ended 1997 to
December 31, November 12, December 31,
---------------- ------------ -------------------------
1994 1995 1996 1997 1995 1996
---- ---- ---- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Customer A.......... 14% 30% 49% 47% 47% 58%
Customer B.......... 14% 24% 21% 25% 26% 26%
</TABLE>
92
<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 1998, and the related
statements of income and retained earnings and cash flows for each of the
years in the three-year period ended December 31, 1998. 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 1998 and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 26, 1999
93
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 71 $ 153
Trade accounts receivable, less allowance for
doubtful accounts of $15 and $65, respectively.... 577 740
Prepaid expenses................................... 75 184
------ ------
Total current assets............................. 723 1,077
Property and equipment, net (notes 1 and 2).......... 538 864
Other assets......................................... 6 3
------ ------
Total assets..................................... $1,267 $1,944
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 55 $ 152
Accrued compensation and benefits.................. 231 290
Accrued expenses and other liabilities............. 3 12
Capital lease obligations-current.................. -- 6
------ ------
Total current liabilities........................ 289 460
Capital lease obligations, less current
installments........................................ -- 11
Stockholders' equity
Common stock, $0.01 par value; 100,000 shares
authorized; 1,000 shares issued and outstanding... -- --
Additional paid-in capital......................... 10 10
Retained earnings.................................. 968 1,463
------ ------
Total stockholders' equity....................... 978 1,473
------ ------
Total liabilities and stockholders' equity....... $1,267 $1,944
====== ======
</TABLE>
See accompanying notes to financial statements.
94
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net revenues.................................... $ 5,305 $ 5,709 $ 7,485
Cost of revenues, excluding depreciation........ 1,935 2,086 2,379
Selling, general and administrative expenses.... 1,120 1,231 1,816
Depreciation expense............................ 143 148 154
--------- --------- ---------
Operating income.............................. 2,107 2,244 3,136
Interest income, net............................ 14 8 3
Other, net.................................... (17) 7 6
--------- --------- ---------
Net Income...................................... 2,104 2,259 3,145
Retained earnings at beginning of year.......... 1,303 1,247 968
Less stockholder distributions.................. 2,160 2,538 2,650
--------- --------- ---------
Retained earnings at end of year................ $ 1,247 $ 968 $ 1,463
========= ========= =========
Net income per share--basic and diluted......... $2,104.00 $2,259.00 $3,145.00
========= ========= =========
Weighted average shares outstanding............. 1,000 1,000 1,000
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
95
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $2,104 $2,259 $3,145
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation......................................... 143 148 154
Loss on disposal of equipment........................ 17 -- --
Changes in operating assets and liabilities
Trade accounts receivable........................... 93 (153) (163)
Prepaid expenses.................................... (191) 233 (109)
Accounts payable and accrued expenses............... (149) 145 165
------ ------ ------
Net cash flows provided by operating activities.... 2,017 2,632 3,192
------ ------ ------
Cash flows from investing activities:
Additions to property and equipment................... (245) (49) (461)
Proceeds from sale of property and equipment.......... 15 -- --
Decrease (Increase) in other assets................... (2) (1) 3
------ ------ ------
Net cash flows used in investing activities........ (232) (50) (458)
------ ------ ------
Cash flows from financing activities:
Payments of obligations under capital leases.......... -- -- (2)
Distribution to stockholders.......................... (2,160) (2,537) (2,650)
------ ------ ------
Net cash flows used in financing activities........ (2,160) (2,537) (2,652)
------ ------ ------
Net increase (decrease) in cash and cash equivalents... (375) 45 82
Cash and cash equivalents at beginning of period....... 401 26 71
------ ------ ------
Cash and cash equivalents at end of period............. $ 26 $ 71 $ 153
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
96
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
NOTES TO FINANCIAL STATEMENTS
(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) 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.
(c) Cash and Cash Equivalents
Cash and cash equivalents includes deposits and short-term investments with
original maturities of three months or less.
(d) 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.
(e) 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 taxes on ABCC's taxable
income. Accordingly, these financial statements do not contain a provision for
income taxes.
(f) Revenue Recognition
Revenue for conference calls is recognized upon completion of the call.
Revenue for services is recognized upon performance of the service.
(g) Fair Value of Financial Statements
All financial statements are carried at amounts that approximate estimated
fair value.
(h) 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.
