<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-15527
VIALOG Corporation
(Exact name of registrant as specified in its charter)
Massachusetts 04-3305282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
32 Crosby Drive
Bedford, Massachusetts 01730
(Address of principal executive offices, including Zip Code)
(781) 761-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes [X] No [_]
At August 9, 2000 the registrant had outstanding an aggregate of 9,486,438
shares of its Common Stock, $.01 par value.
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<PAGE>
VIALOG CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1999 and June 30, 2000
(Unaudited)............................................................ 3
Consolidated Statements of Operations (Unaudited) for the Three and Six
Months Ended June 30, 1999 and 2000.................................... 4
Consolidated Statements of Cash Flows (Unaudited) for the Six Months
Ended June 30, 1999 and 2000........................................... 5
Notes to Consolidated Financial Statements (Unaudited).................. 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 10-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............... 16
Item 6. Exhibits and Reports on Form 8-K.................................. 16
Signatures................................................................ 18
Exhibit Index............................................................. 19
</TABLE>
2
<PAGE>
VIALOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 547 $ 481
Accounts receivable, net of allowance for doubtful
accounts of $579 and $621 in 1999 and 2000,
respectively....................................... 11,637 17,538
Prepaid expenses.................................... 435 498
Other current assets................................ 310 460
-------- --------
Total current assets.............................. 12,929 18,977
Property and equipment, net........................... 17,814 19,552
Deferred debt issuance costs.......................... 3,801 3,328
Goodwill and intangible assets, net................... 64,094 62,060
Other assets.......................................... 583 1,001
-------- --------
Total assets...................................... $ 99,221 $104,918
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit............................ $ 4,770 $ 6,415
Current portion of long-term debt................... 2,332 3,261
Accounts payable.................................... 5,216 10,634
Accrued interest expense............................ 1,215 1,215
Accrued expenses and other liabilities.............. 3,319 2,365
-------- --------
Total current liabilities......................... 16,852 23,890
Long-term debt, less current portion.................. 75,827 76,794
Other long-term liabilities........................... 1,499 1,403
Commitments and contingencies
Stockholders' equity:
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;
issued: 9,144,200 and 9,481,733 shares in 1999 and
2000, respectively; outstanding: 9,133,569 and
9,471,102 shares in 1999 and 2000, respectively.... 91 95
Additional paid-in capital.......................... 45,602 45,664
Accumulated deficit................................. (40,603) (42,881)
Treasury stock, at cost; 10,631 shares.............. (47) (47)
-------- --------
Total stockholders' equity........................ 5,043 2,831
-------- --------
Total liabilities and stockholders' equity........ $ 99,221 $104,918
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues...................... $ 18,031 $ 19,398 $ 33,913 $ 38,622
Cost of revenues, excluding
depreciation..................... 8,251 8,497 15,884 17,090
Selling, general and
administrative expense........... 6,649 5,867 11,483 11,755
Depreciation expense.............. 1,019 1,345 1,900 2,588
Amortization of goodwill and
intangibles...................... 999 1,042 1,829 2,111
Non-recurring charge.............. 2,982 -- 2,982 --
--------- --------- --------- ---------
Operating income (loss)......... (1,869) 2,647 (165) 5,078
Interest expense, net............. (3,339) (3,559) (6,710) (7,031)
--------- --------- --------- ---------
Loss before income tax expense.. (5,208) (912) (6,875) (1,953)
Income tax expense................ -- (175) (50) (325)
--------- --------- --------- ---------
Net loss........................ $ (5,208) $ (1,087) $ (6,925) $ (2,278)
========= ========= ========= =========
Net loss per share--basic and
diluted.......................... $ (0.61) $ (0.12) $ (0.97) $ (0.25)
========= ========= ========= =========
Weighted average shares
outstanding--basic and diluted... 8,562,249 9,373,226 7,140,146 9,271,128
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
1999 2000
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................... $ (6,925) $(2,278)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation.............................................. 1,900 2,588
Amortization of goodwill and intangibles.................. 1,829 2,111
Amortization of debt issuance costs and debt discount..... 1,574 1,616
Provision for doubtful accounts........................... 169 265
Compensation expense for issuance of common stock and
options.................................................. 52 --
Non-cash portion of non-recurring charge.................. 797 --
Changes in operating assets and liabilities, net of effects
from acquisitions of businesses:
Accounts receivable....................................... (2,316) (6,166)
Prepaid expenses and other current assets................. (363) (213)
Other assets.............................................. 525 (505)
Accounts payable.......................................... (838) 5,418
Accrued expenses.......................................... 1,829 (676)
Other long-term liabilities............................... 1,125 (119)
-------- -------
Cash flows provided by (used in) operating activities... (642) 2,041
-------- -------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired........... (29,095) --
Additions to property and equipment........................ (4,310) (4,581)
-------- -------
Cash flows used in investing activities................. (33,405) (4,581)
-------- -------
Cash flows from financing activities:
Advances on line of credit, net............................ 2,112 1,645
