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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
May 3, 2000
-----------------------------------------------------------
Date of Report (Date of earliest event reported)
VIALOG CORPORATION
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(Exact name of registrant as specified in charter)
Massachusetts 000-24689 04-3305282
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(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
35 New England Business Center, Suite 160
Andover, MA 01810
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(Address of principal executive offices)
(978) 975-3700
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Registrant's telephone number, including area code
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Item 5. Other Events
- ------- ------------
On May 3, 2000, Vialog Corporation (the "Company") commenced an offer
to exchange (the "Exhange Offer") an aggregate of $58,500,000 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 (the "Preferred Stock"),
for all of the Company's $75,000,000 12 3/4% Series B Senior Notes due November
15, 2001 (the "Senior Notes"), or $780 in cash and 2.2 shares of Preferred Stock
for each $1,000 principal amount of Senior Notes tendered in 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 Offering Memorandum and
Solicitation Document, dated May 3, 2000. The Exchange Offer will expire at 5
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 copy of the Offering Memorandum and Solicitation Document including
the exhibits thereto, is attached as an exhibit to this Current Report on Form
8-K.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
- ------ ------------------------------------------------------------------
(c) Exhibits
99.1 Offering Memorandum and Solicitation Document, dated May
3, 2000
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIALOG CORPORATION
By: /s/ Michael E. Savage
----------------------
Michael E. Savage
Senior Vice President and Chief
Financial Officer
Dated: May 4, 2000
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EXHIBIT 99.1
OFFERING MEMORANDUM AND SOLICITATION DOCUMENT
VIALOG CORPORATION
EXCHANGE OFFER AND
SOLICITATION OF CONSENTS TO THE AMENDMENT TO INDENTURE
We are offering to exchange (the "Exchange"):
. An aggregate of $58,500,000 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 per share (the "Preferred Stock")
for all of our $75,000,000 12 3/4% Series B Senior Notes due November 15, 2001
(the "Senior Notes"). In addition, accrued and unpaid interest on the Senior
Notes will be paid through the effective date of the Exchange. See "The
Exchange Offer--Consideration."
The aggregate as-converted percentage of the Company's Common Stock that
will be represented by the Preferred Stock will depend on the conversion price
per share. The conversion price will be established on the Effective Date (as
defined below), and will be the lesser of (i) $8.00 per share or (ii) 150% of
the average closing price of the Company's Common Stock for the 20 trading
days immediately preceding the Effective Date, subject to certain downward
adjustments as described in Annex H. If the Effective Date had occurred on May
2, 2000, then the conversion price would be $6.389 per share and the Preferred
Stock would represent in the aggregate 22% of the Company's outstanding Common
Stock.
We are offering $780.00 in cash and 2.2 shares of Preferred Stock for each
$1,000 principal amount of your Senior Notes.
The proposed Exchange is part of a strategic plan that includes, among other
things, a new credit facility.
To complete the proposed Exchange outside of bankruptcy (the "Exchange
Offer"), we are requiring that 95% of the aggregate principal amount of the
outstanding Senior Notes be validly tendered in the Exchange Offer. We believe
that completing the Exchange outside of bankruptcy will allow us to avoid
possible disruptions of our business (including relations with customers,
suppliers and others) and expenses that would result from a bankruptcy
proceeding. As of the date of this Offering Memorandum, certain holders of the
Senior Notes, representing approximately 87% of the aggregate principal amount
of the Senior Notes, have agreed in writing to, among other things, tender
their Senior Notes in the Exchange Offer.
The tender of your Senior Notes pursuant to the Exchange Offer will
constitute a consent to certain amendments to the Indenture relating to the
Senior Notes (the "Indenture") that would become effective if we complete the
Exchange outside of bankruptcy. These amendments would eliminate substantially
all of the restrictive covenants and many of the events of default in the
Indenture. See "Proposed Amendments To Indenture."
DEADLINES
The Exchange Offer and the consent solicitation will expire at 5:00 p.m.,
New York City time, on Wednesday, June 1, 2000, unless extended. To effect the
Exchange outside of bankruptcy, we need you to tender your Senior Notes
pursuant to the Exchange Offer. If we do not receive your acceptance of the
Exchange Offer, we may be either unable to complete the proposed Exchange or
forced to attempt to implement the proposed Exchange through a costly and
uncertain bankruptcy proceeding.
RISKS
See "Risk Factors" beginning on page 12 for a discussion of certain risk
factors which should be considered in connection with the Exchange Offer, the
proposed amendments to the Indenture.
----------------
The date of this Offering Memorandum and Solicitation Document is May 3,
2000.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES OF THIS OFFERING
MEMORANDUM AND SOLICITATION DOCUMENT AND CORRESPONDENCE IN CONNECTION WITH THE
EXCHANGE OFFER MAY BE DIRECTED TO THE COMPANY AT THE ADDRESS AND TELEPHONE
NUMBER PROVIDED ON THE BACK PAGE.
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Our Common Stock is currently listed on the American Stock Exchange.
The Preferred Stock offered in the Exchange has not been registered with the
Securities and Exchange Commission (the "SEC") or any state securities
commission. We are relying on Section 3(a)(9) of the Securities Act of 1933,
as amended (the "Securities Act"), to exempt the offer and sale of the
Preferred Stock from registration under the Securities Act and Section
18(b)(4)(C) of the Securities Act to exempt the offer and sale of the
Preferred Stock from registration under state securities laws.
This Offering Memorandum and Solicitation Document is not an offer to sell
the Preferred Stock nor an offer to buy the Preferred Stock in any state where
the offer or sale is not permitted.
Neither the SEC nor any state securities commission has approved or
disapproved of the Preferred Stock or determined if this Offering Memorandum
and Solicitation Document is accurate or complete.
Since no bankruptcy case has yet been filed, no bankruptcy court has
approved this Offering Memorandum and Solicitation Document. However, if a
bankruptcy case is filed, we will seek bankruptcy court approval of the
adequacy of the information in this document to the extent necessary under
Section 1125(a)(1) of Title 11 of the United States Code (the "Bankruptcy
Code").
Except for historical information, matters discussed in this Offering
Memorandum and Solicitation Document contain "forward-looking" information, as
defined by the Private Securities Litigation Reform Act of 1995, and describe
our belief concerning future business and capital market conditions based on
currently available information. The Company has identified these forward-
looking statements by words such as "anticipates", "expects", "believes",
"estimates", "could result" and "appears" and similar expressions. Our
expectations, beliefs and projections are expressed in good faith and are
believed to have a reasonable basis, including, without limitation,
management's examination of historical operating trends, data contained in our
records, and data available from third parties, but there can be no assurance
that our expectations, beliefs or projections will result or be achieved or
accomplished. Risks and uncertainties which could cause actual results or
performance to differ materially from those expressed in these statements
include the following: changes in the market, new products, changes in
technology and the impact of competitive products and pricing. We assume no
obligation to update the information contained herein.
You should rely only on the information incorporated by reference or
provided in this Offering Memorandum and Solicitation Document. We have not
authorized anyone to provide you with different information. You should not
assume that the information in this Offering Memorandum and Solicitation
Document or any supplement is accurate as of any date other than the date on
the cover of the document. By tendering your Senior Notes, you represent that
you are basing your decision solely on this Offering Memorandum and
Solicitation Document and your own examination of our company and the terms of
the proposed Exchange, including the merits and risks involved.
The contents of this Offering Memorandum and Solicitation Document should
not be construed as legal, business or tax advice. You should consult your own
attorney, business advisor and tax advisor as to such matters.
2
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549 or at the SEC's regional offices located at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World
Trade Center, Suite 1300, New York, New York 10048. You may obtain further
information on the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. Our SEC filings are also available to the public over the
Internet at the SEC's website at http://www.sec.gov.
INCORPORATION BY REFERENCE
We have attached as Annex A and are incorporating by reference into this
Offering Memorandum and Solicitation Document our Annual Report on Form 10-K
for the year ended December 31, 1999. We also are incorporating by reference
into this Offering Memorandum and Solicitation Document all of our filings
with the SEC under Sections 13(a), 13(c), 14 and 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), from the date hereof
until the completion of the proposed Exchange.
The information incorporated herein by reference is considered to be part of
this Offering Memorandum and Solicitation Document and later information that
we file with the SEC will automatically update and supersede this information.
You may obtain a copy of these filings at no cost by writing or telephoning
us at:
Vialog Corporation
35 New England Business Center
Andover, Massachusetts 01810
Telephone: (978) 975-3700
Attention:Michael Savage
Chief Financial Officer
We will respond to requests for information incorporated by reference into
this Offering Memorandum and Solicitation Document within one business day of
receipt of such request and will send the incorporated documents by first-
class mail or other equally prompt means. This includes information contained
in documents filed subsequent to the date of this Offering Memorandum and
Solicitation Document through the date of responding to the request.
3
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY.................................................................. 6
The Company............................................................ 6
Background............................................................. 6
Strategic Plan......................................................... 6
The Proposed Exchange.................................................. 7
Certain Consequences of the Exchange................................... 9
Federal Income Tax Considerations...................................... 10
Description of Capital Stock........................................... 10
Listing and Trading of Senior Notes, Common Stock and Preferred Stock.. 11
Exchange Agent......................................................... 11
Board Approval......................................................... 11
RISK FACTORS............................................................. 12
Risks to Holders of Senior Notes If the Exchange Is Not Successfully
Completed............................................................. 12
Risks If the Exchange Offer Is Completed Outside of Bankruptcy......... 12
Continuing Risks to the Company and all of Our Security Holders........ 12
Risks to Holders of Our Common Stock and Preferred Stock............... 15
THE EXCHANGE OFFER....................................................... 16
Consideration.......................................................... 16
Background and Purpose of the Exchange Offer........................... 16
Development of Terms of the Exchange Offer............................. 16
Proposed Amendments.................................................... 17
Expiration; Extension; Termination..................................... 17
Conditions of the Exchange Offer....................................... 17
Sources of Funds for Exchange Offer.................................... 19
Appraisal Rights....................................................... 19
Exchange Agent......................................................... 19
Legal Opinion.......................................................... 19
PROCEDURE FOR TENDERING SENIOR NOTES AND DELIVERY OF CONSENTS............ 20
General................................................................ 20
Tender of Senior Notes; Delivery of Consents........................... 20
Signature Guarantees................................................... 21
Book-Entry Transfers................................................... 21
Guaranteed Delivery Procedures......................................... 22
Transfers of Ownership of Tendered Notes............................... 22
Lost or Missing Certificates........................................... 22
Backup Withholding..................................................... 23
Acceptance of Senior Notes, Delivery of Preferred Stock and Payment.... 23
Withdrawal............................................................. 24
Revocation of Consents................................................. 24
Interpretation......................................................... 25
No Payments for Solicitation........................................... 25
THE COMPANY.............................................................. 26
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION................... 28
</TABLE>
4
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
THE STRATEGIC PLAN....................................................... 33
General................................................................ 33
Strategic Plan Components.............................................. 33
Growth Strategy........................................................ 33
The New Credit Facility................................................ 34
FEDERAL INCOME TAX CONSIDERATIONS........................................ 36
Exchange of Senior Notes for Cash and Preferred Stock.................. 36
Treatment of the Preferred Stock....................................... 37
Tax Consequences to the Company........................................ 38
Backup Withholding..................................................... 39
SECURITIES LAW MATTERS................................................... 40
The Exchange Offer..................................................... 40
Issuance and Resale of the New Preferred Stock Outside of Bankruptcy... 40
DESCRIPTION OF CAPITAL STOCK............................................. 41
Authorized and Outstanding Shares...................................... 41
Common Stock........................................................... 41
Preferred Stock........................................................ 41
Certain Charter and By-Laws Provisions................................. 43
Indemnification and Insurance.......................................... 43
PRICE RANGE OF COMMON STOCK.............................................. 44
PROPOSED AMENDMENTS TO INDENTURE......................................... 45
General................................................................ 45
Comparison of Senior Notes Before and After Amendment of the Indenture. 45
Annex A: Annual Report on Form 10-K for the fiscal year ended
December 31, 1999............................................ A-1
Annex B: Letter of Transmittal/Consent Form........................... B-1
Annex C: Notice of Guaranteed Delivery................................ C-1
Annex D: Letter to Owners of Senior Notes from Securities Dealers,
Commercial Banks, Trust Companies and Other Nominees......... D-1
Annex E: Letter to Securities Dealers, Commercial Banks, Trust
Companies and Other Nominees from the Company................ E-1
Annex F: Guidelines for Certification of Taxpayer Identification
Number on Form W-9........................................... F-1
Annex G: Amendment to Indenture....................................... G-1
Annex H: Certificate of Vote of Directors Establishing a Class or
Series of Stock.............................................. H-1
</TABLE>
5
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SUMMARY
This summary highlights some of the information contained elsewhere or
incorporated by reference in this document. It does not contain all of the
information that may be important to you. You should carefully read this entire
document and the other documents to which it refers before deciding whether to
accept the Exchange Offer and consent to the proposed amendments to the
Indenture. The terms "we", "us", "our company", "the Company" and "Vialog"
refer to Vialog Corporation, a Massachusetts corporation, and its consolidated
subsidiaries, and all references to "Vialog Corporation" refer to Vialog
Corporation as a standalone entity.
THE COMPANY
Vialog, founded in 1996, is a leading independent provider of audio, video
and Internet conferencing services. We believe we are the largest company
focused solely on conferencing services, with four operating centers,
approximately 12,378 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. We believe we differentiate
ourselves from our competitors by providing superior customer service and an
extensive range of enhanced and customized conferencing solutions. We have
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 customers to the Company. We provided
services to more than 6,000 customers representing over 30,000 accounts during
the twelve months ended December 31, 1999.
Operator-attended audioconferencing is the cornerstone of our business, and
we believe it to be the principal service which builds customer loyalty. We
also offer operator-on-demand audioconferencing, as well as enhanced
audioconferencing services such as digital replay, broadcast fax and audio
streaming. Our 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. We
have designed our service delivery infrastructure to be flexible so that
comprehensive, custom solutions for each customer may be easily designed and
implemented.
Vialog'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.
BACKGROUND
We have significant future debt service obligations, consisting primarily of
the Senior Notes that mature in November 2001. Although we believe that we will
have sufficient liquidity to meet our financial obligations as they become due
for the next twelve months, we may not have funds available to pay all the
Senior Notes at maturity unless there are significant improvements in the
credit markets.
STRATEGIC PLAN
To address our significant debt service obligations and the effect these
obligations have had and are expected to continue to have on our profitability
we have developed and begun to implement a strategic plan designed to improve
our operating performance, lower our operating costs, reduce our long-term
debt, improve our debt service coverage ratios and improve our earnings per
share.
The strategic plan consists of two principal components:
.the New Credit Facility (as hereinafter defined); and
.the proposed Exchange.
6
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On April 7, 2000, Vialog received a signed joint commitment letter and
attached summary of terms from two major banks relating to a proposed $75
million new senior secured term loan and revolving credit facility. The closing
under the New Credit Facility is subject to certain conditions, including
completion and execution of definitive documentation, and accordingly there can
be no assurance that the New Credit Facility will become available. Because we
intend to use a portion of the proceeds of the New Credit Facility to fund the
Exchange, we will not consummate the Exchange if we do not enter into the New
Credit Facility.
Execution of both components of the plan is crucial to the plan's successful
implementation. We do not expect to consummate either component of the
strategic plan if we are unable to consummate both components.
See "The Strategic Plan" beginning on page 33 for a more detailed description
of these components.
THE PROPOSED EXCHANGE
CONSIDERATION
We are offering to exchange:
. An aggregate of $58,500,000 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 per share (the "Preferred Stock")
for all of the outstanding Senior Notes. Accrued and unpaid interest on the
Senior Notes will continue to be payable when due through (but not including)
the Effective Date (as defined below under "The Exchange Offer--Conditions of
the Exchange Offer").
The aggregate as-converted percentage of the Company's Common Stock that will
be represented by the Preferred Stock will depend on the conversion price per
share. The conversion price will be established on the Effective Date, and will
be the lesser of (i) $8.00 per share or (ii) 150% of the average closing price
of the Company's Common Stock for the 20 trading days immediately preceding the
Effective Date, subject to certain downward adjustments as described in Annex
H. If the Effective Date had occurred on May 2, 2000, then the conversion price
would be $6.389 per share and the Preferred Stock would represent in the
aggregate 22% of the Company's outstanding Common Stock.
Each holder of Senior Notes would receive $780.00 in cash and 2.2 shares of
Preferred Stock for each $1,000 principal amount of Senior Notes.
The terms of the Exchange are the product of negotiations with
representatives of an informal committee of substantial holders of the Senior
Notes (the "Unofficial Committee"). Members of the Unofficial Committee
beneficially own approximately 87% of the aggregate principal amount of the
Senior Notes. The Unofficial Committee is being advised by Debevoise &
Plimpton. All of the members of the Unofficial Committee have agreed in writing
to, among other things, tender their Senior Notes in the Exchange Offer.
PURPOSE
The purpose of the Exchange Offer is to acquire at least 95% of the Senior
Notes. If we are unable to complete the implementation of our strategic plan,
you may ultimately receive less for your Senior Notes than the cash offered in
the Exchange.
IMPLEMENTATION OF THE EXCHANGE
In order to complete the Exchange outside of bankruptcy, we are requiring
that at least 95% of the aggregate principal amount of the Senior Notes be
validly tendered in the Exchange Offer.
WE BELIEVE THAT THE POTENTIAL RISKS OF A BANKRUPTCY PROCEEDING SIGNIFICANTLY
OUTWEIGH THE POTENTIAL BENEFITS. TO EFFECT THE EXCHANGE OUTSIDE OF BANKRUPTCY,
WE NEED YOU TO TENDER YOUR SENIOR NOTES PURSUANT
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TO THE EXCHANGE OFFER. IF WE DO NOT RECEIVE YOUR ACCEPTANCE OF THE EXCHANGE
OFFER, WE MAY BE EITHER UNABLE TO COMPLETE THE PROPOSED EXCHANGE OR FORCED TO
ATTEMPT TO IMPLEMENT THE PROPOSED EXCHANGE THROUGH A COSTLY AND UNCERTAIN
BANKRUPTCY PROCEEDING.