97
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(i) 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, 1997, and 1998, basic earnings per share were calculated
based on weighted average common shares outstanding. There were no common
stock equivalents outstanding for any periods presented; accordingly, basic
and fully diluted earnings per share are the same.
(j) Reclassifications
Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1997 1998
---- ----- -----
<S> <C> <C> <C>
Office furniture and equipment............................ $179 $ 182 $ 246
Conferencing equipment.................................... 779 811 1,170
Purchased software........................................ 7 21 21
Vehicles.................................................. 34 34 69
---- ----- -----
999 1,048 1,506
Less: accumulated depreciation and amortization......... 361 (510) (642)
---- ----- -----
Property and equipment, net........................... $638 $ 538 $ 864
==== ===== =====
</TABLE>
(3) 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, $138,803, and $160,000 in
1996, 1997, and 1998, respectively.
(4) 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
limited number of such providers, management believes that other providers
could provide similar services on comparable terms.
(5) LEASES
(b) Operating 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 under
various operating leases. Total rent expense amounted to approximately
$73,000, $95,000, and
98
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
$99,000 for the years December 31 1996, 1997, and 1998, respectively. Future
minimum lease payments under noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1999................................................................. $60,700
2000................................................................. 22,900
2001................................................................. 1,900
2002................................................................. 400
</TABLE>
(b) Capital Leases
During 1998, the Company entered into a capital lease for certain
conferencing equipment. The following is a summary of the leased property as
of December 31, 1998:
<TABLE>
<S> <C>
Conference Equipment................................................ $18,603
Less accumulated amortization....................................... (886)
-------
$17,717
=======
</TABLE>
The following is a schedule of future minimum lease payments under capital
leases and the present value of the minimum lease payments as of December 31,
1998:
<TABLE>
<S> <C>
1999................................................................ $ 7,046
2000................................................................ 7,046
2001................................................................ 5,028
Total minimum lease payments........................................ 19,120
Less amount representing interest at 7.5%........................... (2,210)
-------
Present value of minimum lease payments............................. 16,910
Less current installments........................................... (5,758)
-------
$11,152
=======
</TABLE>
(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.
(7) COMMITMENTS AND CONTINGENCIES
(a) Purchase Agreement
In February, 1998, the Company entered into an agreement with a long
distance telephone provider. Under the terms of the agreement, ABCC is
committed to minimum monthly purchases of $25,000 for a term of two years.
99
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(b) Service Agreement
During 1998, ABCC entered into service agreements for its digital network.
The total expense under these agreements during 1998 was $18,000. Future
payments under these noncancelable agreements are as follows:
<TABLE>
<S> <C>
1999................................................................. $34,900
2000................................................................. 34,900
2001................................................................. 16,600
</TABLE>
(8) SUBSEQUENT EVENT-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. Effective February 10, 1999, the merger transaction was completed
and ABCC became a wholly-owned subsidiary of VIALOG Corporation.
100
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Company.
Directors and Executive Officers
The following table sets forth certain information with regard to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Glenn D. Bolduc(1).......... 46 Chief Executive Officer, President and
Director,
President--Oradell (NJ) Center, Montgomery
(AL) Center,
Atlanta (GA) Center and Reston (VA) Center
John J. Dion................ 40 Vice President--Finance and Treasurer
Vice President--Marketing and Business
Robert F. Moore............. 44 Development
Gary G. Vilardi............. 44 Vice President--Sales
John R. Williams(2)......... 38 Vice President--Operations
Michael D. Shepherd......... 35 Vice President--Wholesale Sales
Clarissa A. Peterson........ 35 Vice President--Human Resources
C. Raymond Marvin........... 60 Vice President
Joanna M. Jacobson(1)(3).... 39 Director
David L. Lougee(1)(3)....... 59 Director
Richard E. Hamermesh........ 51 Director
Patti R. Bisbano............ 54 Director and President--Danbury (CT) Center
Edward M. Philip............ 33 Director
Courtney P. Snyder.......... 49 President--Cambridge (MA) Center
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Mr. Williams recently resigned as Vice President--Operations and will be
transitioning his responsibilities over the next 30 to 45 days. Upon
separation from the Company, Mr. Williams is expected to provide
consulting services to the Company.
(3) Member of the Audit Committee.