Proceeds from issuance (payments) of long-term debt, net... (871) 1,352
Proceeds from issuance of common stock..................... 33,420 66
Deferred offering costs.................................... 596 --
Deferred debt issuance costs............................... (16) (589)
-------- -------
Cash flows provided by financing activities............. 35,241 2,474
-------- -------
Net increase (decrease) in cash and cash equivalents........ 1,194 (66)
Cash and cash equivalents at beginning of period............ 232 547
-------- -------
Cash and cash equivalents at end of period.................. $ 1,426 $ 481
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................. $ 5,142 $ 5,137
======== =======
Taxes..................................................... $ -- $ 23
======== =======
Acquisitions of businesses:
Assets acquired............................................ $ 31,041 $ --
Liabilities assumed and issued............................. (1,855) --
Common stock issued........................................ -- --
-------- -------
Cash paid.................................................. 29,186 --
Less cash acquired......................................... (91) --
-------- -------
Net cash paid for acquisitions of businesses............ $ 29,095 $ --
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission, and reflect all adjustments (all of which
are of a normal recurring nature) which, in the opinion of management, are
necessary for a fair statement of the results of the interim periods
presented. The unaudited results of operations for the three and six months
ended June 30, 2000 are not necessarily an indication of the results of
operations for the full year. These financial statements do not include all
disclosures associated with annual financial statements and, accordingly,
should be read in conjunction with the financial statements and footnotes for
the year ended December 31, 1999 included in the Company's Form 10-K. The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(2) Description of Business
VIALOG Corporation (the "Company") was incorporated in Massachusetts on
January 1, 1996. The Company was formed to create a national provider of
conferencing services, consisting primarily of operator-attended and operator
on-demand audioconferencing, as well as video and Internet conferencing
services. On November 12, 1997, the Company closed a private placement of
$75.0 million in Senior Notes due 2001 (the "Private Placement").
Contemporaneously with the closing of the Private Placement, the Company
acquired six private conference service bureaus located in the United States
(the "Original Acquisitions"). On February 10, 1999, the Company completed an
initial public offering of its common stock and consummated agreements to
acquire three private conference service bureaus located in the United States
(see Note 4 "Acquisitions").
Prior to November 12, 1997, the Company did not conduct any operations, and
all activities conducted by it related to the acquisitions and the completion
of financing transactions to fund the acquisitions.
(3) 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, commissions and offering
expenses, were approximately $32.7 million. Of the net proceeds, approximately
$29.1 million was used to acquire three private conference service bureaus (as
discussed in Note 4). 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 was used for working capital and general corporate
purposes.
(4) Acquisitions
On February 10, 1999, the Company 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 the initial public
offering of the Company's common stock. Each of the acquisitions (together
with the Original Acquisitions, each an "Operating Center"; collectively, the
"Operating Centers") is a wholly-owned subsidiary of the Company. The
acquisitions were accounted for using the purchase method of accounting.
The total purchase price of the acquired companies was $29.1 million and
consisted of $28.4 million in cash paid to the stockholders of the acquired
companies, approximately $400,000 of acquisition costs and approximately
$300,000 related to tax reimbursements.
6
<PAGE>
The purchase price exceeded the fair value of the net assets by an estimated
$27.4 million. The excess was allocated to goodwill and other intangibles and
is being amortized over periods from 3 to 20 years. In addition, the Company
repaid $305,000 of long-term debt of the acquired companies.
(5) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June
December 31, 30,
1999 2000
------------ -------
($000's)
<S> <C> <C>
12 3/4% Senior Notes payable, due November 15, 2001,
net of unamortized discount of $2,027 and $1,484,
respectively.......................................... $72,973 $73,517
Term loans............................................. 4,655 6,221
Capitalized lease obligations.......................... 525 317
Other long-term debt................................... 6 --
------- -------
Total long-term debt................................. 78,159 80,055
Less current portion................................. 2,332 3,261
------- -------
Total long-term debt, less current portion........... $75,827 $76,794
======= =======
</TABLE>
Senior Notes Payable
The Senior Notes issued in the Private Placement bear interest at 12 3/4%
per annum, payable semi-annually on May 15 and November 15 of each year. The
Senior Notes, which are guaranteed by each of the Operating Centers, mature on
November 15, 2001 and are redeemable in whole or in part at the option of the
Company on or after November 15, 1999 at 110% of the principal amount thereof,
and on or after November 15, 2000 at 105% of the principal amount thereof, in
each case together with accrued interest to the date of redemption.
(6) Net Loss Per Share
As the Company was in a net loss position for the three and six months ended
June 30, 1999 and 2000, common stock equivalents of 1,475,073, 943,284,
1,573,254 and 1,095,070 for the three months ended June 30, 1999 and 2000 and
the six months ended June 30, 1999 and 2000, respectively, were excluded from
the diluted net loss per share calculation as they would be antidilutive. As a
result, diluted net loss per share for the three and six months ended June 30,
1999 and 2000 is the same as basic net loss per share and, therefore, has not
been presented separately.