PROPOSED AMENDMENTS TO THE INDENTURE
In connection with the Exchange Offer, we also are soliciting your consents
to certain amendments to the Indenture for the Senior Notes. These amendments
would eliminate substantially all of the restrictive covenants and many of the
events of default in the Indenture. The valid tender of your Senior Notes will
constitute consent to the proposed amendments to the Indenture.
If registered holders of at least a majority in aggregate principal amount of
the Senior Notes consent to the proposed amendments, we will, together with
State Street Bank and Trust Company, the trustee for the Senior Notes (the
"Trustee"), execute an Amendment to Indenture (the "Amendment to Indenture")
that reflects the proposed amendments. The Amendment to Indenture will not
become effective, however, unless the Exchange Offer is completed outside of
bankruptcy. If we complete the proposed Exchange through a bankruptcy
proceeding, all of the Senior Notes will be exchanged, the Amendment to
Indenture will not become effective and the Indenture and the Senior Notes will
be discharged. See "Proposed Amendments to Indenture."
CONDITIONS OF THE EXCHANGE OFFER
Conditions to completion of the Exchange Offer outside of bankruptcy include,
among other things:
. the valid tender of at least 95% of the principal amount of the Senior
Notes (the "95% tender requirement");
. the availability of at least $75,000,000 of new bank financing on the
Effective Date;
. the absence of any legal proceedings that challenge or otherwise
adversely affect the Exchange Offer; and
. certain customary conditions pertaining to compliance with applicable
securities laws, changes to existing law and the absence of financial or
other national emergencies.
Other than the condition relating to new bank financing which may only be
waived with the consent of the Unofficial Committee, these conditions may be
waived by us in our sole discretion, although currently we do not intend to
waive any of them.
For further discussion of these conditions, see "The Exchange Offer--
Conditions of the Exchange Offer."
PROCEDURE FOR ACCEPTING THE EXCHANGE OFFER
If you wish to accept the Exchange Offer, you must either
. deliver your Senior Notes, together with a properly completed and duly
executed Letter of Transmittal/Consent Form (a "Letter of Transmittal")
(or, in the case of a book-entry transfer, an Agent's Message (as
defined under "Procedure For Tendering Senior Notes and Delivery of
Consents--Book-Entry Transfers")) and any other documents required by
the Letter of Transmittal, to the Exchange Agent at the address set
forth on the back cover page of this document on or prior to expiration
of the Exchange Offer, or
. comply with the guaranteed delivery procedures described below.
The valid tender of your Senior Notes will also constitute consent to the
proposed amendments to the Indenture.
If you are not an Eligible Institution (as defined in the following sentence)
and are requesting special delivery or transfer of the cash and Preferred Stock
you will receive in the Exchange Offer, your signature on
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the Letter of Transmittal (and any related notice of withdrawal) must be
guaranteed by an Eligible Institution. The term "Eligible Institution" means a
member firm of a registered national securities exchange, a member of the
National Association of Securities Dealers, Inc., or a commercial bank or trust
company with an office in the United States.
If you are the beneficial owner of Senior Notes that are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
you wish to accept the Exchange Offer, you should contact your broker or other
nominee promptly and instruct such person, as the registered holder of Senior
Notes, to validly tender your Senior Notes to the Exchange Agent on your
behalf. If your Senior Notes are registered in anyone else's name and you wish
to tender them yourself, then you must either submit a properly completed
Letter of Transmittal signed by the registered holder or have your Senior Notes
endorsed or accompanied by bond powers signed by the registered holder with
such registered holder's signature guaranteed by an Eligible Institution, as
described above.
In order to validly tender your Senior Notes, you must complete the
Substitute Form W-9 provided in the Letter of Transmittal (and, when requested,
each person who receives Preferred Stock in the Exchange Offer must provide a
Form W-9 (or substitute Form W-9)) and provide tax-related information to us.
If you want to tender your Senior Notes but are unable to locate them, please
contact the Trustee at: State Street Bank and Trust Company, Corporate Trust
Division, 2 Avenue de Lafayette, Boston, Massachusetts 02111-1724, Attention:
Mr. Roland Gustafsen (Telephone: (617) 662-1699), about procedures for
obtaining replacement Senior Notes.
EXPIRATION, TERMINATION AND WITHDRAWAL
The Exchange Offer is scheduled to expire at 5:00 p.m., New York City time on
Wednesday, June 1, 2000 (the "Expiration Date"). We may extend the Expiration
Date at our option, however, we need to receive the tender of your Senior Notes
as soon as possible. If we are forced to implement the Exchange through a
bankruptcy proceeding, completion of the Exchange may be delayed.
We may terminate the Exchange Offer at any time, in our sole discretion. Upon
termination of the Exchange Offer, all Senior Notes previously tendered will be
promptly returned to the tendering holders.
You may withdraw your tender of Senior Notes, or any related consent at any
time prior to 5:00 p.m., New York City time, on June 1, 2000 (the "Withdrawal
Termination Date"). Although we may extend the Expiration Date, the Withdrawal
Termination Date will not be affected by any extension of the Expiration Date.
After the Withdrawal Termination Date, you may not withdraw your Senior Notes
or related consents unless (i) required by law or (ii) we have not completed
the Exchange by July 15, 2000.
INTERPRETATION
We will decide any and all questions affecting the validity of any tender or
withdrawal of Senior Notes. Our decision will be final and binding. We may
reject any tenders that are not in proper form or which our counsel believe
would be unlawful.
CERTAIN CONSEQUENCES OF THE EXCHANGE
CONSEQUENCES OF FAILURE TO COMPLETE THE EXCHANGE
If we do not receive sufficient acceptances to complete the Exchange, we may
not have funds available to pay all the Senior Notes at maturity unless there
are significant improvements in the credit markets. If we do not
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have funds available and are otherwise unable to reach a satisfactory agreement
with holders of the Senior Notes, we will have to consider other alternatives
at maturity of the Senior Notes. These alternatives include a bankruptcy
proceeding resulting in a different plan of reorganization that could result in
significantly less recovery for the holders of the Senior Notes than that
offered in the Exchange.
CONSEQUENCES OF THE EXCHANGE TO PARTICIPATING HOLDERS
Participation in the Exchange will result in the following consequences for a
holder of Senior Notes:
. Receipt of Cash; Reduction of Overall Investment. To the extent of the
cash received in the Exchange, such holder will have received cash that
may not otherwise be available upon maturity of the Senior Notes,
thereby reducing the aggregate amount of its investment that will be
financially at risk in the Company in the future.
. Receipt of Equity. To the extent of the Preferred Stock received in the
Exchange, such holder will have given up a portion of its debt claim
against the Company for an equity interest in the Company.
CONSEQUENCES TO NON-PARTICIPATING HOLDERS
If the Exchange Offer is consummated outside of bankruptcy, non-tendering
holders will not have received the cash portion of the exchange consideration
and, consequently, will be subject to continuing risks related to our financial
position to the full extent of their Senior Notes. In addition, non-tendering
holders of Senior Notes face the probability of a more limited trading market
for their Senior Notes after consummation of the Exchange Offer. The Senior
Notes, as amended by the proposed amendments to the Indenture, also will not
have the benefit of various protective business covenants and events of default
that are currently in the Indenture. (See "Risk Factors--Risks If the Exchange
Offer Is Completed Outside of Bankruptcy" and "Proposed Amendments To
Indenture.")
If a holder of Senior Notes decides not to accept the Exchange Offer based on
an expectation that the Exchange Offer will nevertheless be successfully
consummated outside of bankruptcy and that as a result, the likelihood that
such holder's Senior Notes will be paid in full when due may be improved, such
holder will run the risk that less than the required number of holders of
Senior Notes accept the Exchange Offer. If that happens, we may be unable to
complete the Exchange. (See "--Consequences of Failure to Complete the
Exchange.")
FEDERAL INCOME TAX CONSIDERATIONS
We intend to take the position that the exchange of Senior Notes for
Preferred Stock and cash pursuant to the Exchange Offer will be treated as a
taxable exchange. Accordingly, a holder of Senior Notes will recognize gain or
loss in an amount equal to the difference between (a) the sum of the cash and
the fair market value of the Preferred Stock received pursuant to the Exchange
and (b) the holders adjusted tax basis in the Senior Notes. The Exchange Offer
will also have important tax effects on the Company, including the potential
realization of income from cancellation of indebtedness and limitations on its
ability to utilize net operating losses. See "Federal Income Tax
Considerations."
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock currently consists of 30,000,000 shares of
Common Stock, par value $0.01 per share, and 10,000,000 shares of preferred
stock, par value $0.01 per share. As of December 31, 1999, we had 9,133,569
shares of Common Stock and no shares of preferred stock outstanding. We have
reserved an aggregate of 4,750,000 shares of Common Stock for issuance pursuant
to our stock plans and 350,000 shares of Preferred Stock for issuance in
connection with the Exchange Offer.
Common Stock. Each share of Common Stock has one vote on all matters on which
stockholders are entitled or permitted to vote, including the election of
directors. The holders of Common Stock are entitled to
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share ratably in dividends declared by the Board of Directors out of funds
legally available therefor. The Company did not declare any dividends on any
class of equity during 1999 and does not expect to declare or pay cash
dividends to holders of its Common Stock in the foreseeable future. In
addition, it is expected that covenants governing the New Credit Facility will
restrict the payment of cash dividends by the Company.
Preferred Stock. Except as otherwise expressly provided in the Certificate of
Vote of Directors relating to the Preferred Stock, the holders of the Preferred
Stock shall vote as a single class with the holders of Common Stock, with each
share of Preferred Stock entitled to one vote for each share of Common Stock
issuable upon conversion of the Preferred Stock on the relevant record date.
The holders of the issued and outstanding Preferred Stock shall be entitled to
receive, at our election, a cash or payment-in-kind dividend on each issued and
outstanding share of Preferred Stock equal to 8% of the liquidation preference
for each share, or $100.00 plus all accrued but unpaid dividends on each such
share, payable semi-annually. These dividends shall be prior and in preference
to the payment of any dividend on our Common Stock.
In the event of any liquidation, dissolution or winding up of the Company,
each holder of shares of Preferred Stock will be entitled to receive, prior and
in preference to any payment or distribution of any legally available funds or
assets on any shares of Common Stock or any other class or series of our
capital stock, an amount per share equal to $100.00, plus all accrued but
unpaid dividends on each such share. The Company may redeem all or a portion of
the Preferred Stock at any time following the issuance of the Preferred Stock.
The Preferred Stock is subject to customary anti-dilution protection. The
Company has agreed to file a registration statement covering the shares of
Preferred Stock issued in the Exchange within 120 days of the Effective Date.
LISTING AND TRADING OF SENIOR NOTES, COMMON STOCK AND PREFERRED STOCK
The Senior Notes are not listed on any national or regional exchange or
included in the NASDAQ. The Senior Notes trade on a limited basis in the over-
the-counter market. Trading in the Senior Notes is extremely limited, however,
and you are encouraged to obtain current information on the market price of the
Senior Notes that you hold.
The Common Stock is currently quoted on the AMEX under the symbol "VX." On
May 2, 2000, the reported closing price of the Common Stock was $5.375 per
share.
The Preferred Stock when issued will not be quoted on any national or
regional exchange or included in the NASDAQ.
EXCHANGE AGENT
State Street Bank and Trust Company will act as Exchange Agent for the
Exchange Offer. All correspondence in connection with the Exchange Offer and
the Letter of Transmittal should be sent to the Exchange Agent at the address
set forth on the back cover page of this document.
BOARD APPROVAL
The Company's Board of Directors has unanimously approved the terms of the
proposed Exchange and believes that it is in the best interests of the Company.
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RISK FACTORS
Holders of Senior Notes should consider the factors set forth below, as well
as the other information set forth in this document and in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, a copy of
which is attached hereto, prior to determining whether to (1) tender Senior
Notes and (2) consent to the proposed amendments to the Indenture.
RISKS TO HOLDERS OF SENIOR NOTES IF THE EXCHANGE IS NOT SUCCESSFULLY COMPLETED
We are currently in a very competitive market. We believe that the strategic
plan is necessary to enable us to stay competitive. Although we believe that
we will have sufficient liquidity to meet our financial obligations as they
become due for the current fiscal year, we may not have funds available to pay
all the Senior Notes at maturity unless there are significant improvements in
the credit markets. Thus, if we do not complete the Exchange, we will have to
consider other alternatives, including bankruptcy, at or before maturity of
the Senior Notes. The results of these alternatives may be significantly less
favorable to the holders of Senior Notes than the Exchange.
RISKS IF THE EXCHANGE OFFER IS COMPLETED OUTSIDE OF BANKRUPTCY
Particular Consequences to Non-Tendering Holders of Senior Notes
If the Exchange Offer is completed outside of bankruptcy, holders of Senior
Notes who do not accept the Exchange Offer will lose the benefit of numerous
provisions in the Indenture. See "The Exchange Offer--Proposed Amendments" and
"Proposed Amendments To Indenture." In addition, because the number of holders
of Senior Notes after the completion of the Exchange Offer will be extremely
limited, it is unlikely that there will be any active trading in the Senior
Notes. Finally, non-tendering holders of Senior Notes will be giving up the
opportunity to receive for their Senior Notes the consideration that we are
offering in the Exchange, including the $780.00 in cash for each $1,000
principal amount of Senior Notes. After the completion of the Exchange, the
New Credit Facility will be secured by liens on all of our assets and
therefore will be senior in priority to the Senior Notes.
Particular Consequences to Tendering Holders of Senior Notes
Holders who tender Senior Notes will receive cash and Preferred Stock but
will lose all rights associated with the Senior Notes. The Indenture obligates
us to pay holders of Senior Notes 12 3/4% per year in interest. It is
anticipated that cash dividend payments on the Preferred Stock and the Common
Stock will be prohibited under the terms of the New Credit Facility, subject
to certain exceptions. Also, the Senior Notes represent indebtedness rather
than equity. As such, if the Company were to be liquidated, dissolved or wound
up, holders of Senior Notes would be entitled to payment prior to holders of
Preferred Stock and Common Stock.
Finally, if we were to become subject to a petition for relief under the
Bankruptcy Code within 90 days after the consummation of the Exchange Offers
(or, with respect to any insiders specified in the Bankruptcy Code, within one
year after consummation of the Exchange Offer) and certain other conditions
are met, the consideration paid to holders of our Senior Notes in the Exchange
Offer, absent the presence of one of the Bankruptcy Code defenses to
avoidance, could be avoided as a preferential transfer and, to the extent
avoided, the value of such consideration could be recovered from such holder
and possibly from subsequent transferees.
CONTINUING RISKS TO THE COMPANY AND ALL OF OUR SECURITY HOLDERS
High Leverage; Our Financial Condition
Once the Exchange is complete and the New Credit Facility is in place, we
will continue to be in a highly leveraged position. Our debt service
obligations will be substantial. In addition, the terms of the New Credit
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Facility will impose operating and financial restrictions. As a result, (i)
our ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes will be impaired, (ii) a substantial portion of our cash flow from
operations will be dedicated to servicing our indebtedness, (iii) we will be
unable to pay dividends, (iv) we may be at a competitive disadvantage to our
less-leveraged competitors, (v) we could be more vulnerable to changes in
general economic conditions, and (vi) if we are unable to meet our debt
service obligations, the Preferred Stock issued in the Exchange may have
little or no value.
We believe, however, that once the strategic plan has been implemented, we
will be able to generate sufficient funds from operations to make our required
principal and interest payments. There is no guarantee, however, that we will
be able to do so.
Competition
Several of our current and potential competitors have substantially greater
financial, sales, marketing, managerial, operational and other resources, as
well as greater name recognition, than Vialog. As a result, competitors may be
able to respond more effectively than we can to new or emerging technologies
and changes in customer requirements, to initiate or withstand significant
price decreases or to devote substantially greater resources than Vialog in
order to develop and promote new services. In addition, 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 Vialog. In addition, there can be no
assurance that our current interexchange carrier ("IXC") and local exchange
carrier ("LEC") customers will not begin to provide the teleconferencing
services currently provided by us and pursue such market actively and in
direct competition with us. Furthermore, if we are able to expand our video
and Internet conferencing service offerings, we will encounter additional
competition, not only from existing providers of audioconferencing, but also
from competitors dedicated to video and/or Internet conferencing.
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. Prior to that time,
our operating centers each operated as separate, independent businesses. In
addition, we used the purchase method of accounting to record the acquisitions
of the operating centers and consequently, our pro forma and consolidated
financial information may not be indicative of our future operating results
and financial condition.
Difficulty of Integrating the Operating Centers.
Prior to their acquisitions, our operating centers used different operating
practices and procedures and management information systems. There can be no
assurance that we 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.
Restrictions Imposed by Lenders.
The New Credit Facility will 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 breach of any of these covenants could result in a default
under the New Credit Facility, which would permit the lenders under the New
Credit Facility to declare all amounts borrowed thereunder to be due and
payable, together with accrued and unpaid interest. In addition, as a result
of these covenants, our ability to respond to changing business and economic
conditions and to secure additional financing, if needed, may be significantly
restricted, and we may be prevented from engaging in transactions that might
otherwise be considered beneficial to the
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Company. Any of such events could adversely impact the market for the
Company's Senior Notes, Preferred Stock and Common Stock.
Teleconferencing Insourcing.
Many of our 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 our customers will not
establish internal teleconferencing facilities or expand existing facilities,
then cease to use the Company's services.
Recent Entry into Internet Conferencing Markets.
We have limited experience to handle Internet conferencing. There can be no
assurance that we will be able to obtain significant business from Internet
conferencing services or, if obtained, that we have the ability to service
such business.
Technological Considerations.
We currently derive a substantial portion of our net revenues from the sale
of audio teleconferencing services. If the manufacturers of private branch
exchanges ("PBXs"), the equipment used by most businesses and institutions to
handle their internal telephone requirements, develop improved, cost-effective
PBX capabilities for handling teleconferencing calls with the quality and
functionality of existing MCUs used in the teleconferencing business, our
customers could choose to purchase such equipment and hire the personnel
necessary to service their teleconferencing needs through internal telephone
systems.
Long Distance Services Contracts.