GLENN D. BOLDUC has served as Chief Executive Officer, President and a
Director of the Company since October 1, 1996 and served as Treasurer from
July 9, 1997 to January 13, 1999. He has also served as President of the
Oradell Center since June 24, 1998, as President of the Montgomery Center
since July 1, 1998, as President of the Atlanta Center since September 30,
1998 and as President of the Reston Center since March 17, 1999. From July,
1989 to September, 1996, Mr. Bolduc served as Chief Financial Officer of
MutliLink, an independent supplier of audio conferencing bridges.
JOHN J. DION has served as Vice President--Finance for the Company since
November, 1996 and as Treasurer since January 13, 1999. Mr. Dion 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
101
<PAGE>
("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 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. Mr. Williams recently resigned as Vice
President--Operations and will be transitioning his responsibilities over the
next 30 to 45 days. Upon separation from the Company, Mr. Williams is expected
to provide consulting services to the Company.
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.
CLARISSA A. PETERSON joined the Company on August 3, 1998 as Vice
President--Human Resources. Ms. Peterson served as Employee Relations Manager
at Global One from July, 1997 to July, 1998. From July, 1996 to July, 1997,
Ms. Peterson served as Director of Human Resources for Access. From October,
1988 to February, 1996, Ms. Peterson served in various human resource
positions for Superior Beverages, Inc., an Anheuser-Busch distributor. Ms.
Peterson's final position with Superior Beverages, Inc. was Vice President--
Human Resources.
C. RAYMOND MARVIN has served as a Vice President of the Company since
December 31, 1997. He founded Access in 1987 and served as President and Chief
Executive Officer of Access from its inception to December 31, 1997 and as a
director of Access from its inception to November 12, 1997.
JOANNA M. JACOBSON served as a consultant to VIALOG Corporation prior to,
and became a Director of the Company on November 12, 1997. Since April, 1996,
Ms. Jacobson has been President of Keds, a distributor of athletic footwear
and a division of Stride-Rite Corporation. From February, 1995 to March, 1996,
she was a partner in Core Strategy Group, a strategic marketing consulting
firm. From December, 1991 to September, 1994, Ms. Jacobson was a Senior Vice
President of Marketing and Product Development for Converse, Inc., a
distributor of athletic footwear.
DAVID L. LOUGEEE 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
102
<PAGE>
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 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 became a Director of the Company contemporaneous with the
Company's initial public 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.
COURTNEY P. SNYDER has served as President of the Cambridge Center since
November 12, 1997. He founded 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. Hammermesh, elected as a Director on June 19, 1998, and Mr.
Philip, whose appointment as Director commenced on February 10, 1999, 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 reviews 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 makes 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 administers the Company's compensation programs, including the 1996
Stock Plan, and performs such other duties as may from time to time be
determined by the Board of Directors.
Item 11. Executive Compensation.
Director Compensation
Directors who are also employees of the Company or one of its subsidiaries
do not receive additional cash compensation for serving as Directors. Ms.
Bisbano, a Director of the Company and the President of the Danbury Center,
will be granted an option to purchase 2,500 shares of Common Stock following
each annual meeting of stockholders if she then serves on the Board of
Directors. Each Director who is not an employee of the Company or one of its
subsidiaries has been granted options to purchase a total of 20,000 shares of
Common Stock at its then fair market value. Following each annual meeting of
stockholders, each non-employee Director then in office will be granted an
option to purchase 5,000 shares of Common Stock. Each non-employee Director
will receive a $10,000 annual retainer payable quarterly in arrears.
Additionally, each non-employee Director will receive $1,000 for attendance at
each Board of Directors meeting and $500 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.
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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 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 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.
104
<PAGE>
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, 1998 and
the Company's four most highly-compensated executive officers other than the
President who were serving as executive officers on December 31, 1998 (the
"Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------------- --------------------- ---
Awards Payouts
---------- ----------
Securities
Restricted Underlying All
Other Annual Stock Options/ Other
Salary Bonus Compensation Award(s) SARs Compensation
Name and Principal Position ($) ($) ($) ($)(1) (#) ($)
- --------------------------- ------- ----- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Glenn D. Bolduc......... 261,923 0 (2) 0 40,000 0
President and CEO
C. Raymond Marvin....... 251,308 0 (2) 0 100,000 0
Vice President
Robert F. Moore......... 163,269 0 (2) 0 25,000 0
Vice President--
Marketing and Business
Development
Courtney P. Snyder...... 159,991 0 (2) 0 0 3,969(3)
President--Cambridge
Center
Gary G. Vilardi......... 157,308 0 (2) 0 11,000 0
Vice President--Sales
</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, 1998. However, as of December 31, 1998, 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(#) ($10.00/Share)
------------------------ -------------------- --------------
<S> <C> <C>
Glenn D. Bolduc..................... 25,000 250,000
C. Raymond Marvin................... 0 0
Robert F. Moore..................... 0 0
Courtney P. Snyder.................. 48,780 487,800
Gary G. Vilardi..................... 0 0
</TABLE>
The Company has no current plans to pay dividends on the above-referenced
restricted shares.