(7) Non-recurring Charges
During the third quarter of 1998, the Company incurred a $1.2 million non-
recurring charge related to the consolidation of the Atlanta and Montgomery
Operating Centers. In accordance with the consolidation plan, the Atlanta
Operating Center remained staffed through January 1999, after which time the
Atlanta facility was vacated and its traffic managed by conference
coordinators in the Montgomery Operating Center as well as other Operating
Centers. During the three and six months ended June 30, 2000, the Company paid
out approximately $51,000 and $76,000, respectively, related to rental costs
on the Atlanta facility. At June 30, 2000, approximately $368,000 of the
original accrual for the non-recurring charge was remaining for estimated
costs still to be incurred related to the remaining rental commitment on the
Atlanta facility.
During the second quarter of 1999, the Company incurred a $3.0 million non-
recurring charge related to the consolidation of four of the Company's
Operating Centers. The Operating Centers affected include Oradell, New Jersey
and Danbury, Connecticut, which the Company closed in the third quarter of
1999; and Houston, Texas and Palm Springs, California, which the Company
closed in the fourth quarter of 1999. In conjunction with the
7
<PAGE>
closings, the Company expanded its other facilities to accommodate the
transitioned business. In addition, the Company relocated its corporate
offices during the second quarter of 2000 and plans to combine its Cambridge
Operating Center with its corporate offices during the third quarter of 2000.
During the three and six months ended June 30, 2000, the Company paid out
approximately $304,000 and $625,000, respectively, related primarily to
personnel reductions and facility closings, and wrote off approximately
$196,000 of leasehold improvements related to the corporate offices. At June
30, 2000, approximately $775,000 of the original accrual for the non-recurring
charge was remaining for estimated costs in accordance with the terms of the
original restructuring plan.
(8) Officer Resignation
Selling, general and administrative expenses for the three and six months
ended June 30, 1999 include approximately $1.2 million in increased operating
expenses due to costs associated with the departure of the Company's former
Chief Executive Officer and other management staff. During the three and six
months ended June 30, 2000, the Company paid out approximately $78,000 and
$174,000, respectively, of such costs. At June 30, 2000, approximately $41,000
of the original accrual was remaining for estimated future obligations.
8
<PAGE>
(9) Supplemental Consolidating Condensed Financial Information
The 12 3/4% Senior Notes due November 15, 2001, in the aggregate principal
amount of $75.0 million, are fully and unconditionally guaranteed, on a joint
and several basis, by all of the Company's subsidiaries. Each of the
guarantors is a wholly-owned subsidiary of the Company. Summarized financial
information of the Company and its subsidiaries is presented below as of and
for the six months ended June 30, 2000. Separate financial statements and
other disclosures concerning the guarantor subsidiaries are not presented
because management has determined that they are not material to investors.
<TABLE>
<CAPTION>
VIALOG Call
Corp. Access Points ABCC TCC ABCI CPI Americo CDC Eliminations Consolidated
-------- ------- ------- ------- ------ ------ ------ ------- ------ ------------ ------------
($000's)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet
Information as of
June 30, 2000
(unaudited)
Total current
assets........... $(29,149) $21,908 $12,068 $ 8,929 $5,527 $ 703 $ 41 $(1,196) $ 146 $ -- $ 18,977
Property and
equipment, net... 1,401 8,357 5,734 2,134 837 288 277 467 57 -- 19,552
Investment in
subsidiaries..... 86,307 -- -- -- -- -- -- -- -- (86,307) --
Goodwill and
intangible
assets, net...... -- 13,448 16,083 13,930 3,429 5,275 5,356 2,444 2,095 -- 62,060
Other assets..... 3,923 248 67 22 10 3 -- 50 6 -- 4,329
-------- ------- ------- ------- ------ ------ ------ ------- ------ -------- --------
Total assets.... $ 62,482 $43,961 $33,952 $25,015 $9,803 $6,269 $5,674 $ 1,765 $2,304 $(86,307) $104,918
======== ======= ======= ======= ====== ====== ====== ======= ====== ======== ========