A significant portion of our direct costs are attributable to the purchase
of local and long distance telephone services. If the costs of long distance
services increase over time, our current purchasing strategy, which calls for
shorter-term contracts, may place us at a competitive disadvantage with
respect to competitors that have entered into longer-term contracts for long
distance services.
Regulation.
In general, the telecommunications industry is subject to extensive
regulation by federal, state and local governments. There can be no assurance
that the Federal Communications Commission (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 we would be able to comply with any such requirements. The
Telecommunications Act of 1996 has effected significant changes in the
telecommunications industry and we cannot predict the extent to which such
changes or the implementation of the Telecommunications Act of 1996 by the FCC
may ultimately affect our business. Changes in the current federal, state or
local legislation or regulation could have a material adverse effect on our
business, financial condition, results of operations and prospects and could
adversely impact the market for our Common Stock. Moreover, government
regulations in countries other than the United States vary widely and may
restrict our ability to offer our services in those countries.
Potential Fluctuation in Quarterly Results.
Our expenses are based, in part, on our expectations as to future net
revenues. If net revenues are below expectations, we 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.
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Absence of Dividends.
We intend to retain future earnings, if any, for use in the development of
our business and do not anticipate declaring or paying any cash dividends on
the Common Stock in the foreseeable future. In addition, the Company will be
restricted from paying dividends except in certain limited circumstances
pursuant to the terms of the New Credit Facility.
Potential Acquisitions.
One element of our business strategy is to acquire additional group
communications service businesses. However, we are aware of only a limited
number of potential acquisition candidates. Our inability to implement our
acquisition strategy successfully or the failure to integrate new businesses
or operations into our current operations could have a material adverse effect
on our business, financial condition, results of operations and prospects and
could adversely impact the market for the Common Stock.
RISKS TO HOLDERS OF OUR COMMON STOCK AND PREFERRED STOCK
Possible Volatility of Stock Price.
The market price of the Common Stock could be subject to significant
fluctuations in response to various factors and events, including the depth
and liquidity of the trading market for the Common Stock and variations in the
Company's operating results. In addition, the stock market in recent years has
experienced broad price and volume fluctuations that have often been unrelated
to the operating performance of companies. These broad market fluctuations may
also adversely affect the market price of the Common Stock.
Effect of Certain Charter and By-Law Provisions and Anti-Takeover
Provisions.
The Company's Articles of Organization, our 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
our Common Stock which may be caused by accumulations of stock, thereby
depriving stockholders of certain opportunities to sell their stock at
temporarily higher prices. In addition, 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.
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THE EXCHANGE OFFER
CONSIDERATION
We are offering to exchange:
. An aggregate of $58,500,000 in cash, and
. An aggregate of 165,000 newly issued Preferred Stock
for all of the outstanding Senior Notes. Accrued and unpaid interest on the
Senior Notes will continue to be payable when due. Any accrued but unpaid
interest on the Senior Notes through the completion of the Exchange will be
paid on the date upon which the Exchange becomes effective (the "Effective
Date").
The aggregate as-converted percentage of the Company's Common Stock that
will be represented by the Preferred Stock will depend on the conversion price
per share. The conversion price will be established on the Effective Date, and
will be the lesser of (i) $8.00 per share or (ii) 150% of the average closing
price of the Company's Common Stock for the 20 trading days immediately
preceding the Effective Date, subject to certain downward adjustments as
described in Annex H. If the Effective Date had occurred on May 2, 2000, then
the conversion price would be $6.389 per share and the Preferred Stock would
represent in the aggregate 22% of the Company's outstanding Common Stock.
Each holder of Senior Notes would receive $780.00 in cash and 2.2 shares of
Preferred Stock for each $1,000 principal amount of Senior Notes.
BACKGROUND AND PURPOSE OF THE EXCHANGE OFFER
We have significant future debt service obligations, consisting primarily of
the Senior Notes that mature in November 2001. Although we believe that we
will have sufficient liquidity to meet our financial obligations as they
become due for the current fiscal year, we may not have funds available to pay
all the Senior Notes at maturity unless there are significant improvements in
the credit markets. To address these debt service obligations, we have
developed a strategic plan designed to enable us to reduce our long-term debt
and improve our profitability.
The purpose of the Exchange Offer is to acquire at least 95% of the
outstanding Senior Notes. If we are unable to complete the proposed Exchange
and the implementation of our strategic plan, you may ultimately receive less
for your Senior Notes than the cash offered in the Exchange. See "The
Strategic Plan."
DEVELOPMENT OF TERMS OF THE EXCHANGE OFFER
In December, 1999, as part of the development of our strategic plan,
Houlihan, Lokey, Howard & Zukin, Inc. ("Houlihan") was retained as the
investment banking agent to structure an exchange offer for the Company's
outstanding Senior Notes.
In December, 1999, Houlihan began to develop the terms for an exchange offer
that could be offered to holders of Senior Notes. The Company initiated
conversations with several holders of the Senior Notes. At about the same
time, certain institutional holders of Senior Notes formed the Unofficial
Committee. Once constituted, the Unofficial Committee retained Debevoise &
Plimpton as its counsel and to act as its representative in negotiations with
us.
In December, 1999, the Board of Directors met to review the exchange offer
developed by Houlihan for presentation to the Unofficial Committee. The Board
unanimously approved an offer of $58.5 million in cash and $16.5 million face
amount of Preferred Stock for all of the Senior Notes.
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In January, 1999, representatives of the Company spoke with certain holders
of the Notes, including the members of the Unofficial Committee and its
counsel, to describe the proposed offer. In these conversations, we reviewed
our present situation and prospects in detail, explained the rationale for our
new offer and answered questions.
On February 15, 2000, lock-up letters were sent to the members of the
Unofficial Committee proposing total consideration of $58.5 million in cash
and $16.5 million face amount of Preferred Stock.
Members of the Unofficial Committee holding approximately 87% of the Senior
Notes signed lock-up letters agreeing to, among other things, tender their
Senior Notes in the Exchange Offer. The lock-up letters will terminate, if not
extended, on July 15, 2000.
PROPOSED AMENDMENTS
We are seeking consents to the proposed amendments to the Indenture in case
we complete the Exchange Offer outside of bankruptcy. The proposed amendments
would eliminate substantially all of the restrictive covenants and most of the
events of default in the Indenture. If registered holders of at least a
majority in aggregate principal amount of the Senior Notes consent to the
proposed amendments, we will, together with the Trustee, execute the Amendment
to Indenture. The Amendment to Indenture will not become effective unless the
Exchange Offer is completed outside of bankruptcy. See "Proposed Amendments to
Indenture."
The valid tender of your Senior Notes will constitute consent to the
proposed amendments.
EXPIRATION; EXTENSION; TERMINATION
The Exchange Offer will expire at 5:00 p.m., New York City time, on June 1,
2000. We reserve the right to extend the Expiration Date for the Exchange
Offer. If we receive a sufficient number of acceptances to complete the
Exchange outside of bankruptcy, we believe that it will take approximately two
more weeks to complete the Exchange.
During any extension of the Exchange Offer, all Senior Notes previously
tendered and not accepted for exchange will remain subject to the terms and
conditions set forth in this Exchange Offer and Solicitation Document and may,
subject to the terms and conditions set forth herein, be accepted for exchange
by us. During any extension of the Exchange Offer, all consents delivered to
the Exchange Agent will remain effective unless validly revoked prior to
execution of the Amendment to Indenture. See "Procedure for Tendering Notes
and Delivery of Consents--Revocation of Consents."
We expressly reserve the absolute right, in our sole discretion (i) to amend
or modify any or all of the terms of any or all of the Exchange Offer, or (ii)
to terminate the Exchange Offer and the consent solicitations and delay
acceptance for exchange of, or exchange for, the Senior Notes tendered and/or
consents delivered pursuant thereto. Any extension or termination of the
Exchange Offer or any amendment or modification of any of the terms of the
Exchange Offer will be followed as promptly as practicable by public
announcement thereof, such announcement in the case of an extension to be
issued no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date. Without limiting the manner by
which we may choose to make such announcement, we will not, unless otherwise
required by law, have any obligation to publish, advertise or otherwise
communicate any such public announcement other than by making a release to the
Dow Jones News Service or such other means of announcement as we deem
appropriate.
Upon termination of the Exchange Offer, all Senior Notes previously tendered
in the Exchange Offer will be promptly returned to the tendering holders.
CONDITIONS OF THE EXCHANGE OFFER
Completion of the Exchange Offer outside of bankruptcy is conditioned upon
the following:
(i) at least 95% of the principal amount of the Senior Notes shall have
been validly tendered and not withdrawn in the Exchange Offer;
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(ii) the Company shall have obtained at least $75,000,000 of new bank
financing which shall be available on the Effective Date;
(iii) there shall not have been instituted or threatened before any court
or governmental agency, authority or body or any arbitrator any
action or proceeding (i) challenging the acquisition of Senior Notes
or the issuance of Preferred Stock or payment of cash pursuant to the
Exchange Offer, or (ii) in our sole judgment, otherwise materially
adversely affecting the transactions contemplated by the Exchange
Offer or the contemplated benefits of the Exchange Offer;
(iv) there shall not have been proposed or enacted any statute or other
legislation, rule or regulation, and no action shall have been taken
by any governmental authority, which would or might, in our sole
judgment, prohibit, restrict or delay consummation of the Exchange
Offer or materially impair the contemplated benefits of the Exchange
Offer;
(v) there shall not exist, in our sole judgment, any other actual or
threatened legal impediment to the acquisition by us of Senior Notes or
to the issuance of the Preferred Stock or payment of cash pursuant to
the Exchange Offer or any other circumstances that would materially
adversely affect the transactions contemplated by the Exchange Offer or
the contemplated benefits of the Exchange Offer;
(vi) there shall not have occurred, in our sole judgment: (a) any general
suspension of trading in, or limitation on prices for, securities
listed on the New York Stock Exchange (the "NYSE") or in the over-the-
counter market; (b) a declaration of a banking moratorium or any
suspension of payments in respect of the banks in the United States
(whether or not mandatory); (c) a commencement of a war, armed
hostilities or other international or national emergency directly or
indirectly involving the United States; (d) any significant change in
the United States or any other currency exchange rates or a suspension
of, or limitation on, the markets therefor (whether or not mandatory);
(e) any limitation (whether or not mandatory) by any governmental
authority on, or any other event having reasonable likelihood of
affecting, the extension of credit by banks or other lending
institutions in the United States; or (f) in the case of any of the
foregoing existing at the time of the commencement of the Exchange
Offer, in our sole judgment, a material acceleration or worsening
thereof; and
(vii) there shall not have occurred or be likely to occur an event or
events which, in our sole judgment, would or might prohibit, restrict
or delay the consummation of the Exchange Offer or materially impair
the contemplated benefits of the Exchange Offer or otherwise result
in consummation of the Exchange Offer not being in our best
interests.
If any of the foregoing conditions shall not be satisfied, we may either:
. terminate the Exchange Offer and return all Senior Notes tendered;
. extend the Exchange Offer and retain all tendered Senior Notes until the
final Expiration Date for the extended Exchange Offer; or
. waive the unsatisfied conditions with respect to the Exchange Offer and
accept all Senior Notes tendered pursuant to the Exchange Offer.
All the foregoing conditions are for our sole benefit and we may assert them
regardless of the circumstances giving rise to such condition and we may waive
them in whole or in part, at any time and from time to time, in our sole
discretion. Our failure at any time to exercise any of the foregoing rights
shall not be deemed a waiver of that right and each right shall be deemed an
ongoing right which may be asserted at any time and from time to time. As used
herein, "Effective Date" means the date specified as such in a written notice
given by us to the Exchange Agent and the Trustee, which notice also confirms
that each of the foregoing conditions to completion of the Exchange Offer have
been completed or satisfied (or waived by us), provided, however, that such
notice shall be given by us to the Exchange Agent and Trustee no later than
two (2) business days prior to the date specified therein as the Effective
Date.
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SOURCES OF FUNDS FOR EXCHANGE OFFER
The expenses to be incurred in connection with the Exchange Offer, including
the fees and expenses of the Exchange Agent and the Trustee, and printing,
filing, accounting, legal and financial advisor fees, will be paid by us and
are estimated to be approximately $300,000 (a portion of which has been paid
prior to the completion of the Exchange Offer).
The payment of expenses and the cash payment to holders of Senior Notes will
be funded by existing cash and by draws under the New Credit Facility.
APPRAISAL RIGHTS
Holders of Senior Notes do not have any appraisal or similar statutory
rights in connection with the Exchange Offer or the consent solicitation.
EXCHANGE AGENT
State Street Bank and Trust Company will act as Exchange Agent for the
Exchange Offer. All correspondence in connection with the Exchange Offer and
the Letter of Transmittal/Consent Form dated May 3, 2000 (the "Letter of
Transmittal") should be addressed to the Exchange Agent as set forth on the
back cover page of this document.
LEGAL OPINION
The validity of (i) the Preferred Stock issuable in the Exchange Offer and
(ii) the Common Stock issuable upon conversion of the Preferred Stock, is
being passed upon by counsel acceptable to counsel to the Unofficial
Committee.
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PROCEDURE FOR TENDERING SENIOR NOTES AND DELIVERY OF CONSENTS
GENERAL
The following summarizes the procedures to be followed by all holders of
Senior Notes in tendering their securities and delivering consents to the
proposed amendments to the Indenture.
Holders who tender Senior Notes in the Exchange Offer in accordance with the
procedures described below will be deemed to have delivered consents to the
proposed amendments to the Indenture.
TENDER OF SENIOR NOTES; DELIVERY OF CONSENTS
A registered holder of Senior Notes can tender Senior Notes by:
. delivering a properly completed and duly executed Letter of Transmittal
or manually-signed facsimile thereof (or, in the case of a book-entry
transfer, an Agent's Message (as defined under "--Book-Entry Transfers"
below)) and any other documents required by the Letter of Transmittal,
to the Exchange Agent at the address set forth below and on the back
cover page of this document, and
. either delivering certificates representing the Senior Notes to the
Exchange Agent or complying with the book-entry transfer procedures
described under "--Book-Entry Transfers" below,
on or prior to the Expiration Date. A registered holder who cannot comply with
these procedures on a timely basis or whose Senior Notes are not immediately
available may tender Senior Notes pursuant to the guaranteed delivery
procedures under "Guaranteed Delivery Procedures" described below.
Letters of Transmittal and certificates representing Senior Notes should be
sent only to the Exchange Agent and not to us or to the Trustee. The following
is the address for hand deliveries and delivery by overnight courier to the
Exchange Agent:
By Mail: By Hand and Overnight Courier:
State Street Bank and Trust Company
Corporate Trust Department, 5th Floor
State Street Bank and Trust Company Attn: Susan Lavey
Corporate Trust Department 2 Avenue de Lafayette
Attn: Susan Lavey Boston, MA 02111-1724
P.O. Box 778
Boston, MA 02102
For Information Call:
(617) 662-1544
If the certificates for Senior Notes are registered in the name of a person
other than the signer of a Letter of Transmittal, then, in order to tender
such Senior Notes pursuant to the Exchange Offer, the certificates
representing such Senior Notes must be endorsed or accompanied by appropriate
bond powers, signed exactly as the name or names of such holder or holders
appear on the certificates, with the signatures on the certificates or bond
powers guaranteed as provided below. In the event such procedures are followed
by a beneficial owner tendering Senior Notes, the registered holder or holders
of such Senior Notes must sign a valid proxy pursuant to the Letter of
Transmittal, because Senior Notes may not be tendered without also consenting
to the proposed amendments to the Indenture and only holders are entitled to
deliver consents.
Any beneficial owner whose Senior Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee or held
through a book-entry transfer facility, and who wishes to tender Senior Notes
and deliver a consent to the proposed amendments to the Indenture should
contact such registered holder promptly and instruct such registered holder to
tender Senior Notes on such beneficial owner's behalf.
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To effectively tender Senior Notes that are held through The Depository
Trust Company ("DTC"), DTC participants should transmit their acceptance
through DTC's Automated Tender Offer Program ("ATOP"), for which the
transaction will be eligible, and DTC will then edit and verify the acceptance
and send an Agent's Message to the Exchange Agent for its acceptance. Delivery
of tendered Senior Notes held through DTC must be made to the Exchange Agent
pursuant to the book-entry delivery procedures set forth below or the
tendering DTC participant must comply with the guaranteed delivery procedures
set forth below.
THE METHOD OF DELIVERY OF SENIOR NOTES AND ALL OTHER REQUIRED DOCUMENTS TO
THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER TENDERING SENIOR
NOTES. INSTEAD OF DELIVERY BY MAIL, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR
HAND DELIVERY SERVICE. IF DELIVERY IS BY MAIL, WE SUGGEST THAT YOU USE
PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE
MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT
DELIVERY TO THE EXCHANGE AGENT PRIOR TO SUCH DATE.
A valid tender of your Senior Notes will constitute an agreement with us in
accordance with the terms and conditions set forth in this Offering Memorandum
and Solicitation Document and in the Letter of Transmittal. You should read
the Letter of Transmittal carefully.
The entire principal amount of Senior Notes deposited with the Exchange
Agent will be deemed to have been tendered unless otherwise indicated. If less
than the entire principal amount of any Senior Notes evidenced by a submitted
certificate is tendered, the tendering holder should fill in the principal
amount tendered in the appropriate box on the Letter of Transmittal with
respect to the deposit being made. Such tender will also constitute a consent
to the proposed amendments to the Indenture, but only to the extent of the
principal amount of Senior Notes being tendered. The Exchange Agent will then
return to the tendering holder (unless otherwise requested under "Special
Delivery Instructions" in the Letter of Transmittal), as promptly as
practicable following the Expiration Date, Senior Notes in principal amount
equal to the portion of such delivered Senior Notes not tendered.
SIGNATURE GUARANTEES
All signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities
Dealers, Inc., or by a commercial bank or trust company having an office in
the United States (each of which is an "Eligible Institution") unless the
Senior Notes tendered pursuant thereto are tendered:
. by a registered holder of Senior Notes (or by a participant in DTC whose
name appears on a security position listing such participant as the
owner of such Senior Notes) who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal, or
. for the account of an Eligible Institution.