(2) 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.
(3) TCC paid an aggregate of $3,969 in premiums on two life insurance policies
on the life of Mr. Snyder. Both of the policies were canceled in early
1998.
105
<PAGE>
Employment and Noncompetition Agreements
The following table sets forth a summary of the terms of the employment
arrangements entered into with the Named Executive Officers.
<TABLE>
<CAPTION>
Current
Name Position Salary Expires
- ---- -------- ------- -------
<S> <C> <C> <C>
Glenn D. Bolduc(1)...... President and CEO--VIALOG $265,000 Terminable upon 30 days notice
C. Raymond Marvin(2).... Vice President--VIALOG $242,000 November, 1999
Robert F. Moore(3)...... Vice President--Marketing
and Business Development $170,000 Terminable upon 30 days notice
Courtney P. Snyder(4)... President--Cambridge Center $164,000 November, 2000
Gary G. Vilardi(5)...... Vice President--Sales $160,000 Terminable upon 30 days notice
</TABLE>
- --------
(1) 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. Mr. Bolduc is entitled to a monthly
automobile allowance of $1,000.
(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. Moore's employment agreement provides that if Mr. Moore's employment
is terminated by the Company other than for cause, disability or death, he
will be entitled to receive his base compensation and group insurance
benefits for a period of twelve months, subject to adjustment in the event
Mr. Moore obtains new employment during the twelve-month period after the
termination of his employment. Mr. Moore is entitled to a monthly
automobile allowance of $500.
(4) 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. Mr. Snyder is
entitled to a monthly automobile allowance of $400.
(5) Mr. Vilardi's employment agreement provides that if Mr. Vilardi's
employment is terminated by the Company other than for cause, disability
or death, he will be entitled to receive his base compensation and group
insurance benefits for a period of twelve months, subject to adjustment in
the event Mr. Vilardi obtains new employment during the twelve-month
period after the termination of his employment. Mr. Vilardi is entitled to
a monthly automobile allowance of $500.
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. As of January 1, 1999, there
were 756,104 additional shares available for grant under the Plan.
106
<PAGE>
The Plan will remain in effect until February 14, 2006 unless terminated
earlier by the Board of Directors. The Plan may be amended by the Board of
Directors without the consent of the stockholders of the Company, except that
any amendment, although effective when made, will be subject to stockholder
approval if required by any Federal or state law or regulation or by the rules
of any stock exchange or automated quotation system on which the Common Stock
may then be listed or quoted.
The following table sets forth all options granted to the Named Executive
Officers in 1998:
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------
% of Potential Realizable
Total Value at Assumed
Number of Options Annual Rates of
Securities Granted to Stock
Underlying Employees Exercise Price Appreciation
Options in Fiscal Price Expiration for
Name Granted (#) Year ($/Share) Date Option Term(4)
---- ----------- ---------- --------- ---------- ---------------------
5%($) 10%($)
---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Glenn D. Bolduc......... 40,000 4.9 8.00(1) (3) 201,250 510,000
C. Raymond Marvin....... 100,000 12.3 5.75(2) (3) 362,000 916,400
Robert F. Moore......... 25,000 3.1 8.00(1) (3) 125,800 318,800
Courtney P. Snyder...... 0 0 0 (3) 0 0
Gary G. Vilardi......... 1,000 0.1 10.00(2) (3) 6,290 15,940
10,000 1.2 8.00(1) (3) 50,300 127,500
</TABLE>
- --------
(1) The exercise price of these options is the initial public offering price
per share.
(2) The exercise price of these options is the fair market value on the date
of grant as determined by the Board of Directors of the Company. 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, the
Company's future prospects and the anticipated initial public offering. In
addition, the Company periodically obtained independent valuations of the
Company's Common Stock.
(3) 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.
(4) 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 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.