Current
liabilities...... $ 20,008 $ 1,460 $ 1,377 $ 250 $ 334 $ (2) $ 229 $ 141 $ 93 $ -- $ 23,890
Long-term debt,
excluding current
portion.......... 76,789 -- -- -- 5 -- -- -- -- -- 76,794
Other
liabilities...... 95 225 613 -- -- 40 53 377 -- -- 1,403
Stockholders'
equity
(deficit)........ (34,410) 42,276 31,962 24,765 9,464 6,231 5,392 1,247 2,211 (86,307) 2,831
-------- ------- ------- ------- ------ ------ ------ ------- ------ -------- --------
Total
liabilities and
stockholders'
equity
(deficit)....... $ 62,482 $43,961 $33,952 $25,015 $9,803 $6,269 $5,674 $ 1,765 $2,304 $(86,307) $104,918
======== ======= ======= ======= ====== ====== ====== ======= ====== ======== ========
Statement of
Operations
Information for
the Six Months
Ended June 30,
2000 (unaudited)
Net revenues..... $ -- $17,299 $ 9,691 $ 7,964 $3,534 $ -- $ -- $ -- $ 243 $ (109) $ 38,622
Cost of revenues,
excluding
depreciation..... 1,695 7,145 4,162 2,523 1,323 4 83 19 245 (109) 17,090
Selling, general
and
administrative
expenses......... 10,405 419 278 277 288 24 23 -- 41 -- 11,755
Depreciation
expense.......... 175 1,085 674 211 151 73 96 60 63 -- 2,588
Amortization of
goodwill and
intangibles...... -- 434 552 480 102 213 198 72 60 -- 2,111
-------- ------- ------- ------- ------ ------ ------ ------- ------ -------- --------
Operating income
(loss).......... (12,275) 8,216 4,025 4,473 1,670 (314) (400) (151) (166) -- 5,078
Interest income
(expense), net... (7,014) (5) 1 -- (5) (7) -- (1) -- -- (7,031)
-------- ------- ------- ------- ------ ------ ------ ------- ------ -------- --------
Income (loss)
before income tax
expense......... (19,289) 8,211 4,026 4,473 1,665 (321) (400) (152) (166) -- (1,953)
Income tax
expense.......... -- (325) -- -- -- -- -- -- -- -- (325)
-------- ------- ------- ------- ------ ------ ------ ------- ------ -------- --------
Net income
(loss).......... $(19,289) $ 7,886 $ 4,026 $ 4,473 $1,665 $ (321) $ (400) $ (152) $ (166) $ -- $ (2,278)
======== ======= ======= ======= ====== ====== ====== ======= ====== ======== ========
Cash Flow
Information for
the Six Months
Ended June 30,
2000 (unaudited)
Cash flows
provided by (used
in) operating
activities....... $ (1,850) $ 1,763 $ 2,023 $ 99 $ 33 $ 65 $ (27) $ 15 $ (80) $ -- $ 2,041
Cash flows
provided by (used
in) investing
activities....... (950) (1,668) (1,844) (110) (7) -- -- -- (2) -- (4,581)
Cash flows
provided by (used
in) financing
activities....... 2,688 (6) (56) -- (27) (104) (6) (15) -- -- 2,474
-------- ------- ------- ------- ------ ------ ------ ------- ------ -------- --------
Net increase
(decrease) in
cash and cash
equivalents...... (112) 89 123 (11) (1) (39) (33) -- (82) -- (66)
Cash and cash
equivalents at
the beginning of
period........... 386 (49) 91 14 -- (10) 33 -- 82 -- 547
-------- ------- ------- ------- ------ ------ ------ ------- ------ -------- --------
Cash and cash
equivalents at
the end of
period........... $ 274 $ 40 $ 214 $ 3 $ (1) $ (49) $ -- $ -- $ -- $ -- $ 481
======== ======= ======= ======= ====== ====== ====== ======= ====== ======== ========
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with The financial statements and
footnotes for the three and six months ended June 30, 2000 and the Form 10-K
for the year ended December 31, 1999 filed with the Securities and Exchange
Commission.
VIALOG Corporation
Results of Operations
The Company was incorporated on January 1, 1996. On November 12, 1997, the
Company consummated agreements to acquire six private conference service
bureaus, all of which became wholly-owned subsidiaries of the Company. Prior
to November 12, 1997, the Company did not conduct any operations, and all
activities conducted by it were related to the original acquisitions. On
February 10, 1999, the Company completed an initial public offering of its
common stock and contemporaneously acquired three private conference service
bureaus, all of which became wholly-owned subsidiaries of the Company.
Net revenues. Net revenues increased approximately $1.4 million, or 8%, from
$18.0 million to $19.4 million for the three months ended June 30, 1999 and
2000, respectively, and increased $4.7 million, or 14%, from $33.9 million to
$38.6 million for the six months ended June 30, 1999 and 2000, respectively.