BOOK-ENTRY TRANSFERS
The Exchange Agent will establish an account with respect to the Senior
Notes at DTC promptly after the date of this Offering Memorandum and
Solicitation Document. A financial institution that is a participant in DTC's
system may make book-entry delivery of Senior Notes by causing DTC to transfer
such Senior Notes into the Exchange Agent's account at DTC in accordance with
DTC's procedure for such transfer. ATOP is the only method of processing
exchange offers through DTC. To accept the Exchange offer through ATOP,
participants in DTC holding book entry interests representing the Senior Notes
("Book Entry Interests") must send electronic instructions to DTC through
DTC's communication system in place of sending a signed, hard copy of the
Letter of Transmittal. DTC is obligated to communicate those electronic
instructions to the Exchange Agent. To tender Book Entry Interests through
ATOP, the electronic instructions sent to DTC and transmitted by DTC to the
Exchange Agent must contain a computer generated message by which the
participant acknowledges its receipt of and agrees to be bound by the Letter
of Transmittal.
21
<PAGE>
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of a book-entry
confirmation, which states that DTC has received an express acknowledgment
from the participant in DTC tendering the Senior Notes stating (i) the
aggregate principal amount of Senior Notes which have been tendered by such
participant and for which consents to the proposed amendments to the Indenture
have been thereby delivered, (ii) that such participant has received and
agrees to be bound by the terms of the Exchange Offer, and (iii) that the
Company may enforce such agreement against the participant.
GUARANTEED DELIVERY PROCEDURES
If a holder desires to tender Senior Notes and consent to the proposed
amendments to the Indenture and (i) the holder's Senior Notes are not lost but
are not immediately available, (ii) time will not permit the holder's Senior
Notes or other required documents to reach the Exchange Agent before the
Expiration Date, or (iii) the procedures for book-entry transfer cannot be
completed on a timely basis, a tender and consent may be effected if:
. the tender is made through an Eligible Institution; and
. prior to the Expiration Date, the Exchange Agent receives from the
Eligible Institution a properly completed Notice of Guaranteed Delivery
(by telegram, telex, facsimile transmission, mail or hand delivery)
substantially in the form we provide which sets forth the name and
address of the holder and the amount of Senior Notes tendered; and
. a Letter of Transmittal (or a manually signed facsimile thereof),
properly completed and validly executed with any required signature
guarantees or, in the case of a book-entry transfer, an Agent's Message,
together with certificates for all Senior Notes in proper form for
transfer (or a book-entry confirmation with respect to all tendered
Senior Notes), and any other required documents are received by the
Exchange Agent within three NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
TRANSFERS OF OWNERSHIP OF TENDERED NOTES
Holders may not transfer record ownership of any Senior Notes validly
tendered into the Exchange Offer and not validly withdrawn. Beneficial
ownership in tendered Senior Notes may be transferred by the holder by
delivering to the Exchange Agent, at one of its addresses set forth on the
back cover of this Exchange Offer and Solicitation Document, an executed
Letter of Transmittal identifying the name of the person who deposited the
notes to be transferred, and completing the special payment instructions box
with the name of the transferee (or, if tendered by book-entry transfer, the
name of the participant in DTC whose name appears on the security position
listing as the transferee of such notes) and the principal amount of the
Senior Notes to be transferred. If certificates have been delivered or
otherwise identified (through a book-entry confirmation with respect to such
Senior Notes) to the Exchange Agent, the name of the holder who deposited the
Senior Notes, the name of the transferee and the certificate numbers relating
to such Senior Notes should also be provided in the Letter of Transmittal. A
person who succeeds to the beneficial ownership of tendered Senior Notes
pursuant to the procedures set forth herein will be entitled to receive the
Exchange consideration if the Senior Notes are accepted for exchange or to
receive the tendered Senior Notes if the Exchange Offer is terminated.
LOST OR MISSING CERTIFICATES
If a holder desires to tender Senior Notes pursuant to the Exchange Offer,
but the certificates representing such Senior Notes have been mutilated, lost,
stolen or destroyed, such holder should write to or telephone the
22
<PAGE>
Trustee, at the address or numbers listed below, about procedures for
obtaining replacement certificates for such Senior Notes, arranging for
indemnification or about any other matter that requires handling by the
Trustee:
State Street Bank and Trust Company
Corporate Trust Division
2 Avenue de Lafayette
Boston, Massachusetts 02111-1724
Attention: Mr. Roland Gustafsen
Telephone: (617) 662-1699
BACKUP WITHHOLDING
Each tendering holder must complete and deliver the Substitute Form W-9
provided in the Letter of Transmittal to us (or the Exchange Agent) and
either:
. provide his correct taxpayer identification number (social security
number, for individuals) and certify (a) that the taxpayer
identification number provided is correct (or that such holder is
awaiting a taxpayer identification number) and (b) that such holder is
not subject to backup withholding because (A) such holder is exempt from
backup withholding, (B) such holder has not been notified by the
Internal Revenue Service that he is subject to backup withholding as a
result of failure to report all interest or dividends, or (C) the
Internal Revenue Service has notified such holder that he is no longer
subject to backup withholding, or
. otherwise provide an adequate basis for exemption from backup
withholding.
Holders who do not satisfy these conditions may be subject to a $50 (or
greater) penalty imposed by the Internal Revenue Service and may be subject to
backup withholding (as discussed below). Exempt holders (including, among
others, corporations and certain foreign individuals) are not subject to these
requirements if they satisfactorily establish their status as such. Certain
foreign holders may be required to provide a Form W-8 (or successor form) in
order to avoid or reduce withholding tax.
Pursuant to the backup withholding provisions of federal income tax law,
unless the conditions described above are satisfied, we or the Exchange Agent,
as the case may be, will withhold an amount of any cash proceeds payable to a
tendering holder that will enable us or the Exchange Agent, as the case may
be, to remit the appropriate amount of backup withholding due to the Internal
Revenue Service with respect to the Exchange. Backup withholding is 31%.
Amounts paid as backup withholding do not constitute an additional tax and
generally will be credited against the holder's federal income tax
liabilities. Different withholding rates and rules may apply in the case of
foreign holders. By tendering Senior Notes pursuant to the Exchange Offer, a
holder that does not comply with the conditions described in the preceding
paragraph authorizes us or the Exchange Agent, as the case may be, to pay cash
in an amount sufficient to satisfy the holder's withholding obligations.
ACCEPTANCE OF SENIOR NOTES, DELIVERY OF PREFERRED STOCK AND PAYMENT
The acceptance for exchange and payment of Senior Notes validly tendered and
not withdrawn and delivery of Preferred Stock and payment of cash in exchange
for the Senior Notes will be made promptly after the Expiration Date. We,
however, expressly reserve the right to delay acceptance of any of the Senior
Notes or terminate the Exchange Offer and not accept for exchange any Senior
Notes not theretofore accepted if any of the conditions set forth under "The
Exchange Offer--Conditions of the Exchange Offer" shall not have been
satisfied or waived by us. For purposes of the Exchange Offer, we will be
deemed to have accepted for exchange validly tendered Senior Notes if, as and
when we give oral or written notice thereof to the Exchange Agent. Subject to
the following paragraph and the other terms and conditions of the Exchange
Offer, delivery of Preferred Stock and payment of cash for Senior Notes
accepted pursuant to the Exchange Offer will be made by the Exchange Agent as
soon as practicable after receipt of such notice. The Exchange Agent will act
as agent for the tendering holders for the purposes of receiving Preferred
Stock and cash from us and transmitting the Preferred Stock and cash to the
tendering holders. We will return any tendered Senior Notes not accepted for
exchange without expense to the tendering holder as promptly as practicable
following the Expiration Date.
23
<PAGE>
Notwithstanding any other provision hereof, delivery of Exchange
consideration for Senior Notes accepted for exchange pursuant to the Exchange
Offer will in all cases be made only after timely receipt by the Exchange
Agent of (a) certificates for (or a timely book-entry confirmation with
respect to) such Senior Notes, (b) a Letter of Transmittal (or a manually
signed facsimile thereof), properly completed and validly executed, with any
required signature guarantees or, in the case of a book-entry transfer, an
agent's message, and (c) any other documents required by the applicable Letter
of Transmittal and the instructions thereto. Accordingly, tendering holders
whose certificates for Senior Notes or book-entry confirmation with respect to
Senior Notes are actually received by the Exchange Agent after the Expiration
Date may be paid later than other tendering holders. UNDER NO CIRCUMSTANCES
WILL INTEREST BE PAID ON THE EXCHANGE CONSIDERATION TO BE PAID BY US BECAUSE
OF ANY DELAY IN MAKING SUCH DELIVERY OR OTHERWISE.
All tendering holders, by execution of the Letter of Transmittal (or
facsimile thereof), waive any right to receive notice of acceptance of their
Senior Notes for exchange.
WITHDRAWAL
Holders who tender Senior Notes pursuant to the Exchange Offer may not
withdraw such Senior Notes after the Withdrawal Termination Date unless (i) we
reduce the Exchange consideration deliverable to such holders, (ii) we reduce
the principal amount or otherwise modify the terms of the Senior Notes subject
to the Exchange Offer, (iii) we are otherwise required by law to permit
withdrawal, or (iv) we do not complete the Exchange by July 15, 2000. In the
case of a reduction in the Exchange consideration or the principal amount of
Senior Notes subject to the Exchange Offer, previously tendered Senior Notes
may be validly withdrawn until the expiration of five business days after the
date that notice of any such reduction is first published, given or sent to
holders by us. PRIOR TO THE EXECUTION OF THE AMENDMENT TO INDENTURE, A
WITHDRAWAL OF THE TENDER OF A SENIOR NOTE WILL ALSO EFFECT A REVOCATION OF A
CONSENT TO THE PROPOSED AMENDMENTS TO THE INDENTURE. Consents to the proposed
amendments to the Indenture cannot be revoked after execution of the Amendment
to Indenture. See "Proposed Amendments to Indenture."
Holders who wish to exercise their right of withdrawal must give notice of
withdrawal in writing or by telegram, telex or facsimile transmission, which
notice must be received by the Exchange Agent at the address set forth on the
back cover page of this Offering Memorandum and Solicitation Document. Except
as provided in the preceding paragraph, such notice must be received on or
prior to the Withdrawal Termination Date. Any such notice of withdrawal must
specify the name of the person who tendered the Senior Notes to be withdrawn;
the name in which the Senior Notes are registered (or, if tendered by book-
entry transfer, the name of the participant in DTC whose name appears on the
security position listing as the owner of such notes), if different from that
of the depositor; and the principal amount of Senior Notes to be withdrawn. If
Senior Notes have been delivered or otherwise identified (through book-entry
confirmation) to the Exchange Agent, the name of the registered holder and the
serial numbers of the particular Senior Notes to be so withdrawn (or, in the
case of Senior Notes transferred by book-entry transfer, the name and number
of the account at DTC to be credited with withdrawn Senior Notes) must also be
furnished to the Exchange Agent prior to the physical release of the withdrawn
Senior Notes. Such notice of withdrawal must be signed by the holder in the
same manner as the original signature on the Letter of Transmittal or be
accompanied by evidence satisfactory to us that the person withdrawing the
tender has succeeded to the beneficial ownership of the Senior Notes.
Any permitted withdrawals of tenders of Senior Notes may not be rescinded,
and any Senior Notes withdrawn will thereafter be deemed not validly tendered
for purposes of the Exchange Offer, provided, however, that withdrawn Senior
Notes may be re-tendered by following one of the procedures for tendering
described herein at any time on or prior to the Expiration Date.
REVOCATION OF CONSENTS
Any holder who has delivered a consent, or who succeeds to ownership of
Senior Notes in respect of which a consent has previously been delivered, may
validly revoke such consent prior to execution of the Amendment
24
<PAGE>
to Indenture by delivering a written notice of revocation in accordance with
the following procedures. In order to be valid, a notice of revocation of a
consent must contain the name of the person who delivered the consent and the
description of the Senior Notes to which it relates, the certificate number or
numbers of such Senior Notes (unless such Senior Notes were tendered by book-
entry transfer) and the aggregate principal amount represented by such Senior
Notes, be signed by the holder thereof in the same manner as the original
signature on the applicable Letter of Transmittal (including the required
signature guarantees) or be accompanied by evidence satisfactory to us that
the person revoking the consent has succeeded to the beneficial ownership of
the Senior Notes, and be received prior to the execution of the Amendment to
Indenture by the Exchange Agent at one of its addresses set forth on the back
cover of this Exchange Offer and Solicitation Document. A purported notice of
revocation that lacks any of the required information or is dispatched to an
improper address will not validly revoke a consent previously given.
THE VALID REVOCATION OF A HOLDER'S CONSENT WILL CONSTITUTE THE CONCURRENT
VALID WITHDRAWAL OF THE TENDERED SENIOR NOTES WITH RESPECT TO WHICH THE
CONSENT WAS DELIVERED. AS A RESULT, A HOLDER WHO VALIDLY REVOKES A PREVIOUSLY
DELIVERED CONSENT WILL NOT RECEIVE ANY CONSIDERATION IN THE EXCHANGE OFFER.
INTERPRETATION
We, in our sole discretion, will determine all questions as to the form of
all documents and the validity (including time of receipt), eligibility,
acceptance and withdrawal of tendered Senior Notes. Our determination shall be
final and binding. We reserve the absolute right to reject any and all tenders
not in proper form or the acceptance of which would, in the opinion of our
legal counsel, be unlawful. Neither we, the Exchange Agent nor any other
person will be under any duty to give notification of any defects or
irregularities in tenders or withdrawals or will incur any liability for
failure to give any such notification. The Exchange Agent will return any
Senior Notes it receives that are not properly tendered and as to which
irregularities have not been cured or waived. Our interpretation of the terms
and conditions of the Exchange Offer (including the Letter of Transmittal and
the instructions thereto) will be final and binding on all parties.
NO PAYMENTS FOR SOLICITATION
We have not retained any dealer-manager or similar agent in connection with
the Exchange Offer and will not make any payments to any broker, dealer or
other person for soliciting tenders of Senior Notes or consents to the
proposed amendments to the Indenture. We will pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Offering Memorandum and
Solicitation Document and related documents to the beneficial owners of Senior
Notes, and in handling and forwarding tenders to us.
25
<PAGE>
THE COMPANY
Vialog, founded in 1996, is a leading independent provider of audio, video
and Internet conferencing services. We believe we are the largest company
focused solely on conferencing services, with four operating centers,
approximately 12,378 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. We believe we
differentiate ourselves from our competitors by providing superior customer
service and an extensive range of enhanced and customized conferencing
solutions. We have 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
customers to the Company. We provide services to more than 6,000 customers
representing over 30,000 accounts during the twelve months ended December 31,
1999.
During 1999, the Company added three key telecommunications and Internet
industry veterans to its management team to provide the leadership necessary
to capitalize on the growth prospects in the conferencing industry. Kim
Mayyasi, the Company's President and CEO, has over twenty years of telecom
experience in the long distance, cellular and paging industries. Most
recently, Mr. Mayyasi founded the MSP Group, a marketing technology and
service company that was acquired by one of the nation's largest advertising
firms in 1995. Michael Savage, the Company's CFO, has a background in leading
high growth and publicly traded companies. Mr. Savage came to the Company from
Digital City, a subsidiary of America Online and the Internet's largest local
city resource and community guide. During his career, Mr. Savage has
successfully managed two IPOs and accomplished several major debt refinancings
for a variety of companies. Bob Saur the Company's Chief Information Officer
has more than twenty years of experience in building information and
telecommunications systems infrastructure for fast-growing companies in the
high tech, IT consulting and financial services industries. Prior to Vialog,
Mr. Saur was Chief Information Officer at Cambridge Technology Partners, a
4,500 person management consulting and systems integration services firm.
The teleconferencing industry has been experiencing significant growth. The
Company intends to capitalize on this strong growth as it continues to expand
its national marketing and sales program. In addition to internal growth
generated by strong industry fundamentals and the Company's enhanced marketing
capabilities, the Company intends to increase its wholesale or outsourcing
business. Management believes that the broad trend among the service providers
in the North American telecommunications industry to outsource labor-intensive
activities such as teleconferencing will lead to new outsourcing contracts,
particularly as Regional Bell Operating Companies ("RBOCs") gain approval to
provide long distance service. Further, the Company's recently launched
innovations including WebConferencing.com and Ready-To-Meet(TM) target
previously untapped market segments, including the Internet.
The Company offers one of the most comprehensive portfolios of audio, video
and Internet conferencing services in the 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.
The Company's website, WebConferencing.com, uses the Internet to facilitate
remote meetings, presentations and group collaboration. WebConferencing.com's
e-commerce capability is an ideal opportunity for Vialog's strategic partners
to private label its services and market them over the web.
The Company has a core competency in its customer service capabilities,
which stresses operator training, personalized service and customer 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
generation. 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.
26
<PAGE>
Through the recent consolidation of its nine operating centers into four
operating centers, Vialog expects to improve its operating margins by reducing
labor and overhead expenditures. Also, as Vialog grows through increased
penetration, it also improves its cost structure based on economies of scale.
Long distance expenses represent Vialog's second largest cost, and Vialog's
recently announced contract with Qwest Communications International, Inc.
reduces its per minute long distance cost by approximately 52%. Additionally,
advances in bridge technology have reduced Vialog's capital requirements to
accommodate growth in audioconferencing from approximately $850 per port in
1999 to a current cost per port of approximately $650.
Vialog'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.
27
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited Pro Forma Consolidated Balance Sheet is based on the
historical financial statements of the Company as of December 31, 1999
adjusted to give effect to (i) the New Credit Facility and the proposed
Exchange as if they had occurred on that date. The unaudited Pro Forma
Consolidated Statement of Operations is based on the historical financial
statements of the Company for the year ended December 31, 1999 and gives
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), (ii) the
consummation of an initial public offering of common stock, and (iii) the New
Credit Facility and the proposed Exchange (collectively, the "Pro Forma
Adjustments") as if they each had occurred on January 1, 1999. The terms of
the Exchange are described elsewhere in this Offering Memorandum and
Solicitation Document. Specifically, the Exchange is contingent upon several
conditions, which are more fully described in "The Exchange Offer--Conditions
of the Exchange Offer" described elsewhere in this Offering Memorandum and
Solicitation Document, including achieving an acceptable level of tenders of
Senior Notes. The Pro Forma Adjustments are described in the accompanying
notes.