107
<PAGE>
The following table sets forth the value of all unexercised options held by
the Named Executive Officers at the end of 1998:
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............. 194,587 80,413 1,463,020 262,500
C. Raymond Marvin........... 0 100,000 0 225,000
Robert F. Moore............. 30,087 64,913 168,000 252,000
Courtney P. Snyder.......... 30,900 44,100 69,525 99,225
Gary G. Vilardi............. 30,007 30,993 175,020 124,980
</TABLE>
- --------
(1) There was no public trading market for the Common Stock on December 31,
1998. Accordingly, solely for the purposes of this table, the values in
this column have been calculated on the basis of the initial public
offering price less the aggregate exercise price of the options.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of March 22, 1999 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 Executive Officers as a group. All persons listed have an address in
care of the Company's principal executive office and have sole voting and
investment power with respect to their shares unless otherwise indicated. As
of March 22, 1999, the Company had outstanding 8,298,670 shares of Common
Stock.
<TABLE>
<CAPTION>
Number of Shares
Name Beneficially Owned(1) Percent of Class
---- --------------------- ----------------
<S> <C> <C>
John J. Hassett......................... 937,762 (2) 11.3
Glenn D. Bolduc......................... 268,170 (3) 3.2
Patti R. Bisbano........................ 89,676 (4) 1.1
Courtney P. Snyder...................... 85,980 (5) 1.0
David L. Lougee......................... 71,338 (6) *
Robert F. Moore......................... 38,170 (7) *
Gary V. Vilardi......................... 35,006 (8) *
C. Raymond Marvin....................... 13,000 (9) *
Joanna M. Jacobson...................... 10,000 (10) *
Richard G. Hamermesh.................... 6,006 (11) *
Edward M. Philip........................ 4,008 (12) *
All executive officers, Directors and
Named Executive Officers as a group (14
persons)............................... 761,090 9.1
</TABLE>
- --------
* Less than 1%.
108
<PAGE>
(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) Includes 837,762 shares held by Mr. Hassett and 100,000 shares held by
Susan C. Hassett, the spouse of Mr. Hassett. Does not include 60,000
shares held by J. Michael Powell as Trustee for Mr. Hassett's two minor
children, as to which Mr. Hassett disclaims beneficial ownership.
(3) Includes 34,000 shares held by Mr. Bolduc, 204,170 shares with respect to
which options held by Mr. Bolduc may be exercised as of June 1, 1999 and
30,000 shares held by Grace K. Bolduc, the spouse of Mr. Bolduc, as
Trustee for their three minor children.
(4) Includes 52,174 shares issued to Ms. Bisbano in connection with the
Original Acquisition and 37,502 shares with respect to which options
granted to Ms. Bisbano may be exercised as of June 1, 1999.
(5) Includes 48,780 shares issued to Mr. Snyder in connection with the
Original Acquisition and 37,200 shares with respect to which options
granted to Mr. Snyder may be exercised as of June 1, 1999.
(6) Includes 64,000 shares held by Mr. Lougee and 7,338 shares with respect
to which options held by Mr. Lougee may be exercised as of June 1, 1999.
(7) Includes 38,170 shares with respect to which options held by Mr. Moore
may be exercised as of June 1, 1999.
(8) Includes 35,006 shares with respect to which options held by Mr. Vilardi
may be exercised as of June 1, 1999.
(9) Includes an estimated 13,000 shares with respect to which options held by
Mr. Marvin may be exercised as of June 1, 1999.
(10) Includes 10,000 shares with respect to which options held by Ms. Jacobson
may be exercised as of June 1, 1999.
(11) Includes 6,006 shares with respect to which options held by Dr. Hamermesh
may be exercised as of June 1, 1999.
(12) Includes 4,008 shares with respect to which options to be granted to Mr.
Philip may be exercised as of June 1, 1999.
Item 13. Certain Relationships and Related 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 1998, the Company paid Mirick, O'Connell, DeMallie
& Lougee, LLP an aggregate of approximately $844,000 in legal fees and
expenses for legal services provided to VIALOG.
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 $175,000, $230,000 and $220,000 in 1996, 1997 and 1998, 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)
109
<PAGE>
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. For the period December, 1997 to December, 1998, John J. Hassett
provided consulting services to the Company in consideration of fees totaling
$90,000.
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 the initial public 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.
PART IV
Item 14. Financial Statements, Schedules, Reports on Form 8-K and Exhibits.
(a) Documents filed as part of this Form 10-K:
1.Financial Statements
See index to Financial Statements under ITEM 8--Financial Statements
and Supplementary Data.