The increase was primarily due to increased call volumes for audio and video
conferencing services as well as the acquisition of three private conference
service bureaus on February 10, 1999. The major components of this increase
were (i) an increase in the Reston center's net revenues of $2.1 million and
$4.4 million for the three and six months ended June 30, 2000, respectively,
which consisted of increased sales of conferencing services to predominantly
existing customers as well as the transitioned traffic resulting from the
consolidation of other operating centers, (ii) an increase in the combined
Atlanta and Montgomery operating center's net revenues of $935,000 and $1.4
million for the three and six months ended June 30, 2000, respectively, which
was primarily attributable to increased audioconferencing services to existing
customers and new customers, as well as the transitioned traffic resulting
from the consolidation of other operating centers, (iii) a net decrease of
$276,000 for the three months ended June 30, 2000 and an increase of $1.4
million for the six months ended June 30, 2000, relating to the Chanhassen,
Houston and Palm Springs operating centers which were acquired on February 10,
1999 and included in the Company's consolidated results beginning February 11,
1999, resulting in a partial period of operations included in the six months
ended June 30, 1999, and (iv) a decrease of $1.3 million and $2.5 million for
the three and six months ended June 30, 2000, respectively, relating to the
consolidation of the Oradell and Danbury operating centers, both of which were
closed during the third quarter of 1999 and the related traffic transitioned
to other operating centers.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation, increased approximately $246,000, or 3%, from $8.3 million to
$8.5 million for the three months ended June 30, 1999 and 2000, respectively,
and increased $1.2 million, or 8%, from $15.9 million to $17.1 million for the
six months ended June 30, 1999 and 2000, respectively, but decreased as a
percentage of revenue from 45.8% to 43.8% for the three months ended June 30,
1999 and 2000, respectively, and from 46.8% to 44.2% for the six months ended
June 30, 1999 and 2000, respectively. The dollar increase was primarily due to
(i) an increase in the Reston center's cost of revenues, excluding
depreciation, of $865,000 and $2.0 million for the three and six months ended
June 30, 2000, respectively, resulting from increased telecommunications costs
and personnel and related
10
<PAGE>
costs associated with increased call volumes as well as the transitioning of
traffic from the consolidation of other operating centers, (ii) an increase of
$98,000 for the three months ended June 30, 2000 and a net decrease of
$148,000 for the six months ended June 30, 2000 in the combined Atlanta and
Montgomery center's cost of revenues, excluding depreciation, which was
attributable to the combination of long distance cost savings experienced as a
result of migrating traffic to lower cost long distance service providers and
increased staffing and operations-related costs associated with increased call
volumes as well as the transitioning of traffic from the consolidation of other
operating centers, (iii) an increase of $192,000 and $347,000 for the three
and six months ended June 30, 2000, respectively, in information technology
related costs and other technology infrastructure improvements, (iv) a net
decrease of $256,000 for the three months ended June 30, 2000 and an increase of
$272,000 for the six months ended June 30, 2000, relating to the Chanhassen,
Houston and Palm Springs operating centers which were acquired on February 10,
1999 and included in the Company's consolidated results beginning February 11,
1999, and (v) a decrease of $653,000 and $1.3 million for the three and six
months ending June 30, 2000, respectively, relating to the consolidation of the
Oradell and Danbury operating centers, both of which were closed during the
third quarter of 1999. The decrease as a percentage of revenues was primarily
due to an overall reduction in telecommunications cost per minute resulting from
negotiating telecommunications contracts with lower prices and the favorable
impact resulting from the acquisition of the three operating centers on February
10, 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $782,000, or 12%, from $6.6 million to $5.9
million for the three months ended June 30, 1999 and 2000, respectively, and
increased $272,000, or 2%, from $11.5 million to $11.8 million, for the six
months ended June 30, 1999 and 2000, respectively. The decrease for the three
months ended June 30, 2000 and the modest increase for the six months ended
June 30, 2000 were attributable to approximately $1.2 million in costs
associated with the departure of the former Chief Executive Officer and other
management staff which were included in the 1999 totals. The remaining
increase was due to (i) an increase in selling expense of $189,000 and
$465,000 for the three and six months ended June 30, 2000, respectively,
related to increases in personnel, commissions and related expenses associated
with higher sales volume, and (ii) an increase, excluding the $1.2 million
charge noted above, of $229,000 and $1.0 million related to increased staffing
costs such as compensation, benefits and travel expenses as well as outside
services in the general and administrative area.
Depreciation and amortization expense. Depreciation and amortization expense
increased $369,000 from $2.0 million to $2.4 million for the three months
ended June 30, 1999 and 2000, respectively, and increased $970,000 from $3.7
million to $4.7 million for the six months ended June 30, 1999 and 2000,
respectively. The increase was primarily due to additions to property and
equipment throughout 1999 and 2000, as well as the additional property and
equipment purchased in connection with the acquisition of the Chanhassen,
Houston and Palm Springs operating centers which were acquired on February 10,
1999. In addition, amortization of goodwill and intangibles increased $43,000
and $282,000 for the three and six months ended June 30, 2000, respectively,
which represents primarily amortization expense related to the three operating
centers acquired on February 10, 1999.
Non-recurring charge. The results for the three months ended June 30, 1999
include a non-recurring charge of approximately $3.0 million related to the
consolidation of four of the Company's operating centers. The operating
centers affected included Oradell, New Jersey and Danbury, Connecticut, which
the Company closed in the third quarter of 1999; and Houston, Texas, and Palm
Springs, California, which the Company closed in the fourth quarter of 1999.