The unaudited pro forma consolidated financial information does not purport
to represent what the Company's results of operations would actually have been
had such events occurred on such date or to project the Company's results of
operations for any future period. The unaudited pro forma financial
information should be read in conjunction with the consolidated financial
statements and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in the Company's most recent Annual Report
on Form 10-K, which is attached hereto as Annex A and incorporated by
reference into this Offering Memorandum and Solicitation Document. As
discussed in the footnotes, among other assumptions, the unaudited pro forma
consolidated financial information assumes an exchange of 90% of the Senior
Notes.
VIALOG CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
-----------------------------
VIALOG CORP. ADJUSTMENTS(1) CONSOLIDATED
------------ -------------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 547 $(52,650)(a) $ 2,972
55,075 (b)
Accounts receivable, net of allow-
ance for doubtful
accounts of $579................. 11,637 11,637
Prepaid expenses.................. 435 435
Other current assets.............. 310 310
-------- -------- --------
Total current assets............ 12,929 2,425 15,354
Property and equipment, net......... 17,814 17,814
Deferred debt issuance costs........ 3,801 (3,179) (a) 3,493
(129) (a)
3,000 (b)
Goodwill and intangible assets, net. 64,094 64,094
Other assets........................ 583 583
-------- -------- --------
Total assets.................... $ 99,221 $ 2,117 $101,338
======== ======== ========
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
----------------------------
PRO FORMA ADJUSTMENTS(1) CONSOLIDATED
--------- -------------- ------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities :
Revolving line of credit.............. $ 4,770 (4,770)(b) 17,500
17,500 (b)
Current portion of long-term debt..... 2,332 (2,059)(b) 5,773
5,500 (b)
Accounts payable...................... 5,216 5,216
Accrued interest expense.............. 1,215 1,215
Accrued expenses and other
liabilities.......................... 3,319 3,319
-------- -------- --------
Total current liabilities........... 16,852 16,171 33,023
Long-term debt, less current portion.... 75,827 (67,500)(a) 52,056
1,825 (a)
(2,596)(b)
44,500 (b)
Other long-term liabilities............. 1,499 1,499
Commitments and contingencies...........
Series A Cumulative Redeemable Preferred
Stock, $0.01 par value 1,856,250 shares
issued and outstanding; involuntary
liquidation value $14,850.............. 14,850 (a) 14,850
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 shares; outstanding:
9,133,569 shares..................... 91 91
Additional paid-in capital............ 45,602 45,602
Accumulated deficit................... (40,603) (5,133)(a) (45,736)
Treasury stock, at cost; 10,631
shares............................... (47) (47)
-------- -------- --------
Total stockholders' equity.......... 5,043 (5,133) (90)
-------- -------- --------
Total liabilities and stockholders'
equity............................. $ 99,221 $ 2,117 $101,338
======== ======== ========
</TABLE>
(1) UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS
(a) Represents retirement of 90% of the $75 million 12 3/4% Series B
Senior Notes due November 15, 2001. The Senior Notes are being exchanged
for approximately $53 million in cash and $15 million in Preferred Stock.
(b) Represents issuance of New Credit Facility in exchange for cash and
retirement of credit facility with Coast Business Credit.
29
<PAGE>
VIALOG CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA (1) PRO FORMA AS ADJUSTED
--------------------------------------- --------------------------------
VIALOG CORP. ADJUSTMENTS CONSOLIDATED ADJUSTMENTS(2) CONSOLIDATED
------------ ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 68,629 $1,910 (a) $ 70,539 $ 70,539
Cost of revenues,
excluding depreciation. 32,387 646 (a) 33,033 33,033
Selling, general and
administrative expense. 23,442 505 (a) 23,849 23,849
(98)(b)
Depreciation expense.... 4,190 64 (a) 4,254 4,254
Amortization of goodwill
and intangibles........ 4,060 170 (c) 4,230 4,230
Non-recurring charge.... 2,982 -- 2,982 2,982
---------- ------ --------- ------- ----------
Operating income........ 1,568 623 2,191 -- 2,191
Interest expense, net... (13,524) (14)(a) (13,538) (484)(b) (8,205)
1,991 (c)
674 (d)
1,088 (e)
1,896 (f)
168 (g)
---------- ------ --------- ------- ----------
Loss before income tax
expense and
extraordinary items.. (11,956) 609 (11,347) 5,333 (6,014)
Income tax expense...... (164) -- (164) (164)
---------- ------ --------- ------- ----------
Net loss before ex-
traordinary items.... (12,120) 609 (11,511) 5,333 (6,178)
Loss on early
extinguishment of debt. (7,928)(a) (7,928)
---------- ------ --------- ------- ----------
Net loss.............. (12,120) 609 (11,511) (2,595) (14,106)
Accrued dividends on
preferred stock........ -- -- -- (1,188) (1,188)
---------- ------ --------- ------- ----------
Net loss to common
stockholders......... $ (12,120) $ 609 $ (11,511) $(3,783) $ (15,294)
========== ====== ========= ======= ==========
Net loss per share--
basic and diluted...... $ (1.53) $ (1.33) $ (1.77)
========== ========= ==========
Weighted average shares
outstanding............ 7,947,333 8,655,025 8,655,025
========== ========= ==========
</TABLE>
30
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS
(1) The following pro forma adjustments give effect to (i) the acquisitions by
Vialog Corporation on February 10, 1999 of all of the stock of ABCC, CPI
and ABCI, and (ii) the consummation of an initial public offering of
common stock as if each had occurred on January 1, 1999.
(a) Represents the combined operating results of ABCC, CPI and ABCI for
the period January 1, 1999 through February 10, 1999.
(b) As a condition to closing the acquisitions, certain officers and
employees agreed to accept reduced compensation and benefits subsequent to
the acquisitions. This 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.
(c) Adjustment reflects the amortization of goodwill and intangible
assets, which are amortized over periods ranging from 5 to 25 years.
(2) The following adjustments give effect to the New Credit Facility and the
proposed Exchange as if each had occurred on January 1, 1999.
(a) Represents retirement of 90% of the senior note balance and related
issuance costs as of January 1, 1999 as well as the resulting loss on early
extinguishment of debt.
(b) Represents amortization of estimated issuance costs incurred in
connection with the closing of the New Credit Facility. The amortization is
computed by dividing the estimated issuance costs of $3 million by the
weighted average life of the New Credit Facility.
(c) Represents cash interest savings resulting from the New Credit
Facility based on reduced interest rates. The cash savings assumes a
weighted average interest rate of 9.8% (LIBOR + 3.6%) throughout 1999 as
compared to 12.75% interest on the senior notes.
(d) Represents interest savings assuming retirement of the Coast Business
Credit facility on January 1, 1999.
(e) Removal of original issue discount (OID) amortization assuming
retirement of senior notes effective January 1, 1999.
(f) Removal of bond issuance cost amortization assuming retirement of
senior notes effective January 1, 1999.
(g) Removal of deferred credit line costs incurred in connection with the
credit facility from Coast Business Credit assumed retired effective
January 1, 1999.
(h) Represents dividends incurred in connection with preferred stock
offering. Dividends are calculated as 8% of the preferred stock valuation
in accordance with the Offering Memorandum and Solicitation Document.
31
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues............................... $ 4,816 $ 46,820 $ 68,629
Cost of revenues, excluding depreciation... 2,492 24,321 32,387
Selling, general and administrative ex-
pense...................................... 7,178 15,196 23,442
Depreciation expense....................... 273 2,835 4,190
Amortization of goodwill and intangibles... 306 2,490 4,060
Non-recurring charge....................... 8,000 1,200 2,982
---------- ---------- ----------
Operating income (loss).................. (13,433) 778 1,568
Interest expense, net...................... (1,866) (12,629) (13,524)
---------- ---------- ----------
Loss before income tax expense........... (15,299) (11,851) (11,956)
Income tax expense......................... (522) (26) (164)
---------- ---------- ----------
Net loss................................. $ (15,821) $ (11,877) $ (12,120)
========== ========== ==========
Net loss per share--basic and diluted...... $ (5.48) $ (3.27) $ (1.53)
========== ========== ==========
Weighted average shares outstanding........ 2,889,005 3,632,311 7,945,313
========== ========== ==========
</TABLE>
32
<PAGE>
THE STRATEGIC PLAN
GENERAL
To address our significant debt service obligations and the effect these
obligations have had and are expected to continue to have on our profitability
we have developed and begun to implement a strategic plan designed to improve
our operating performance, lower our operating costs, reduce our long-term
debt, improve our debt service coverage ratios and improve our earnings per
share.
STRATEGIC PLAN COMPONENTS
The strategic plan consists of two components:
. the New Credit Facility; and
. the proposed Exchange.
Execution of both components of the plan is crucial to the plan's successful
implementation. We do not expect to consummate either component of the
strategic plan if we are unable to consummate both components.
GROWTH STRATEGY
Following completion of the Strategic Plan, 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:
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 consolidation 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 telemarketing effort and implementation of database marketing
programs.
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 Inter-Exchange Carriers ("IXCs"), Local
Exchange Carriers ("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 does not compete with IXCs, LECs or RBOCs in their core
businesses, it has the capacity and resources to handle significant
conferencing volume and it has experience in providing services on an
outsourced basis.
The Company believes that the Internet provides a new market for multimedia
conferencing services. By aggressively developing new services that leverage
the power of the Internet to deliver content during remote meetings, Vialog
can realize new revenues among its more than 32,000 corporate accounts.
Further, using its Internet portal site, WebConferencing.com, distribution of
its services through the Internet can cost-effectively reach smaller companies
where direct sales are not economically feasible. The Company has launched an
affiliate program to enlist strategic Internet partners to accelerate market
penetration.
33
<PAGE>
THE NEW CREDIT FACILITY
On April 7, 2000, Vialog received a signed joint commitment letter and
attached summary of terms from two major banks relating to a proposed $75
million new senior secured term loan and revolving credit facility (the "New
Credit Facility"). The closing under the New Credit Facility is subject to
certain conditions, including completion and execution of definitive
documentation, and accordingly there can be no assurance that the New Credit
Facility will become available. The following is a summary of the principal
terms and conditions which are expected to be set forth in the definitive
documentation for the New Credit Facility.
The New Credit Facility is expected to provide for up to $75.0 million in
senior secured financing, consisting of (i) an aggregate principal amount of
$50.0 million of term loan facilities (the "Term Facilities") in two tranches:
(A) a $35.0 million six-year term loan A facility (the "Term A Facility") and
(B) a $15.0 million seven-year term loan B facility (the "Term B Facility")
and (ii) a reducing revolving credit facility having an aggregate principal
amount of $25.0 million (the "Revolving Facility"). Loans under the Revolving
Facility will be available to each of the seven operating subsidiaries of the
Company (the "Borrowers") at any time during a six-year term subject to the
fulfillment of customary conditions precedent, including the absence of a
default under the New Credit Facility.
It is expected that the initial borrowing under the Term Facilities will be
in the amount necessary to fund cash payments to tendering holders of Senior
Notes and pay related expenses and refinance certain other senior indebtedness
of Vialog and is expected to occur on or about the date of consummation of the
Exchange Offer. The Revolving Facility will be available, subject to certain
conditions (including, without limitation, adequate availability under each
Borrower's borrowing base, determined from a formula to be negotiated), to
repay additional Senior Notes, support working capital requirements, and for
general corporate purposes and capital expenditures.
Vialog and its subsidiaries will be required to repay loans outstanding
under the Term Facilities in accordance with the following schedule:
Loans under the Term A Facility (the "Term A Loans") will have a final
maturity date on or about June 30, 2006. Quarterly amortization will be
required beginning in 2001, resulting in aggregate annual repayment amounts
(expressed in absolute dollars) as follows:
<TABLE>
<CAPTION>
TERM A LOANS
------------
ANNUAL
YEAR AMOUNT
---- ----------
<S> <C>
2001........................................ $5,000,000
2002........................................ $6,000,000
2003........................................ $7,000,000
2004........................................ $7,500,000
2005........................................ $7,500,000
2006........................................ $2,000,000
</TABLE>
Loans under the Term B Facility (the "Term A Loans") will have a final
maturity date on or about June 30, 2007. Quarterly amortization will be
required beginning in 2001, resulting in aggregate annual repayment amounts
(expressed in absolute dollars) as follows:
<TABLE>
<CAPTION>
TERM B LOANS
------------
ANNUAL
YEAR AMOUNT
---- ----------
<S> <C>
2001........................................ $ 500,000
2002........................................ $ 500,000
2003........................................ $ 500,000
2004........................................ $ 500,000
2005........................................ $ 500,000
2006........................................ $6,000,000
2007........................................ $6,500,000
</TABLE>
34
<PAGE>
The Revolving Facility will terminate on or about March 31, 2006 and will
reduce in equal quarterly amounts according to the following annual schedule,
beginning on September 30, 2001:
<TABLE>
<CAPTION>
REVOLVING FACILITY
------------------
ANNUAL
YEAR REDUCTION
---- ---------
<S> <C>
2001......................................... 5%
2002......................................... 10%
2003......................................... 12.5%
2004......................................... 20%
2005......................................... 22.5%
2006......................................... 30%
</TABLE>
The obligations of each Vialog subsidiary under the New Credit Facility will
be guaranteed by Vialog and each of its other subsidiaries. These obligations
will be secured by a first priority lien on substantially all of the assets
(tangible and intangible) of Vialog and its subsidiaries, including the
capital stock and intercompany debt of Vialog's existing and future
subsidiaries.
Borrowings under the New Credit Facility will bear interest, at Vialog's
option, at the Administrative Agent's (i) alternative base rate ("ABR") or
(ii) reserve-adjusted London Interbank Offered Rate ("LIBOR"), in each case
plus applicable margins. The margins for the Term A Facility and the Revolving
Facility will be ABR plus 175 basis points or LIBOR plus 350 basis points,
while the margins for the Term B Facility will be ABR plus 225 basis points or
LIBOR plus 400 basis points.
Borrowings and commitments under the new credit facilities will be subject
to mandatory prepayment and reduction under certain circumstances, with
customary baskets and exceptions, from the proceeds of permitted asset sales
or other transactions outside the ordinary course of business, from insurance
and condemnation proceeds, from a percentage of excess cash flow and under
certain other circumstances. Voluntary prepayment of any of the loans under
the New Credit Facility will be permitted in whole or in part with prior
notice and without premium or penalty (other than funding losses), subject to
limitations as to minimum amounts.
Each Borrower will be required to pay the Lenders under its respective
Revolving Facility an ongoing commitment fee based on the daily average unused
portion of the Revolving Facility available to such Borrower, which fee will
accrue from the closing date under the New Credit Facility. Vialog will also
be required to pay an annual agency fee to the Administrative Agent. In
addition, Vialog will be required to pay certain one-time underwriting and
other fees to the Lenders upon the closing.
It is expected that the definitive Credit Agreement (the "Credit Agreement")
will contain representations and warranties customarily found in loan
agreements for similar financings. In addition, the definitive Credit
Agreement will contain a number of affirmative and negative covenants. Among
other things, these covenants are likely to restrict the ability of Vialog and
its subsidiaries to dispose of assets, incur additional indebtedness, pay
dividends, create liens on assets, enter into contingent obligations, enter
into synthetic lease transactions, make investments, loans or advances, make
acquisitions, engage in mergers, amalgamations or consolidations, change the
business conducted by Vialog and its subsidiaries, make capital expenditures
or engage in certain transactions with affiliates and otherwise restrict
certain corporate activities. In addition, it is anticipated that the Credit
Agreement will contain financial covenants that require Vialog and its
subsidiaries to maintain, on a consolidated basis, specified financial ratios
and tests, including minimum interest coverage and fixed charge coverage
ratios, maximum leverage ratios, and specified capital expenditure tests.
The Credit Agreement will contain customary events of default, including
nonpayment of principal, interest or fees, material inaccuracy of
representations and warranties, violation of covenants, cross-defaults to
certain other indebtedness of Vialog and its subsidiaries, certain events of
bankruptcy and insolvency, certain ERISA matters, material judgments, material
impairment of any loan document or security and a change of control of Vialog
or its subsidiaries in certain circumstances.
35
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
consequences of the transactions to be accomplished pursuant to the Exchange
Offer to a person who holds Senior Notes at the time the Exchange Offer is
completed. This summary is based upon existing statutes, as well as judicial
and administrative interpretations thereof, all of which are subject to
change, including changes which may be retroactive. Moreover, substantial
uncertainties exist with respect to various federal income tax consequences of
the Exchange Offer. We will not request any opinion of counsel or ruling from
the Internal Revenue Service ("IRS") on any tax issue connected with the
Exchange Offer. Accordingly, no assurance can be given that the IRS will not
challenge any of the tax positions described herein or that such a challenge
will not be successful.
The discussion below does not address the foreign, state or local tax
consequences of the contemplated transactions, nor does it specifically
address the tax consequences to taxpayers subject to special treatment under
the federal income tax laws (including dealers in securities or currencies,
pass-through entities, life insurance companies, tax-exempt organizations,
financial institutions, regulated investment companies, taxpayers subject to
the alternative minimum tax, persons that hold Senior Notes as part of an
integrated investment (including a "straddle") consisting of Senior Notes and
one or more other positions, foreign corporations, foreign partnerships,
foreign trusts, foreign estates, and other persons who, for federal income tax
purposes, are not citizens or residents of the United States, or persons whose
functional currency is other than the United States dollar). The discussion
below assumes the Senior Notes and the Preferred Stock are or will be held as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code").
EXCHANGE OF SENIOR NOTES FOR CASH AND PREFERRED STOCK
The federal income tax consequences of the exchange (the "Exchange") of
Senior Notes for Preferred Stock and cash pursuant to the Exchange Offer will
depend on whether the Senior Notes qualify as "securities" within the meaning
of the reorganization provisions of the Code. The term of a debt instrument is
usually the most significant factor in determining whether it qualifies as a
security. Generally, a debt instrument with a term of ten years or more is
treated as a security. Debt instruments with maturities ranging between five
and ten years are often held to be securities. Debt instruments with a five
year term or less rarely qualify as securities. The Senior Notes were issued
with a term of four years. Thus, we intend to take the position (and the
following discussion assumes) that the Senior Notes do not qualify as
securities and that the Exchange of Senior Notes for Preferred Stock and cash
pursuant to the Exchange Offer will be treated as a taxable exchange.