2.Financial Statement Schedules
All financial statement schedules have been omitted because they are not
required, not applicable, or the information to be included in the financial
statement schedules is included in the Consolidated Financial Statements or
the notes thereto.
3.Exhibits
See Exhibit Index.
(b)Reports on Form 8-K
The Company filed a Form 8-K on October 26, 1998 to report that the Company
executed a two year, $15.0 million credit facility with Coast Business Credit,
a division of Southern Pacific Bank.
110
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization By and Among VIALOG Corporation,
TBMA Acquisition Corporation and Telephone Business Meetings, Inc.
and C. Raymond Marvin Dated as of September 8, 1997.
2.2 Amendment to Agreement and Plan of Reorganization By and Among VIALOG
Corporation, TBMA Acquisition Corporation, Telephone Business
Meetings, Inc. and C. Raymond Marvin Dated as of October 20, 1997.
2.3 Letter Agreement Dated November 5, 1997 between VIALOG Corporation,
Telephone Business Meetings, Inc. and C. Raymond Marvin.
2.4 Amended and Restated Agreement and Plan of Reorganization By and
Among VIALOG Corporation, CSII Acquisition Corporation and Conference
Source International, Inc. and Judy B. Crawford and Olen E. Crawford
Dated as of September 8, 1997.
2.5 Amended and Restated Asset Purchase Agreement By and Among VIALOG
Corporation, Call Points Acquisition Corporation, Call Points, Inc.
and Ropir Industries, Inc. Dated as of October 17, 1997.
2.6 Amended and Restated Agreement and Plan of Reorganization By and
Among VIALOG Corporation, KST Acquisition Corporation, Kendall Square
Teleconferencing, Inc., Courtney Snyder, Paul Ballantine, John
Hassett and Dwight Grader Dated as of September 30, 1997.
2.7 First Amendment to Amended and Restated Agreement and Plan of
Reorganization By and Among VIALOG Corporation, KST Acquisition
Corporation, Kendall Square Teleconferencing, Inc. and Courtney
Snyder, Paul Ballantine, John Hassett and Dwight Grader Dated October
24, 1997.
2.8 Amended and Restated Agreement and Plan of Reorganization By and
Among VIALOG Corporation, AMCS Acquisition Corporation and American
Conferencing Company, Inc. and David Lipsky Dated as of September 30,
1997.
2.9 Amended and Restated Agreement and Plan of Reorganization By and
Among VIALOG Corporation, CDC Acquisition Corporation and
Communications Development Corporation and Patti R. Bisbano and
Maurya Suda Dated as of September 30, 1997.
2.10 First Amendment to Amended and Restated Agreement and Plan of
Reorganization By and Among VIALOG Corporation, CDC Acquisition
Corporation, Communication Development Corporation and Patti R.
Bisbano and Maurya Suda Dated as of October 24, 1997.
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.
2.13+++ Second 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 September 28, 1998.
2.14+++ Third 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 December 19, 1998.
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.15+++ Agreement and Plan of Reorganization By and Among VIALOG Corporation,
CPI Acquisition Corporation and Conference Pros International, Inc.
and Michael Burns Dated as of November 30, 1998.
2.16+++ Agreement and Plan Reorganization By and Among VIALOG Corporation,
Better Acquisition Corporation, and A Better Conference, Inc. and
Patricia A. Cranford and Otis Cranford and Matthew Cranford Dated as
of December 30, 1998.
3.1 Restated Articles of Organization of VIALOG Corporation.
3.2 Amended and Restated By-Laws of VIALOG Corporation.
3.3 Certificate of Incorporation of Communications Development
Corporation.
3.4 By-Laws of Communication Development Corporation.
3.5 Articles of Incorporation of Conference Source International, Inc.
3.6 By-Laws of Conference Source International, Inc.
3.7 Unanimous Consent of Board of Directors of Conference Source
International, Inc. Amending Section 2 of Article II of the By-Laws.
3.8 Certificate of Incorporation of Telephone Business Meetings, Inc.
3.9 Regulations of Telephone Business Meetings, Inc.
3.10 Articles of Organization of Kendall Square Teleconferencing, Inc.
(f/k/a Teleconversant, LTD)
3.11 Articles of Amendment of Certificate of Incorporation of Kendall
Square Teleconferencing, Inc. Changing the Name of the Company from
Teleconversant, Ltd. To Kendall Square Teleconferencing, Inc.
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).
</TABLE>
112
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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.,
Communications 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.--see Exhibit 1.2.