In conjunction with these closings, the Company expanded its other facilities
to accommodate the transitioned business. In addition, the Company relocated
its corporate offices during the second quarter of 2000 and plans to combine
its Cambridge operating center with its corporate offices during the third
quarter of 2000. The non-recurring charge included (i) approximately $1.2
million associated with facility lease costs from the exit dates through the
lease termination dates (net of estimated sublease income), (ii) $860,000
associated with personnel reductions of approximately 130 conference
coordinators, customer service, technical support, and general and
administrative positions, (iii) $683,000 associated with the impairment of
intangible assets, (iv) $150,000 associated with legal fees and other exit
costs, and (v) $114,000 associated with the write-off of
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leasehold improvements. During the three and six months ended June 30, 2000,
the Company paid out approximately $304,000 and $625,000, respectively,
related primarily to personnel reductions and facility closings, and wrote off
approximately $196,000 of leasehold improvements related to the corporate
offices. At June 30, 2000, approximately $775,000 of the original accrual for
the non-recurring charge was remaining for estimated costs in accordance with
the terms of the original restructuring plan.
Interest expense, net. Interest expense, net increased $220,000 from $3.3
million to $3.6 million for the three months ended June 30, 1999 and 2000,
respectively, and increased $321,000 from $6.7 million to $7.0 million for the
six months ended June 30, 1999 and 2000, respectively. The increase was
primarily due to the following: (i) an increase of $204,000 and $266,000 for
the three and six months ended June 30, 2000, respectively, of interest
expense related to the Company's revolving credit facility, (ii) an increase
of $10,000 and $19,000 for the three and six months ended June 30, 2000,
respectively, in non-cash interest expense related to the amortization of
deferred debt issuance costs, and (iii) decreased interest income of
approximately $6,000 and $36,000 for the three and six months ended June 30,
2000 due to reduced cash balances.
Liquidity and Capital Resources
The Company generated negative cash flows of $66,000 for the six months
ended June 30, 2000 as compared to positive cash flows of $1.2 million for the
six months ended June 30, 1999. Included in the cash flows for the six months
ended June 30, 1999 was approximately $4.3 million related to the excess of
the proceeds from the initial public offering over the acquisitions of the
three operating centers acquired on February 10, 1999. For the six months
ended June 30, 2000, the Company generated positive cash flows from operations
of $2.0 million. Cash used in investing activities of $4.6 million for the six
months ended June 30, 2000 represents the acquisition of property and
equipment. Cash provided by financing activities of $2.5 million for the six
months ended June 30, 2000 includes, among other items, $3.0 million related
to advances under the Company's senior credit facility.
On November 12, 1997, the Company completed a Private Placement of $75.0
million of senior notes. The senior notes bear interest at 12 3/4% per annum,
payable semi-annually on May 15 and November 15 of each year. The senior notes
are guaranteed by the operating centers and mature on November 15, 2001. The
senior notes are redeemable in whole or in part at the option of the Company
on or after November 15, 1999 at 110% of the principal amount thereof, and on
or after November 15, 2000 at 105% of the principal amount thereof until
maturity, in each case together with accrued interest to the date of
redemption. In the event of a change in control, as defined in the Indenture,
the Company may be required to repurchase all of the outstanding senior notes
at 101% of the principal amount plus accrued interest and additional interest,
if any. The Indenture contains restrictive covenants with respect to the
Company that among other things, create limitations (subject to certain
exceptions) on (i) the incurrence of additional indebtedness, (ii) the ability
of the Company to purchase, redeem or otherwise acquire or retire any common
stock or warrants, rights or options to acquire common stock, to retire any
subordinated indebtedness prior to final maturity or to make investments in
any person, (iii) certain transactions with affiliates, (iv) the ability to
materially change the present method of conducting business, (v) the granting
of liens on property or assets, (vi) mergers, consolidations and the
disposition of assets, (vii) declaring and paying any dividends or making any
distribution on shares of common stock, and (viii) the issuance or sale of any
capital stock of the Company's subsidiaries. The Indenture does not require
the Company to maintain compliance with any financial ratios or tests, except
with respect to certain restrictive covenants noted above. At June 30, 2000,
the Company was in compliance with all covenants contained in the Indenture.
On October 6, 1998, the Company closed a two year, $15.0 million senior
credit facility with Coast Business Credit, a division of Southern Pacific
Bank. On May 10, 2000, certain terms of the credit facility were amended. The
senior credit facility, as amended, 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 $9.0 million, and
(iii) a revolving loan based on a percentage of eligible accounts receivable.
Loans under the senior credit facility bear interest
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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 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,
including a debt service coverage ratio, a minimum tangible net worth level
and a minimum EBITDA level. At June 30, 2000, the Company was in compliance
with such ratios and tests. As of June 30, 2000, the Company had outstanding
$625,000 on the term loan; $5.6 million on the equipment term loan; and $6.4
million on the revolving loan.
The Company anticipates that its cash flows from operations, supplemented by
borrowings, 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 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.
On May 3, 2000, the Company commenced an offer to exchange an aggregate of
$58.5 million in cash and an aggregate of 165,000 newly issued shares of a new
class of convertible preferred stock, par value $0.01 per share, stated value
$100.00, for all of the Company's $75 million 12 3/4% Series B senior notes
due November 15, 2001, or $780 in cash and 2.2 shares of preferred stock for
each $1,000 principal amount of senior notes tendered in the exchange offer.