Accordingly, a holder of Senior Notes would recognize gain or loss in an
amount equal to the difference between (a) the sum of the cash and the fair
market value of the Preferred Stock received pursuant to the Exchange (other
than any cash or Preferred Stock that is attributable to accrued but unpaid
interest as described below) and (b) the holder's adjusted tax basis in the
Senior Notes. The adjusted tax basis of a Senior Note to a particular holder
will equal the holder's cost for the Senior Note, increased by any original
issue discount (if any), market discount and gain previously included by such
holder in income with respect to the Senior Note and decreased by the amount
of bond premium (if any) previously amortized and by the amount of principal
payments previously received by such holder with respect to the Senior Note.
Generally, any gain recognized pursuant to the Exchange will be capital gain
unless the holder's Senior Notes have accrued market discount, in which case,
such gain will be taxable as ordinary income to the extent of such accrued
market discount. If the gain or loss is capital gain or loss, such gain or
loss will be long-term capital gain or loss if the holder has held the Senior
Notes for more than one year.
A portion of the consideration received by an exchanging holder of Senior
Notes may be attributable to accrued but unpaid interest. Such portion will
result in income or loss to the exchanging holder to the extent the
consideration attributable to accrued but unpaid interest is greater or less
than the amount of interest previously taken into account by the holder in
computing taxable income for federal income tax purposes. Because the cash
consideration paid to an exchanging holder will be increased by the full
amount of any accrued but unpaid interest, we intend to take the position that
the full amount of accrued interest will be paid in cash. It is unclear
whether the IRS will accept such an allocation or will assert that a different
allocation should be made.
36
<PAGE>
The tax basis of the Preferred Stock in the hands of a holder of Senior
Notes will be equal to the fair market value of such Preferred Stock at the
time of the Exchange. The holding period of the Preferred Stock received will
begin the day after the Exchange.
If registered holders of at least 95 percent in aggregate principal amount
of the Senior Notes consent to the proposed amendments to the Indenture and
the Exchange Offer is completed outside of a bankruptcy proceeding, the
execution of the Amended Indenture will not be a taxable event to holders of
the Senior Notes who do not tender. Accordingly, such holders will have the
same tax basis and holding period for the Senior Notes as they had prior to
the execution of the Amended Indenture. See "Proposed Amendments to
Indenture."
TREATMENT OF THE PREFERRED STOCK
Dividends on Preferred Stock. We do not expect to declare or pay cash
dividends to holders of our Preferred Stock in the foreseeable future. We do,
however, expect to declare and pay dividends in the form of additional shares
of Preferred Stock. The amount of each such dividend will equal the fair
market value of the Preferred Stock received by the holders and will be
treated as a distribution subject to Section 301 of the Code. Thus, with
respect to each holder, each such dividend will be (i) taxable as ordinary
income to the extent of such holder's proportionate share of our current or
accumulated earnings and profits, (ii) thereafter, applied against the
adjusted tax basis of the holder's Preferred Stock to the extent of such basis
and (iii) finally, taxable as gain from the sale or exchange of the Preferred
Stock.
Subject to certain limitations, dividends received by corporate shareholders
taxable as ordinary income as described above will be eligible for the 70%
(80% for certain corporations) dividends-received deduction under Section 243
of the Code. Pursuant to Section 1059 of the Code, in the event of an
"extraordinary dividend," a corporate shareholder will, in certain
circumstances, be required to reduce its basis (but not below zero) in an
amount equal to the amount excluded from income pursuant to the dividends-
received deduction under Section 243 of the Code. Any such amount in excess of
the shareholder's basis will be treated as gain from the sale or exchange of
the Preferred Stock.
Redemption of Preferred Stock. If we redeem the Preferred Stock for cash the
redemption will be treated as a sale or exchange if, taking into account the
constructive ownership rules of Section 318 of the Code, the redemption (a)
results in a "complete termination" of your interest in the Company under
Section 302(b)(3) of the Code, (b) is "substantially disproportionate" with
respect to you under Section 302(b)(2) of the Code or (c) is "not essentially
equivalent to a dividend" under Section 302(b)(1) of the Code. If the
redemption is not treated as a sale or exchange it will be taxable as a
dividend in accordance with the treatment described above in "Dividends on
Preferred Stock."
If the redemption is treated as a sale or exchange, the holders of the
Preferred Stock will recognize gain or loss in an amount equal to the
difference between the amount of cash received in exchange for the Preferred
Stock and the holder's adjusted tax basis in the Preferred Stock that was
redeemed, except to the extent of any cash received in payment of declared but
unpaid dividends. Any such gain or loss will be long-term capital gain or loss
if the holder has held the Preferred Stock for more than one year. Any cash
received in payment of declared but unpaid dividends will be taxed as a
dividend in accordance with the treatment described above in "Dividends on
Preferred Stock."
Under certain circumstances, Section 305(c) of the Code requires that the
portion of the redemption price of preferred stock that exceeds its issue
price be treated as constructively distributed on a periodic basis prior to
actual receipt. The Preferred Stock provides for a redemption premium in
certain circumstances. We intend to take the position that the existence of
the redemption premium does not result in a constructive distribution under
Section 305(c). The IRS, however, might take a different position.
37
<PAGE>
Conversion of Preferred Stock. A holder of Preferred Stock will generally
not recognize gain or loss upon a conversion of the Preferred Stock into one
or more shares of Common Stock. However, if the conversion takes place when
there is a dividend arrearage on the Preferred Stock, a portion of the shares
of Common Stock received in the conversion may be treated as a taxable
dividend. Except for any shares of Common Stock that are treated as a
dividend, the holder's adjusted tax basis in each share of Preferred Stock
will be allocated to the shares of Common Stock received in the conversion
based on their relative fair market values on the conversion date and the
holding period of the Common Stock will include the holding period of the
Preferred Stock. However, the adjusted tax basis of any share of Common Stock
that is treated as a dividend will be equal to its fair market value on the
conversion date and the holding period for such share of Common Stock will
commence on the day following the conversion date. The receipt of cash in lieu
of fractional shares of Common Stock pursuant to the conversion will be
treated as a sale of such fractional shares and the holder will be required to
recognize gain or loss in an amount equal to the difference between the amount
of cash received and the adjusted tax basis of the fractional shares. Any such
gain or loss will be long-term capital gain or loss if the holder has held the
Preferred Stock for more than one year.
Adjustments to Conversion Ratio. Treasury Regulations promulgated under
Section 305 of the Code treat certain adjustments to the conversion ratio of
stock such as the Preferred Stock as a constructive distribution of stock
taxable to the holders of such stock under Section 301 of the Code. See
"Dividends on Preferred Stock" for a description of Section 301. Any
adjustment increasing the number of shares of Common Stock into which the
Preferred Stock can be converted would constitute a constructive distribution
of stock unless made pursuant to a bona fide, reasonable, adjustment formula
which has the effect of preventing dilution of the interest of the holders of
the Preferred Stock. Any adjustment in the conversion ratio to compensate the
holders of the Preferred Stock for any taxable distributions of cash or
property made to the holders of the Common Stock will be treated as a
constructive distribution of stock to the holders of the Preferred Stock.
Sale of Preferred Stock. A holder of Preferred Stock will recognize gain or
loss upon a sale of the Preferred Stock in an amount equal to the difference
between the amount received in exchange for the Preferred Stock and the
holder's adjusted tax basis in the Preferred Stock that was sold. Such sales
will not affect the tax consequences of the Exchange described above. In
general, any such gain or loss will be long-term capital gain or loss if the
holder has held the Preferred Stock for more than one year.
TAX CONSEQUENCES TO THE COMPANY
COD. We will be required to realize cancellation of debt ("COD") income as a
result of the Exchange if and to the extent the outstanding balance (principal
plus accrued but unpaid interest) of the Senior Notes exceeds the sum of the
cash and the fair market value of the Preferred Stock delivered in exchange
therefor. Because we expect that the cash and the fair market value of the
Preferred Stock received in the Exchange will approximately equal the
outstanding balance of the Senior Notes exchanged, we do not expect to realize
significant COD income, if any.
If we realize any COD income, unless the Exchange occurs in a proceeding
under Chapter 11 or unless we can establish that we are "insolvent" (i.e. our
liabilities exceed the fair market value of our assets), we will be required
to include such income in our gross income for federal income tax purposes. In
that case, subject to the alternative minimum tax ("AMT") discussion below,
such income will likely be offset by any available net operating loss
carryovers or by losses incurred in the taxable year of the Exchange. See
discussion of "NOLs and Section 382" below.
38
<PAGE>
AMT. For any taxable year, our federal income tax liability equals the
greater of (a) the regular tax computed at standard corporate rates on taxable
income and (b) the AMT computed at a 20 percent rate on alternative minimum
taxable income ("AMTI") (as defined in Section 55 of the Code). In computing
our regular federal income tax liability, all of the income recognized in a
taxable year may be offset by net operating loss carryovers (to the extent
permitted under Section 382 of the Code). Conversely, for purposes of
computing AMTI, net operating loss carryovers (as determined for AMT purposes)
may not offset more than 90 percent of our pre-net operating loss AMTI. Thus,
we will be required to pay federal income tax at an effective rate of at least
2 percent on our pre-net operating loss AMTI, if any, regardless of the amount
of our net operating loss carryovers. To the extent our AMT liability exceeds
our regular tax liability for any taxable year, the excess may be carried
forward as a credit against our regular tax liability in subsequent years.
NOLs and Section 382. We estimate that our net operating loss carryovers for
regular tax purposes were approximately $28.8 million as of December 31, 1999.
These net operating loss carryovers remain subject to examination and possible
adjustment by the IRS, and will be reduced if and to the extent we realize any
COD income as a result of the Exchange. In addition, these net operating loss
carryovers may be subject to limitation under Section 382 of the Code, as
described below. Accordingly, there is no assurance whether and to what extent
our net operating loss carryovers will be available to offset any income
realized by us as a result of the Exchange or thereafter.
Under Section 382 of the Code, if the Exchange results in an "ownership
change," our use of our net operating loss and certain other tax attribute
carryovers and certain built-in losses and deductions generally will be
limited to an amount equal to the fair market value of our capital stock
immediately prior to the ownership change (i.e., prior to the issuance of the
Preferred Stock in the Exchange) multiplied by the "long-term tax exempt rate"
(5.84% for the month of May) for the month the Exchange occurs. In addition,
if we had experienced an ownership change at any previous time, our use of any
tax attributes arising prior to such time will be further limited to an amount
equal to the product of the fair market value of our capital stock immediately
prior to such ownership change and the long-term tax exempt rate at that time.
Based on certain factors relating to the consummation of the Exchange, a
determination will be made whether or not we have experienced an ownership
exchange under Section 382 of the Code.
BACKUP WITHHOLDING
A holder of Preferred Stock may be subject to backup withholding at a rate
of 31% with respect to dividends paid on, or the proceeds of a sale, exchange,
or redemption of, the Preferred Stock unless, in general, such holder is an
exempt recipient or complies with certain procedures. Backup withholding is
not an additional tax. Any amount so withheld will be credited against the
holder's United States federal income tax liability or refunded by the
Internal Revenue Service.
39
<PAGE>
SECURITIES LAW MATTERS
This section discusses certain securities law issues that are raised by the
Exchange Offer and the Exchange. This section should not be considered
applicable to all situations or to all holders of Senior Notes. Holders of
Senior Notes should consult their own legal counsel with respect to these and
other issues.
THE EXCHANGE OFFER
We are relying on Section 3(a)(9) of the Securities Act to exempt the
Exchange Offer from the registration requirements of such act. Section 3(a)(9)
provides that the provisions of the Securities Act will not apply to "any
security exchanged by the issuer with its existing security holders
exclusively where no commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange." The Exchange Offer is
also, pursuant to Section 18(b)(4)(C) of the Securities Act, exempt from state
securities law requirements. Section 18(b)(4)(C) provides, among other things,
that state securities laws will not apply to securities that are exempt from
federal registration under Section 3(a)(9). We have no contract, arrangement,
or understanding relating to, and will not, directly or indirectly, pay any
commission or other remuneration to any broker, dealer, salesperson, agent, or
any other person for, soliciting votes to accept or reject the Exchange Offer.
We have received assurances that no person will provide any information to
holders of the Senior Notes relating to the Exchange Offer other than to refer
the holders of such securities to the information contained in this Offering
Memorandum and Solicitation Document. In addition, none of our financial
advisors and no broker, dealer, salesperson, agent, or any other person, is
engaged or authorized to express any statement, opinion, recommendation, or
judgment with respect to the relative merits and risks of the Exchange Offer.
ISSUANCE AND RESALE OF THE NEW PREFERRED STOCK OUTSIDE OF BANKRUPTCY
In the event that we complete the Exchange outside of bankruptcy, we will
rely on Sections 3(a)(9) and 18(b)(4)(C) of the Securities Act to exempt the
issuance of the new Preferred Stock from federal and state registration
requirements. Under current SEC interpretations, securities that are obtained
in a Section 3(a)(9) exchange assume the same character (i.e. restricted or
unrestricted) as the securities that have been surrendered. In this case, the
Senior Notes are unrestricted securities. The new Preferred Stock will
therefore also be unrestricted and recipients who are not "affiliates" of the
Company (as such term is defined in Rule 144 under the Securities Act) will
therefore be able to resell the Preferred Stock without registration.
Recipients who are affiliates of the Company may resell their shares subject
to the provisions of Rule 144, absent registration or another appropriate
exemption. The Company has agreed to file a registration statement covering
the shares of Preferred Stock issued in the Exchange within 120 days of the
Effective Date.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING SHARES
Our authorized capital stock currently consists of 30,000,000 shares of
Common Stock, par value $0.01 per share and 10,000,000 shares of preferred
stock, par value $0.01 per share. As of December 31, 1999, we had 9,133,569
shares of Common Stock and no shares of preferred stock outstanding. We have
reserved an aggregate of 4,750,000 shares of Common Stock for issuance
pursuant to our stock plans and 350,000 shares of Preferred Stock for issuance
in connection with the Exchange Offer.
COMMON STOCK
Each share of Common Stock has one vote on all matters on which stockholders
are entitled or permitted to vote, including the election of directors.
Subject to preferences that may be applicable to any outstanding shares of
preferred stock, the holders of the Common Stock are entitled to share ratably
in dividends declared by the Board of Directors out of funds legally available
therefor. The Company did not declare any dividends on any class of equity
during 1999 and does not expect to declare or pay cash dividends to holders of
its Common Stock in the foreseeable future. Upon liquidation or dissolution,
subject to preferences that may be applicable to any outstanding shares of
preferred stock, the holders of Common Stock are entitled to share ratably in
all assets available for distribution to stockholders. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The terms of the Series A 8% Cumulative Convertible Preferred Stock are
summarized below and will be set forth in the Certificate of Designation for
the Preferred Stock to be filed with the Secretary of State of the State of
Massachusetts.
Dividends. The holders of the issued and outstanding Preferred Stock shall
be entitled to receive, at our election, a cash or payment-in-kind dividend on
each issued and outstanding share of Preferred Stock equal to 8% of the
liquidation preference for each share (or $100.00 plus all accrued but unpaid
dividends on each such share) payable semi-annually. These dividends shall be
prior and in preference to the payment of any dividend on the Common Stock.
We will be limited by the New Credit Facility as to the amount of cash
dividends we may declare, and do not plan to pay any dividends in the
foreseeable future other than the dividends required to be paid by us pursuant
to the terms of the Preferred Stock.
Liquidation Rights. In the event of any liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary, each holder of shares of
Preferred Stock will be entitled to receive, out of funds and assets that may
be legally distributed to our stockholders, prior and in preference to any
payment or distribution of any legally available funds or assets on any shares
of Common Stock or any other class or series of our capital stock, an amount
of cash per share equal to $100.00, plus all accrued but unpaid dividends on
each such share (the "Liquidation Preference"). If the legally available funds
and assets are insufficient to permit payment to the holders of the Preferred
Stock of their full adjusted liquidation preference, they shall be distributed
pro rata according to the number of shares of Preferred Stock held by each
holder.
Voting Rights. Except as otherwise expressly provided in the Certificate of
Designation, the holders of the Preferred Stock shall vote as a single class
with the holders of our Common Stock, with each share of Preferred Stock
entitled to one vote for each share of Common Stock issuable upon conversion
of the Preferred Stock on the relevant record date.
We will not, without the consent of the holders of at least a majority of
the then outstanding shares of the Preferred Stock, voting separately as a
class:
41
<PAGE>
amend the Vote of Directors Establishing a Class or Series of Stock,
Articles of Organization or By-Laws of the Company (i) so as to permit the
issuance of any securities senior to, or in parity with, the Preferred
Stock; or (ii) in any manner that adversely affects the specified rights,
preferences, privileges or voting rights of the holders of the Preferred
Stock; or
authorize the payment of any "Restricted Payment" (as such term is defined
in the Indenture, dated November 12, 1997, governing the Senior Notes)
We will not, without the consent of the holders of at least a majority of
the then outstanding shares of Preferred Stock and Common Stock (voting as a
single class with each share of Preferred Stock entitled to one vote for each
share of Common Stock issuable upon conversion of the Preferred Stock):
increase the number of shares of capital stock which the Company is
authorized to issue;
authorize any sale, lease, exchange or other disposition by the Company of
all or substantially all of its assets;
authorize any merger or consolidation of the Company with or into any other
entity; or
authorize the liquidation, dissolution or winding up of the Company.
Redemption Rights. At our option, all or a portion of the Preferred Stock
may be redeemed at a price per share equal to (1) 101% of the Liquidation
Preference for each share at any time during the 365-day period following the
issuance of the Preferred Stock, (2) 102% of the Liquidation Preference for
each share at any time during the second 365-day period following the issuance
of the Preferred Stock, (3) 103% of the Liquidation Preference for each share
at any time during the third 365-day period following the issuance of the
Preferred Stock, and (4) the Liquidation Preference for each share at any time
thereafter through the six-year anniversary of the Effective Date (the
"Maturity Date"), in each case subject to the prior right of the holder to
convert such shares to Common Stock.