4.7++++ Exchange Agent Agreement Dated as of February 9, 1998.
10.1 1996 Stock Plan of the Company.
10.2 Equipment Lease between CSI and Ally Capital Corporation Dated April
1, 1996.
10.3 Equipment Lease between CSI and The CIT Group/Equipment Financing,
Inc. Dated November 11, 1996.
10.4 Equipment Lease between CSI and BSFS Equipment Leasing Dated April 8,
1996.
10.5 Equipment Lease between TCC (f/k/a Teleconversant Ltd.) and Wasco
Funding Corp. Dated May 21, 1996.
10.6 Equipment Lease between TCC (f/k/a Teleconversant Ltd.) and Wasco
Funding Corp. Dated July 20, 1995.
10.7 Lease between Aetna Life Insurance Company and ACCESS, as Amended,
Dated December 6, 1994.
10.8 Lease Agreement between SPP Real Estate (Georgia II), Inc. and CSI
Dated November 1, 1996.
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.
</TABLE>
113
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.15 Employment Agreement By and Between Communication Development
Corporation and Patti R. Bisbano Dated as of November 12, 1997.
10.16 Employment Agreement By and Between the Company and William Pucci
Dated as of October 1, 1996.
10.17 Employment Agreement By and Between the Company and John Dion Dated
as of November 4, 1996.
10.18 Employment Agreement By and Between the Company and Gary Vilardi
Dated as of April 1, 1997.
10.19 Employment Agreement By and Between the Company and Robert Moore
Dated as of October 20, 1997.
10.20 Employment Agreement By and Between the Company and John Williams
Dated as of October 14, 1997.
10.21++++ Employment Agreement By and Between Call Points, Inc. And Olen E.
Crawford Dated as of November 20, 1997.
10.22 Stockholder Agreement By and Among John J. Hassett and VIALOG
Corporation Dated as of November 6, 1997.
10.23 Form of Registration Rights Agreement between VIALOG Corporation and
certain of its stockholders specified in Schedules I and II attached
thereto.
10.24 Lease Between Tower Investment Group and Communication Development
Corp. Dated February 23, 1990, Including Subsequent Modifications
Thereto.
10.25 Lease Agreement by and Between 680-690 Kinderkamack Road and
American Conferencing Company, Inc. Dated June 1997.
10.26 Lease Between Robert A. Jones and K. George Najarian, Trustees of
Old Cambridge Realty Trust and Old Kendall Square Realty Trust, and
Kendall Square Teleconferencing, Inc. (f/k/a Teleconversant, Ltd.)
Dated February 15, 1996.
10.27 Lease Between Ropir Communications and Call Points, Inc. Commencing
May 1, 1995.
10.28 Amendment to Lease Between Ropir Industries, Inc. and Call Points,
Inc.
10.29 Equipment Lease between Kendall Square Teleconferencing, Inc. and
Wasco Funding Corp. Dated July 31, 1997.
10.30 Sublease between Eisai Research Institute of Boston, Inc. and VIALOG
Corporation Dated as of August 20, 1997.
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.
</TABLE>
114
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.35+++ Lease Agreement By and Between Executive Park, T.I.C. and VIALOG
Corporation Dated as of August 3, 1998.
10.36+++ Employment Agreement By and Between VIALOG Corporation and Clarissa
Peterson Dated as of August 3, 1998.
10.37*** Loan & Security Agreement Dated as of September 30, 1998 by and
between Kendall Square Teleconferencing, Inc.; Conference Source
International, Inc.; Telephone Business Meetings, Inc.; Call Points,
Inc.; American Conferencing Company, Inc.; and Communication
Development Corporation.
10.38*** Secured Term Note Dated September 30, 1998 in the principal amount of
$4,000,000 delivered by Kendall Square Teleconferencing, Inc.;
Conference Source International, Inc.; Telephone Business Meetings,
Inc.; Call Points, Inc.; American Conferencing Company, Inc.; and
Communication Development Corporation to Coast Business Credit, a
division of Southern Pacific Bank.
10.39*** Secured Term Note Dated September 30, 1998 in the principal amount of
$1,500,000 delivered by Kendall Square Teleconferencing, Inc.;
Conference Source International, Inc.; Telephone Business Meetings,
Inc.; Call Points, Inc.; American Conferencing Company, Inc.; and
Communication Development Corporation to Coast Business Credit, a
division of Southern Pacific Bank.