The preferred stock will be convertible into shares of common stock, $0.01 par
value per share, of the Company as described in the Company's Offering
Memorandum and Solicitation Document. Exchange of the senior notes is subject
to certain conditions including: (a) the valid tender of at least 95% of the
principal amount of the senior notes; and (b) the availability of at least $75
million of new bank financing on the effective date of the exchange offer.
Under the terms of supplements to the exchange offer, the Company has extended
the expiration date of the exchange offer until September 15, 2000.
On July 5, 2000, the Company received a signed joint commitment letter and
attached summary of terms from two major banks with a commitment of $35
million towards a proposed $75 million new senior secured term loan and
revolving credit facility. The two banks have committed to use their best
efforts to underwrite the remaining balance of the proposed term loan and
credit facility. Additionally, the Company is in continuing discussions with a
number of parties to arrange the financing necessary to complete the exchange
offer. The closing under the new credit facility is subject to certain
conditions, including completion and execution of definitive documentation.
There can be no assurance that the new credit facility will become available.
The Company is highly leveraged at June 30, 2000. 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
The Company has experienced no Year 2000 related outages or interruptions.
Operating centers conducted normal operations during the actual roll over and
continued to service customers with no Year 2000 related issues. Performance
testing during and after the roll over found no service or integrity issues.
All functional areas of the Company conducted normal business throughout the
rollover.
Costs: The Company's total expenditures for contingency planning and
staffing during the Year 2000 rollover was less than $200,000. The Company
experienced no material expenditures in connection with its Year 2000
remediation efforts. Remediation efforts were conducted as elements of systems
upgrades or replacements that had been planned for other business reasons. The
cost of purchasing, or developing, and deploying these new systems was not
considered Year 2000 costs as they were included in the Company's integration
plan and were not accelerated due to Year 2000 issues. Most of the expenses
incurred were related to the opportunity cost of time spent by employees of
the Company evaluating Year 2000 compliance matters.
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Risks: The Company is aware of no further Year 2000 related risks
outstanding at this time. There are a number of additional date integrity
issues related to the identification of Year 2000 as a leap year that have
caused concern in the computer industry. The Company believes that based on
its testing and remediation efforts, these date integrity issues do not
present a concern. The Company will continue to monitor systems operations and
integrity during the remainder of Year 2000. No additional Year 2000 related
expenditures are anticipated.
New Accounting Pronouncements
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 effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company will adopt SFAS 133 in 2001, in accordance with SFAS No. 137 which
deferred the effective date of SFAS 133. The Company does not anticipate the
adoption of this standard will have a material impact on the Company's
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". The Company is required to adopt this accounting guidance, as
amended by SAB 101B, no later than the fourth quarter of fiscal year 2000. The
Company believes its existing revenue recognition policies and procedures are
in compliance with SAB 101, and therefore, does not anticipate its adoption
will have a material impact on the Company's financial condition, results of
operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation": an Interpretation of APB Opinion No. 25. This Interpretation
clarifies the application of APB No. 25 for certain issues, including: the
definition of an employee, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of
modifications to the terms of a previously fixed stock option or award, and
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions apply to events occurring after December 15, 1998 or January 12,
2000. To the extent that this Interpretation covers events occurring during
the period after December 15, 1998, or January 12, 2000, but before the
effective date, the effects of applying this Interpretation are recognized on
a prospective basis from July 1, 2000. The Company expects that the adoption
of this Interpretation will not have a material impact on its financial
position, results of operations or cash flows.
Cautionary Statements for Forward Looking Information
Management's discussion and analysis set forth above contains certain
forward looking statements, including statements regarding its financial
position, results of operations and Year 2000 compliance. These forward
looking statements are based on current expectations. Certain factors have
been identified by the Company which could cause the Company's actual results
to differ materially from expected and historical results. These factors are
discussed in the Safe Harbor for Forward Looking Statements section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Form 10-K for the year ended December 31,
1999, and should be read in conjunction with this Form 10-Q.
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Qualitative and Quantitative Disclosures about Market Risk
The Company is exposed to market risk primarily from interest rates on its
$15.0 million credit facility with Coast Business Credit, a division of
Southern Pacific Bank. The credit facility, as amended, 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 $9.0
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 sensitivity analysis below, which hypothetically illustrates our
potential market risk exposure, estimates the effects of hypothetical sudden
and sustained changes in the applicable market conditions on 2000 earnings.
The sensitivity analysis presented does not consider any additional actions
the Company may take to mitigate its exposure to such changes. The market
changes, assumed to occur as of June 30, 2000, include a 50 basis point and a
100 basis point change in market interest rates. The hypothetical changes and
assumptions may be different from what actually occurs in the future.