All shares of Preferred Stock outstanding on the Maturity Date shall be
redeemed on such date at a price per share equal to the Liquidation Preference
for each share on such date.
Conversion Rights. Each share of Preferred Stock issued in the Exchange is
convertible at any time prior to the Maturity Date, at the option of the
holder, into the number of shares of our Common Stock equal to (x) the product
of the number of shares of Preferred Stock (including paid-in-kind dividends
thereon as of the date of such conversion) to be converted and $100.00, (y)
divided by the Conversion Price. The "Conversion Price" shall be established
on the Effective Date and shall be equal to the lesser of (i) $8.00 per share
or (ii) 150% of the average closing price of the Company's Common Stock for
the 20 trading days immediately preceding the Effective Date (the "Market
Price"), subject to downward adjustment on the first anniversary of the
Effective Date as described in the following sentence. If the average closing
price of the Company's Common Stock for the 20 trading days immediately
preceding the first anniversary of the Effective Date (the "Adjusted Market
Price") is less than the Market Price, then the Conversion Price shall be
reduced by a percentage equal to the percentage difference between the Market
Price and the Adjusted Market Price.
Anti-Dilution. The Preferred Stock is subject to customary anti-dilution
protection.
Registration Rights. The Company has agreed to file a registration statement
covering the shares of Preferred Stock issued in the Exchange within 120 days
of the Effective Date.
Rank. The Preferred Stock shall, with respect to dividend rights and rights
upon liquidation, winding up and dissolution, rank prior to all classes or
series of equity securities heretofore and hereafter issued by the
Corporation, including the Common Stock.
42
<PAGE>
CERTAIN CHARTER AND BY-LAWS PROVISIONS
Our Restated Articles of Organization provide that our Board of Directors
may designate the numbers, relative rights, preferences and limitations of one
or more series of Preferred Stock and issue the securities so designated. Such
provisions may discourage or preclude certain transactions, whether or not
beneficial to stockholders, and could discourage certain types of tactics that
involve an actual or threatened acquisition or change of control. The issuance
of the shares of Preferred Stock in connection with the Exchange could
adversely affect the rights of the holders of Common Stock.
The Amended and Restated By-Laws of the Company provide that special
meetings of the stockholders may be called only by the President of the
Company, a majority of the board of directors or by the holders of not less
than 35% of all of the outstanding capital stock of the Company entitled to
vote on the matters to be considered at such meeting. The foregoing provision
could have the effect of delaying until the next annual stockholders' meeting
stockholder actions that are favored by holders of shares of our Common Stock.
INDEMNIFICATION AND INSURANCE
The Amended and Restated By-Laws of the Company and certain indemnification
agreements between the Company and certain of its officers and directors
provide for indemnification of directors and officers to the full extent
provided by Massachusetts law, and state that the indemnification provided
therein shall not be deemed exclusive. The Company has in the past, and may in
the future, purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the Company, or who is or was
serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person and incurred by
such person in any such capacity, or arising out of his or her status as such,
whether or not the Company would have the power to indemnify that person
against such liability under the provisions of the Amended and Restated By-
Laws of the Company. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers or other persons
pursuant to the foregoing provisions, we have been informed that in the
opinion of the SEC such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
43
<PAGE>
PRICE RANGE OF COMMON STOCK
From February 8, 1999 to December 9, 1999, our Common Stock was quoted on
the Nasdaq Stock Market's National Market ("Nasdaq"), under the symbol "VLOG".
Since December 10, 1999, Vialog's Common Stock has been quoted on the American
Stock Exchange, under the symbol "VX." Prior to the initial public offering of
our Common Stock, there was no established public trading market for the
Common Stock. The high and low last sale prices for our Common Stock for the
period from February 8, 1999, the date the Common Stock was first quoted on
Nasdaq, through May 2, 2000 are as follows:
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<C> <S> <C> <C>
1999 First Quarter (from February 8)........................... $6.1875 $ 3.75
Second Quarter............................................ 6.00 3.50
Third Quarter............................................. 4.50 2.625
Fourth Quarter............................................ 4.125 2.8125
2000 First Quarter............................................. 7.75 3.00
Second Quarter (through May 2, 2000)...................... 5.375 2.875
------- ------
</TABLE>
44
<PAGE>
PROPOSED AMENDMENTS TO INDENTURE
GENERAL
We are seeking the consent of the holders of the Senior Notes to the
proposed amendments to the Indenture described below. The proposed amendments
would, among other things, eliminate substantially all restrictive covenants
and events of default currently contained in the Indenture. If the registered
holders of not less than a majority in aggregate principal amount of the
Senior Notes consent to the proposed amendments, we will, together with the
Trustee, execute the Amendment to Indenture. The Amendment to Indenture will
be executed promptly after the later of (i) the Withdrawal Termination Date
and (ii) receipt of the requisite consents, but will not become effective
unless and until the Exchange Offer is completed outside of bankruptcy.
Thereafter, any non-tendering holders of Senior Notes will be bound by the
Amendment to Indenture regardless of whether they consent to the proposed
amendments.
COMPARISON OF SENIOR NOTES BEFORE AND AFTER AMENDMENT OF THE INDENTURE
This comparison is a summary and does not purport to be complete and is
qualified in its entirety by reference to the Senior Notes, the Indenture and
the Amendment to Indenture. A copy of the Amendment to Indenture is attached
as Annex G. Capitalized terms used below and not defined herein have the
meanings given to them in the Indenture.
<TABLE>
<CAPTION>
SENIOR NOTES
(AS IN EFFECT UPON
SENIOR NOTES EFFECTIVENESS OF
(AS CURRENTLY IN EFFECT) PROPOSED AMENDMENTS)
------------------------ --------------------
<S> <C> <C>
Principal Amount
Outstanding............ $75,000,000 The principal amount
outstanding after the Exchange
Offer will depend on the tender
and acceptance rate. Assuming a
95% acceptance level for the
Exchange Offer, $3,750,000
principal amount of Senior
Notes will still be
outstanding.
Interest Rate........... 12 3/4% per annum No Change.
Maturity Date........... November 15, 2001 No Change.
Ranking................. The Senior Notes are unsecured. No Change.
The Senior Notes are senior to
all of our subordinated
indebtedness and rank pari
passu with all of our other
existing and future senior
indebtedness. The Senior Notes
are effectively subordinated to
amounts outstanding under our
credit facility.
Optional Redemption..... We may redeem the Senior Notes No Change.
in whole or in part, at any
time, at the Redemption Prices
(as such term is defined in the
Indenture) set forth in the
Indenture, plus accrued
interest.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
SENIOR NOTES
(AS IN EFFECT UPON
SENIOR NOTES EFFECTIVENESS OF
(AS CURRENTLY IN EFFECT) PROPOSED AMENDMENTS)
------------------------ --------------------
<S> <C> <C>
Change in Control Option... If a Change in Control (as such No Change.
term is defined in the
Indenture) occurs, each holder
of Senior Notes has the right
to require us to purchase all
or any part of such holder's
Senior Notes on a date that is
no later than 60 days after the
Change in Control, at 101% of
the aggregate principal amount
thereof, plus accrued interest.
Limitation on Restricted
Payments.................. We and our subsidiaries may The Indenture will be amended
make Restricted Payments (as to delete in its entirety the
such term is defined in the restrictive covenant relating
Indenture), including the to Restricted Payments.
redemption of capital stock,
only if certain conditions
exist.
Limitation on Indebtedness. The Indenture, with certain The Indenture will be amended
exceptions, prohibits us and to delete in its entirety the
our subsidiaries from incurring restrictive covenant that
Indebtedness (as such term is prohibits us from incurring
defined in the Indenture). such Indebtedness.
Limitations on Transactions
with Affiliates........... Subject to certain exceptions, The Indenture will be amended
we and our subsidiaries may not to delete in its entirety the
enter into any Affiliate restrictive covenant that
Transactions (as such term is limits the Company's ability to
defined in the Indenture) enter into transactions with
except for Affiliate affiliates.
Transactions the terms of which
are no less favorable to the
Company or such subsidiary than
the terms which could be
obtained in a comparable
transaction made on an arm's-
length basis with unaffiliated
persons.
Limitation on Payments by
Subsidiaries.............. Subject to certain specified The Indenture will be amended
exceptions, the Indenture to delete in its entirety the
prohibits us and our restrictive covenant that
subsidiaries from agreeing to prohibits us and our
any encumbrance or restriction subsidiaries form entering such
on the ability of our agreements.
subsidiaries to make certain
types of payments.
Limitation on Liens........ The Indenture prohibits us and The Indenture will be amended
our subsidiaries from incurring to delete in its entirety the
any Liens (as such term is restrictive covenant relating
defined in the Indenture) to Liens.
(other than Permitted Liens (as
such term is defined in the
Indenture)) upon any of our
property or any property of any
subsidiary.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
SENIOR NOTES
(AS IN EFFECT UPON
SENIOR NOTES EFFECTIVENESS OF
(AS CURRENTLY IN EFFECT) PROPOSED AMENDMENTS)
------------------------ --------------------
<S> <C> <C>
Limitation on Sales of
Assets................. The Indenture limits our No Change.
ability to make certain types
of Asset Sales (as such term is
defined in the Indenture).
Limitation on Capital
Stock of Subsidiaries.. The Indenture prohibits us from The Indenture will be amended
permitting any of our to delete in its entirety the
subsidiaries to issue any restrictive covenant relating
Capital Stock (as such term is to the issuance of Capital
defined in the Indenture), Stock by our subsidiaries.
other than to us or to one of
our wholly-owned subsidiaries.
Limitation on Sale and
Leaseback Transactions. The Indenture limits the The Indenture will be amended
circumstances under which we to delete in its entirety the
and our subsidiaries may enter covenant relating to sale and
into sale and leaseback leaseback transactions.
transactions.
Limitation on Dividends. The Indenture prohibits the The Indenture will be amended
Company from declaring or to delete in its entirety the
paying dividends or restrictive covenant relating
distributions on shares of the to Limitations on Dividends.
Company's Capital Stock to
holders of such Capital Stock.
Mergers, Consolidations
or Sales of Assets..... The Indenture prohibits us from The restrictive covenant
consolidating or merging with relating to Mergers,
or into, or selling, assigning, Consolidations or Sales of
transferring, leasing, Assets will be amended to
conveying or otherwise delete the requirement that
disposing of all or certain Consolidated Net Worth
substantially all of our assets and Indebtedness tests be met.
to any person unless certain
conditions are satisfied,
including that the Surviving
Entity (as such term is defined
in the Indenture) assumes our
obligations under the
Indenture, no Event of Default
(as such term is defined in the
Indenture) with respect to the
Senior Notes exists after any
such transaction and that
certain Consolidated Net Worth
(as such term is defined in the
Indenture) and Indebtedness
tests are met.
Compliance Certificate.. The Indenture requires us to No Change.
deliver to the Trustee, within
120 days after the end of each
fiscal year, an officer's
certificate stating whether to
the best of the signer's
knowledge, we have performed
our obligations under the
Indenture.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
SENIOR NOTES
(AS IN EFFECT UPON
SENIOR NOTES EFFECTIVENESS OF
(AS CURRENTLY IN EFFECT) PROPOSED AMENDMENTS)
------------------------ --------------------
<S> <C> <C>
Corporate Existence..... The Indenture requires us to The Indenture will be amended
preserve and keep in full force to delete in its entirety the
and effect our corporate requirement that we and our
existence and the corporate subsidiaries maintain our
existence of each of our corporate existence.
subsidiaries.
Payment of Taxes and
Other Claims........... The Indenture requires us to The Indenture will be amended
pay or discharge or cause to be to delete in its entirety the
paid or discharged all material covenant relating to Payment of
taxes and all lawful claims for Taxes and Other Claims.
labor, materials and supplies
against us or our subsidiaries.
Maintenance of
Properties and The Indenture requires us to The Indenture will be amended
Insurance.............. (i) cause all material to delete in its entirety the
properties owned or leased by covenant relating to
us or useful to the conduct of Maintenance of Properties and
our business or the business of Insurance.
our subsidiaries to be improved
or maintained and kept in
normal condition and (ii)
maintain and cause our
subsidiaries to maintain
insurance customarily carried
by similar businesses of
similar size.
Additional Subsidiary
Guarantees............. The Indenture requires that we The Indenture will be amended
cause to become a Subsidiary to delete in its entirety the
Guarantor (as such term is covenant relating to Additional
defined in the Indenture) any Subsidiary Guarantees.
subsidiary to which we or any
of our subsidiaries transfers
property or which we or any of
our subsidiaries organizes,
acquires or invests, which
subsidiary has total assets
with a book value in excess of
$50,000.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
SENIOR NOTES
(AS IN EFFECT UPON
SENIOR NOTES EFFECTIVENESS OF
(AS CURRENTLY IN EFFECT) PROPOSED AMENDMENTS)
------------------------ --------------------
<S> <C> <C>
Events of Default....... The Indenture defines certain The Indenture will be amended
events as "Events of Default," to delete all Events of Default
including the following: (i) other than those relating to
the failure to pay interest on (1) our agreement to pay
the Senior Notes when due and interest and principal when due
continuance of such failure for and (2) events of bankruptcy,
30 days; (ii) the failure to insolvency or reorganization.
pay principal on or premium of
the Senior Notes when due;
(iii) the failure to perform
any other covenant in the
Indenture for 30 days after
notice from the Trustee or the
holders of 25% in principal
amount of the Senior Notes
outstanding (except in the case
of a default with respect to
the "Mergers, Consolidations
and Sale of Assets" covenant,
which will constitute an Event
of Default with notice but
without passage of time); (iv)
the failure of us or any of our
subsidiaries to make any
payment when due (after giving
effect to any applicable grace
period) under any other senior
Indebtedness in excess of $1
million principal amount; (v)
the failure of us or any of our
subsidiaries to perform any
term, covenant, condition or
provision of any other
Indebtedness in excess of $1
million principal amount,
individually or in the
aggregate, which failure
results in the acceleration of
the maturity of such
Indebtedness; (vi) a judgment
or judgments for the payment of
money not fully covered by
insurance, which exceeds
$1 million, individually or in
the aggregate, is rendered
against us or any of our
subsidiaries and is not
discharged, satisfied or stayed
within 60 days of being
entered; (vii) certain events
of bankruptcy, insolvency or
reorganization of us or any of
our subsidiaries; and (viii)
any of the Subsidiary
Guarantees (as such term is
defined in the Indenture)
ceases to be in full force and
effect or is declared null and
void.
</TABLE>
49
<PAGE>
IMPORTANT
Any holder of Senior Notes who wishes to accept the Exchange Offer should
complete the Letter of Transmittal and forward it with such Senior Notes and
any other required documents to the Exchange Agent. Holders of Senior Notes
registered in the name of a broker, dealer, bank, trust company or other
nominee should contact such institution to tender their Senior Notes. See
"Procedure for Tendering Senior Notes and Delivery of Consents."
THE EXCHANGE AGENT:
By Mail: By Hand and Overnight Courier:
State Street Bank and Trust Company
State Street Bank and Trust Company Corporate Trust Department, 5th Floor
Corporate Trust Department Attn: Susan Lavey
Attn: Susan Lavey 2 Avenue de Lafayette
P.O. Box 778 Boston, MA 02111-1724
Boston, MA 02102
For Information Call:
(617) 662-1544
ADDITIONAL INFORMATION
If you have any additional questions, or need additional copies of this
Offering Memorandum and Solicitation Document, the Letter of Transmittal or
any other Exchange Offer materials, please contact the Company at the address
or telephone number as listed below.
Vialog Corporation
35 New England Business Center
Andover, Massachusetts 01810
Telephone: (978) 975-3700
Attention:Michael Savage
Chief Financial Officer
50
<PAGE>
ANNEX A:
ANNUAL REPORT
ON FORM 10-K
FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1999
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
----------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-15527
VIALOG CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-3305282
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
COMMON AMERICAN STOCK EXCHANGE
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 13, 2000, the aggregate market value of the voting and non-
voting common equity held by non-affiliates of the Company was $57,939,091.
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 $6.375, the closing sales price of
the Company's common stock on March 13, 2000. On such date, the Company had
9,152,485 shares of common stock outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
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 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 (including its subsidiaries, "VIALOG" or the "Company"),
a Massachusetts corporation, is a leading independent provider of value-added
conferencing services. Since its founding on January 1, 1996, the Company has
grown substantially, primarily through acquisitions. On November 12, 1997,
VIALOG acquired six private conference service bureaus. On February 10, 1999,
VIALOG completed an initial public offering of its common stock and acquired
three additional private conference service bureaus.
In order to increase operating efficiencies, during 1999, VIALOG
successfully consolidated the operations of the nine acquired companies into
four operating subsidiaries, which the Company refers to as operating centers.
These operating centers are located in Reston, Virginia; Montgomery, Alabama;
Chanhassen, Minnesota and Cambridge, Massachusetts. A brief description of
each of the Company's operating centers is set forth below:
The Reston Center had net revenues of approximately $18.4 million in 1998
and of approximately $27.4 million in 1999. The Reston Center specializes
in providing conferencing services to numerous organizations, including
financial institutions, government agencies, trade associations and
professional service firms. The Reston Center is also primarily responsible
for the development and provision of services in the fast-growing
videoconferencing marketplace. As of March 1, 2000, the Reston Center had
approximately 194 employees.
The Montgomery Center had net revenues of $17.1 million in 1998 and
approximately $15.2 million in 1999. The Montgomery Center specializes in
providing conferencing services to the retail industry and to various
telecommunications providers. As of March 1, 2000, the Montgomery Center
had approximately 140 employees and is the primary support center for
VIALOG's new, innovative Ready-To-MeetTM conference service.
The Chanhassen Center had net revenues of approximately $7.5 million in
1998 and approximately $10.3 million in 1999. The Chanhassen Center
services a general corporate clientele with a specialty in the
communications industry. As of March 1, 2000, VIALOG's Chanhassen Center
had approximately 87 employees.