10.40*** Security Agreement Dated September 30, 1998 by and Between VIALOG
Corporation and Coast Business Credit, a division of Southern Pacific
Bank.
10.41*** Continuing Guaranty Dated September 30, 1998 executed by VIALOG
Corporation in favor of Coast Business Credit, a division of Southern
Pacific Bank.
11.1**** Statement regarding Computation of Earnings Per Share.
21.1**** Subsidiaries of the Company.
27.1**** Financial Data Schedule.
</TABLE>
- --------
All non-marked Exhibits listed above are incorporated by reference to the
Exhibits to the Registration Statement on Form S-4 filed with the Securities
and Exchange Commission on January 9, 1998 (File No. 333-44041).
+ Incoroporated 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 Amendment No. 1 to the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on July 8, 1998 (File No. 333-53395).
+++ Incorporated by Reference to the Exhibits to Amendment No. 3 to the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on December 31, 1998 (File No. 333-53395).
++++ 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).
** Incorporated by reference to the Exhibits to the Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on May 22,
1998.
*** 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 October 26, 1998.
**** Filed herewith.
115
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VIALOG Corporation
/s/ Glenn D. Bolduc
By: _________________________________
Glenn D. Bolduc,
President and Chief Executive
Officer
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Glenn D. Bolduc President, Chief Executive March 26, 1999
By: __________________________________ Officer and Director
Glenn D. Bolduc
/s/ John J. Dion Vice President--Finance, March 30, 1999
By: __________________________________ Treasurer, Principal
John J. Dion Financial Officer and
Principal Accounting
Officer
/s/ Joanna M. Jacobson Director March 30, 1999
By: __________________________________
Joanna M. Jacobson
/s/ David L. Lougee Director March 30, 1999
By: __________________________________
David L. Lougee
/s/ Patti R. Bisbano Director March 26, 1999
By: __________________________________
Patti R. Bisbano
/s/ Richard G. Hamermesh Director March 26, 1999
By: __________________________________
Richard G. Hamermesh
/s/ Edward M. Philip Director March 30, 1999
By: __________________________________
Edward M. Philip
</TABLE>
116
<PAGE>
Exhibit 11.1
VIALOG Corporation
Calculation of Shares Used in Determining Loss Per Share
For the Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic Loss Per Share
- --------------------
Weighted average number of common
shares outstanding 2,088,146 2,889,005 3,632,311
========== ========== ==========
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Diluted Loss Per Share
- ----------------------
Weighted average number of common
shares outstanding 2,088,146 2,889,005 3,632,311
Common stock equivalents - - -
---------- ---------- ----------
Total 2,088,146 2,889,005 3,632,311
========== ========== ==========
</TABLE>
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Company
- --------------------------------------------------------------------------------
Name State of d/b/a Name+
Incorporation
- --------------------------------------------------------------------------------
* Telephone Business Meetings, Inc. Delaware Access
Teleconferencing
International
* Conference Source International, Georgia None
Inc.
* Communication Development Connecticut None
Corporation
* Kendall Square Teleconferencing, Massachusetts The Conference
Inc. Center f/k/a
Teleconversant
* American Conferencing Company, New Jersey a/k/a Americo
Inc.
* Call Points, Inc. Delaware None
* Conference Pros International, Inc. Texas None
* A Better Conference, Inc. California None
* A Business Conference-Call, Inc. Minnesota None
+ All listed subsidiaries do business as Vialog Group Communications
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 232,000
<SECURITIES> 0
<RECEIVABLES> 7,555,000
<ALLOWANCES> 164,000
<INVENTORY> 0
<CURRENT-ASSETS> 8,809,000
<PP&E> 15,080,000
<DEPRECIATION> 3,093,000
<TOTAL-ASSETS> 69,266,000
<CURRENT-LIABILITIES> 11,187,000
<BONDS> 74,189,000
0
0
<COMMON> 37,000
<OTHER-SE> (16,629,000)
<TOTAL-LIABILITY-AND-EQUITY> 69,266,000
<SALES> 46,820,000
<TOTAL-REVENUES> 46,820,000
<CGS> 0
<TOTAL-COSTS> 24,321,000
<OTHER-EXPENSES> 21,721,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,629,000
<INCOME-PRETAX> (11,851,000)
<INCOME-TAX> 26,000
<INCOME-CONTINUING> (11,877,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,877,000)
<EPS-PRIMARY> (3.27)
<EPS-DILUTED> (3.27)
</TABLE>