As of June 30, 2000, the Company had no derivative financial instruments to
manage interest rate risk. As such, the Company is exposed to earnings and
fair value risk due to changes in interest rates with respect to its revolving
line of credit and its long-term obligations. As of June 30, 2000,
approximately 14.6% of the Company's credit facility and long-term obligations
were floating rate obligations. The detrimental effect on the Company's
earnings of the hypothetical 50 basis point and 100 basis point increase in
interest rates described above for the six months ended June 30, 2000 would be
approximately $27,000 and $55,000, respectively, before income taxes.
The Company does not have any other material market risk exposure.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not currently a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders, held on June 29, 2000, the
stockholders of the Company elected Kim A. Mayyasi and David L. Lougee as
directors of the Company to hold office until the 2003 Annual Meeting of
Stockholders. The nominees were elected with the following votes:
<TABLE>
<CAPTION>
Votes Withheld
Election of Directors Votes For or Opposed
--------------------- --------- --------------
<S> <C> <C>
Kim A. Mayyasi...................................... 7,919,402 23,141
David L. Lougee..................................... 7,925,438 17,105
</TABLE>
There were no broker non-votes for this proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 11(a)--Calculation of Shares Used in Determining Net Loss Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K was filed on May 4, 2000 to report that the Company
commenced an offer to exchange an aggregate of $58.5 million in cash and an
aggregate of 165,000 newly issued shares of a new class of convertible
preferred stock, par value $0.01 per share, stated value $100.00, for all of
the Company's $75 million 12 3/4% Series B senior notes due November 15, 2001,
or $780 in cash and 2.2 shares of preferred stock for each $1,000 principal
amount of senior notes tendered in the exchange offer. The preferred stock
will be convertible into shares of common stock, $0.01 par value per share, of
the Company as described in an Offering Memorandum and Solicitation Document
dated May 3, 2000. The exchange offer will expire at 5:00 p.m., New York City
time on June 1, 2000, unless extended. Exchange of the senior notes is subject
to certain conditions including: (a) the valid tender of at least 95% of the
principal amount of the senior notes; and (b) the availability of at least $75
million of new bank financing on the effective date of the exchange offer.
A report on Form 8-K was filed on May 30, 2000 to report that the Company
distributed a Supplemented Offering Memorandum and Solicitation Document,
supplementing the Offering Memorandum and Solicitation Document dated May 3,
2000, pursuant to which the Company commenced an exchange offer for all of
its outstanding $75 million 12 3/4% Series B senior notes due November 15,
2001. The purpose of the Supplemented Offering Memorandum is to inform
offerees that the Company has extended the exchange offer until 5:00 p.m., New
York City time on June 15, 2000. The Supplemented Offering Memorandum also
provides offerees with updated financial information relating to the Company
for the quarter ended March 31, 2000.
A report on Form 8-K was filed on June 15, 2000 to report that the Company
distributed a supplement to the Supplemented Offering Memorandum and
Solicitation Document dated May 24, 2000, relating to the Company's exchange
offer for all of its outstanding $75 million 12 3/4% Series B senior notes due
November 15, 2001. The purpose of the supplement is to inform offerees that
the date on which all shares of preferred stock offered in the exchange offer
shall be redeemed, if not previously redeemed or converted, has been extended
until the date seven and one-half years from the date of issuance. The
supplement also informs offerees that the Company has extended the expiration
date and withdrawal termination date of the exchange offer until 5:00 p.m.,
New York City time, on June 22, 2000.
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A report on Form 8-K was filed on June 30, 2000 to report that the Company
distributed a second supplement to the Supplemented Offering Memorandum and
Solicitation Document dated May 24, 2000, relating to the Company's exchange
offer for all of its outstanding $75 million 12 3/4% Series B senior notes due
November 15, 2001. The purpose of this supplement is to inform offerees that
the Company has extended the expiration date and withdrawal termination date
of the exchange offer until 5:00 p.m., New York City time, on July 31, 2000.
This supplement also provides offerees with additional information regarding
the Company's proposed $75 million new senior secured term loan and revolving
credit facility. As previously anounced, the Company had originally received a
joint commitment letter from two financial institutions relating to the new
credit facility. However, due to current conditions in the credit market,
these institutions informed the Company this week that they would use their
best efforts to complete the financing. This supplement also extends the date
by which the exchange offer must be completed until September 30, 2000.
A report on Form 8-K was filed on August 1, 2000, to report that the Company
has extended the expiration date of its exchange offer for all of its
outstanding $75 million 12 3/4% senior notes due November 15, 2001 until 5:00
p.m., New York City time, on September 15, 2000. The Company also announced
that it is in continuing discussions with a number of parties, including two
major financial institiutions which the Company has been working with since
earlier this year, to arrange the financing necessary to complete the exchange
offer.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VIALOG Corporation
(Registrant)
Date: August 14, 2000
/s/ Kim A. Mayyasi
-------------------------------------
Kim A. Mayyasi,
President and Chief Executive
Officer
/s/ Michael E. Savage
-------------------------------------
Michael E. Savage,
Senior Vice President and CFO
(Principal Financial Officer
and Principal Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
11(a)--Calculation of Shares Used in Determining Net Loss Per Share........ 20
</TABLE>
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