The Cambridge Center had net revenues of approximately $5.9 million in
1998 and approximately $6.9 million in 1999. The Cambridge Center services
a general business clientele. As of March 1, 2000, the Cambridge Center had
approximately 46 employees. The Cambridge Center will be relocated to a new
VIALOG facility in Bedford, Massachusetts during 2000.
A-2
<PAGE>
The five operating centers closed during 1999 in connection with the
Company's consolidation of operations accounted for additional revenues of
$10.9 million in 1998 and $10.7 in 1999. The conferencing traffic from these
centers is now handled by the four remaining operating centers.
In addition to the consolidation of the operating centers, VIALOG also
completed several other initiatives during 1999 including:
. the launching of WebConferencing.com, VIALOG's new Internet portal site,
and Ready-To-MeetTM, VIALOG's new reservation-less conferencing service,
. the expansion or introduction of premium videoconferencing, web
presentation sharing, and audio streaming services,
. the expansion and restructuring of VIALOG's national sales force, and
. the streamlining and centralization of various administrative functions.
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 four operating centers, state-of-the-art
digital conferencing technology, an Internet portal site (WebConferencing.com)
and an experienced national sales force. The Company believes it
differentiates itself from its competitors by providing innovative products,
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, and has built a large, stable client base
ranging from Fortune 500 companies to small institutions. Customers also
include certain major long distance telecommunications providers who have
outsourced their conferencing services to the Company. During 1999, the
Company provided services to more than 6,000 customers representing over
32,000 accounts.
Audioconferencing is currently the Company's principal service offering.
However, VIALOG is leveraging long-term relationships with its customers in
the traditional audioconferencing business to expand into "new media" market
opportunities including video and web-based services. The Company now offers
an innovative new reservation-less audioconferencing service, Ready-To-MeetTM,
as well as enhanced audioconferencing services such as digital replay and
audio streaming. Media enhanced services now offered by VIALOG include
videoconferencing, fax and e-mail broadcast, as well as a family of Internet
conferencing services. Introduced in October 1999, the Company's user-friendly
Internet portal site, WebConferencing.com, provides internet access to all of
the Company's conferencing services.
VIALOG has embraced a strategy of "solutions selling" that offers customized
conferencing solutions to each of its customers. This includes various
vertical industry applications in the medical and financial marketplaces, as
well as other customized applications like conference event planning and
coaching. Further, customized formats are specifically designed for such
applications as investor relations calls, auctions 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 across a variety of technologies including the
Internet.
The industry in which the Company operates has been experiencing significant
growth. The Company intends to capitalize on this growth by continuing to
expand its national sales and marketing programs. In recognition of what
management believes is a broad trend among telecommunications providers to
outsource labor-intensive activities such as teleconferencing, VIALOG is also
continuing to focus on its wholesale business. VIALOG has established and will
continue to pursue partnerships with Internet businesses to increase market
penetration via the Internet for VIALOG's services.
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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 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." Each bridge has
multiple ports which allow conference participants to connect to a conference
call. Calls may be established manually by an operator who places calls to or
receives calls from conference participants. The Company believes that
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 six 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 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.
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. 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
videoconferencing also became feasible in 1995 with the introduction of more
cost-effective video 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.
Internet Conferencing
Internet conferencing services include web presentation sharing and audio
streaming services. Web presentation sharing, which enables multiple users to
conference and collaborate using both text 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.
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THE COMPANY'S CONFERENCING SERVICES
Audioconferencing
VIALOG offers a broad range of audioconferencing 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 its infrastructure of
approximately 12,000 ports of capacity by charging on a per-line, per-minute
basis. The Company's audioconferencing services are divided into two major
service categories: operator-attended and operator-on-demand. Each category
offers standard services such as dialing out to late participants and
conducting a roll call at no additional cost, as well as enhanced services at
additional cost. For those conference calls requiring a reservation, the
Company's new Internet portal site, WebConferencing.com, may be used for
greater convenience.
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. For
Dial Out audioconferences, the Company's operators contact 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 touch-tone
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 operators are not necessary for an operator-on-
demand audioconference, they can be reached for assistance by pressing "*0."
In November 1999, VIALOG launched a service that eliminates a reservation
and/or an operator to place a conference call between 40 or less parties. The
new product, Ready-to-MeetTM, offers instant audioconferencing through a toll
free dial-in number and access codes assigned by VIALOG. The Company sells
this product through its existing sales force, private label partnerships, and
directly through its Internet portal site, WebConferencing.com.
Consistent with its solutions selling approach, the Company offers
customization of audioconferences through the following enhanced services for
an extra charge:
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 touch-tone 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 touch-tone keypads. Tabulations and results are available
immediately or at the conclusion of the conference.
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Recording. The Company can record the conference on an 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 or via e-mail.
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 bridge and telecommunications
facilities of greater bandwidth than that required for a standard
audioconference and is consequently billed at much higher rates. The Company
provides its video services from its Reston Center.
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 bridge 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 sites prior to a
videoconference and connects them to the conference. As part of its "solutions
approach," the Company tests the standards of all participating sites to
assure compatability and quality standards.
The Company offers PC-based application sharing via the Company's
videoconferencing bridges. 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.
Internet Conferencing
VIALOG's management believes that Internet conferencing offers the Company
many opportunities in an evolving and rapidly expanding marketplace. To extend
its leadership position in the traditional conferencing industry into the
Internet arena, VIALOG launched its Internet portal site, WebConferencing.com,
in October 1999. This unique portal-site enables customers to customize all of
their conferencing needs through a convenient, easy-to-use customer interface.
An e-commerce section within the site allows new customers to immediately sign
up for and purchase VIALOG conferencing services. VIALOG has launched an
Internet affiliate program designed to partner with other Internet companies
to sell private-labeled access to VIALOG's WebConferencing.com website.
Additional Internet conferencing services include web presentation sharing
and audio streaming services. Web presentation sharing, which enables multiple
users to conference and collaborate using both text and voice is the most
recent advancement in conferencing. The Company has a Basic and Premier
version of its web presentation sharing services which differ in interactive
capabilities and media options. 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 Internet conferencing. The Company believes that Internet
conferencing services will likely be used in conjunction with
audioconferencing to allow simultaneous group discussions during display of
documents.
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Enhanced Teleservices
In customizing solutions for customers, the Company complements its audio,
video and Internet conferencing services with enhanced 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.
COMPETITIVE STRENGTHS
The Company believes that several characteristics differentiate it from many
of its competitors including:
High growth segment of the telecommunications industry. The industry in
which the Company operates has been experiencing significant growth. The
Company intends to capitalize on this strong growth as it continues to expand
its national marketing and sales program. In addition to internal growth
generated by strong industry fundamentals and the Company's enhanced marketing
capabilities, the Company intends to increase its wholesale or outsourcing
business. Management believes that the broad trend among the service providers
in the North American telecommunications industry to outsource labor-intensive
activities such as teleconferencing will lead to new outsourcing contracts,
particularly as Regional Bell Operating Companies ("RBOCs") gain approval to
provide long distance service. Further, the Company's recently launched
innovations including WebConferencing.com and Ready-To-MeetTM target
previously untapped market segments, including the Internet.
New management team. During 1999, the Company hired three key
telecommunications and Internet industry veterans to provide the leadership
necessary to capitalize on the growth prospects in the conferencing industry.
Kim Mayyasi, the Company's President and CEO, has over twenty years of telecom
experience in the long distance, cellular and paging industries. Most
recently, Mr. Mayyasi founded the MSP Group, a marketing technology and
service company that was acquired by one of the nation's largest advertising
firms in 1995. Michael Savage, the Company's CFO, has a background in leading
high growth and publicly traded companies. Mr. Savage came to the Company from
Digital City, a subsidiary of America Online and the Internet's largest local
city resource and community guide. During his career, Mr. Savage has
successfully managed two IPOs and accomplished several major debt refinancings
for a variety of companies. Bob Saur the Company's Chief Information Officer
has more than twenty years of experience in building information and
telecommunications systems infrastructure for fast-growing companies in the
high tech, IT consulting and financial services industries. Prior to VIALOG,
Mr. Saur was Chief Information Officer at Cambridge Technology Partners, a
4,500 person management consulting and systems integration services firm.
Broad range of products and services. The Company offers one of the most
comprehensive portfolios of audio, video and Internet conferencing services in
the 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.
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Internet portal site. WebConferencing.com uses the Internet to facilitate
remote meetings, presentations and group collaboration. WebConferencing.com's
e-commerce capability is an ideal opportunity for VIALOG's strategic partners
to private label its services and market them over the web.
Stable and diverse customer base. The Company estimates that approximately
90% of the Company's 1999 revenues and approximately 66% of revenue growth in
1999 was from repeat customers. In addition, no single customer represents
more than 4% of pro forma 1999 revenues, and the Company's top ten customers
represent less than 17% of 1999 revenues. The Company currently has a diverse
base of more than 6,000 customers.
Superior customer service capabilities. The Company has a core competency in
its customer service capabilities, which stresses operator training,
personalized service and customer 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 generation. 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.
Decreasing cost structure. Through the recent consolidation of its nine
operating centers into four operating centers, VIALOG expects to improve its
operating margins by reducing labor and overhead expenditures. Also, as VIALOG
grows through increased penetration, it also improves its cost structure based
on economies of scale. Long distance expenses represent VIALOG's second
largest cost, and VIALOG's recently announced contract with Qwest
Communications reduces its per minute long distance cost by approximately 52%.
Additionally, advances in bridge technology have reduced VIALOG's capital
requirements to accommodate growth in audioconferencing from approximately
$850 per port in 1999 to a current cost per port of approximately $650.
Unique industry position: scale with focus. The Company believes that it is
the largest company in the industry focusing solely on conferencing services.
The Company's largest competitors are long distance service providers for
which 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.
OPERATING STRATEGY
The Company provides a full array of conferencing services through its four
operating centers. 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, especially using the
Internet.
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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, human
resources, benefits administration, finance and cash management functions.
Additionally, the Company recently consolidated four of its 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. Throughout 1999, the Company has
made progress in its efforts to centralize support activities, including
reservations, billing, purchasing and management information systems in order
to standardize its services, improve customer service and reduce operating
expenses. Furthermore, the Company believes that its increased size has
resulted in stronger bargaining power in areas such as long distance
telecommunications, equipment, employee benefits and marketing.
Retain customers and stimulate usage. Through the implementation of 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 6,000 in 1999. 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
has developed 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 consolidation 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 telemarketing 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
Inter-Exchange Carriers ("IXCs"), Local Exchange Carriers ("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 does not
compete with IXCs, LECs or RBOCs in their core businesses, it has the capacity
and resources to handle significant conferencing volume and it has experience
in providing services on an outsourced basis.
Leverage the Internet. The Company believes that the Internet provides a new
market for multimedia conferencing services. By aggressively developing new
services that leverage the power of the Internet to deliver content during
remote meetings, VIALOG can realize new revenues among its more than 32,000
corporate
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accounts. Further, using its Internet portal site, WebConferencing.com,
distribution of its services through the Internet can cost-effectively reach
smaller companies where direct sales are not economically feasible. The
Company has launched an affiliate program to enlist strategic Internet
partners to accelerate market penetration.
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 and
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 employs 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 four 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 two senior telecom sales professionals who
have extensive experience in the industry.
E-commerce. The Company has embraced the Internet, and is using e-commerce
to extend VIALOG's sales distribution. Both through WebConferencing.com and
private-label offerings through Internet strategic partners, VIALOG's services
can be cost-effectively sold to customers too small to be targeted via direct
sales.
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
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with its customers after the initial sales effort, thereby providing
opportunities to support the sales effort with personalized service. 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.
CUSTOMERS
The Company provided services to over 6,000 customers in 1999. 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 1999
consolidated net revenues), including both wholesale and retail customers, by
industry is as follows: financial services (six), telecommunications (five),
retail (four), high technology (three), professional services (two), and
pharmaceutical (one). No account represented more than 10% of the Company's
consolidated net revenues in 1999. The top 10 customers of the Company
represented approximately 22% of the Company's pro forma net revenues in 1998
and 16% of the Company's pro forma net revenues in 1999.
COMPETITION
The conferencing service industry is highly competitive and subject to rapid
change. In the audioconferencing market, 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 WorldCom, Sprint, Global Crossing and
Cable & Wireless, (ii) independent LECs, such as GTE, and (iii) other private
conference service bureaus ("PCSBs"). 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
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.
In the videoconferencing and Internet conferencing markets, the Company
competes with 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 8% of its 1999 pro forma net revenues from
IXCs and LECs which outsource conferencing services provided to their
respective customers. These telecommunications companies
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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 will be 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.
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 bridges 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 bridges 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 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 bridges 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 WorldCom, 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 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
A-12
<PAGE>
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 bridge
equipment produced by three different manufacturers. At present, the equipment
being utilized is not functionally identical, but is compatible with
substantially all network standards. As of December 31, 1999, approximately
58% of the operating centers' port capacity was manufactured by one vendor,
MultiLink, Inc., which was acquired by PictureTel Corporation in 1997.
However, a number of other vendors offer similar bridging equipment. In
December 1999, the Company entered into an eighteen month non-exclusive volume
purchase agreement with Octave Communications which provides for graduated
bridge price discounts based on the number of ports purchased by VIALOG during
the term of the agreement.
EMPLOYEES
As of March 1, 2000, the Company had 619 employees, 332 of whom were
employed full time or part time as operators or reservationists. None of the
Company's employees are represented by unions. The Company has experienced no
work stoppages and believes its relationships with its employees are good.
REGULATION
In general, the telecommunications industry is subject to extensive
regulation by federal, state and local governments. Although there is little
or no direct regulation in the United States of the core group communications
services offered by the Company, various government agencies, such as the FCC,
have jurisdiction over some of the Company's current and potential suppliers
of telecommunications services, and government regulation of those services
has a direct impact on the cost of the Company's group communications
services. There can be no assurance that the FCC or other government agencies
will not seek in the future to regulate the Company as a common carrier and
regulate the prices, conditions or other aspects of the group communications
services offered by the Company, that the FCC will not impose registration,
certification or other requirements on the provision of those services, or
that the Company would be able to comply with any such requirements.
Additionally, 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.
The operating centers are located in leased facilities in Virginia, Alabama,
Massachusetts and Minnesota. The Company believes all of its operating centers
are fully utilized except for its approximately 66,000 square foot facility in
Reston, Virginia which is approximately 80% utilized and its approximately
25,000 square foot facility in Chanhassen, Minnesota which is 60% utilized. As
a result of the closing of five operating centers in connection with the
consolidation of operations in 1999, the Company also currently holds leases
on an 8,219 square foot facility in Atlanta, Georgia, a 1,088 square foot
facility in Oradell, New Jersey, a 3,871 square foot facility in Danbury,
Connecticut and a 7,916 square foot facility in Houston, Texas, each of which
has been substantially or completely vacated. With the exception of the Palm
Springs, California facility, the lease for which expired in December 1999,
the Company intends to find tenants to sublease the vacated facilities through
the lease maturity dates or to negotiate terminations of these leases with the
respective landlords. The Company occupies the operating centers and other
facilities under leases which provide for a total of approximately 165,571
square feet at rates ranging from $9.00 to $28.00 per square foot with
expiration dates, excluding month-to-month leases, ranging from April 2000 to
May 2008. The Company's total lease expense related to its
A-13
<PAGE>
facilities was approximately $1.4 million and $2.3 million for the years ended
December 31, 1998 and 1999, 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.
In connection with the consolidation plan which commenced in 1999, the
Company is in the process of combining its corporate offices and its
Cambridge, Massachusetts operating center into a new leased facility located
in Bedford, Massachusetts. The corporate offices will remain staffed until
June 2000 and the Cambridge operating center will remain staffed until July
2000, after which time its traffic will be managed at the Bedford operating
center. The lease for the new Bedford corporate offices and operating center,
provides for a total of approximately 27,868 square feet at a base rate of
$24.00 per square foot (escalating to $25.00 per square foot in years four
through five of the lease) with an expiration date of May 15, 2005.
ITEM 3. 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.
No matter was submitted during the fourth quarter of 1999 to a vote of
security holders, through the solicitation of proxies or in any other manner.
A-14
<PAGE>
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, 1999 consisted of
30,000,000 shares of common stock, $0.01 par value and 10,000,000 shares of
preferred stock, $0.01 par value. As of December 31, 1999, the Company had
outstanding 9,133,569 shares of common stock and no shares of preferred stock.
The Company has reserved an aggregate of 4,750,000 shares of common stock for
issuance pursuant to its stock plans. (See Item 11--Executive Compensation,
Stock Plans).
On February 10, 1999, the Company completed an initial public offering
("IPO") of its common stock. From February 8, 1999 to December 9, 1999, the
Company's common stock was quoted on the Nasdaq Stock Market's National Market
("Nasdaq") under the symbol "VLOG". Since December 10, 1999, the Company's
common stock has been quoted on the American Stock Exchange under the symbol
"VX". Prior to the IPO, there was no established public trading market for the
Company's common stock. The high and low last sale prices for the Company's
common stock for the period from February 8, 1999, the date the Company's
common stock was first quoted on Nasdaq, through March 24, 2000 are as
follows:
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1999
First Quarter (from February 8)................................ $6.19 $3.75
Second Quarter................................................. 6.00 3.50
Third Quarter.................................................. 4.50 2.63
Fourth Quarter................................................. 4.13 2.81
2000
First Quarter (through March 24, 2000)......................... 7.75 3.00
</TABLE>
As of March 13, 2000, the Company had outstanding 9,152,485 shares of common
stock held by approximately 213 shareholders of record.
DIVIDENDS
The Company did not declare any dividends on any class of equity during
1999, and does not intend to pay dividends in the foreseeable future.
Additionally, pursuant to the terms of the Indenture related to the Company's
November 1997 $75 million bond financing and the senior credit facility the
Company currently maintains with Coast Business Credit, the Company is
prohibited from declaring or paying any dividends or distributions other than
dividends or distributions payable solely in certain of the Company's
qualified capital stock.
SALES OF UNREGISTERED SECURITIES
The Company issued or sold the following unregistered securities in 1999:
. An aggregate of 9,069 shares of common stock between January 1999 and
April 1999 at prices ranging from $0.025 to $5.75 per share to several
of the Company's employees and a consultant upon the exercise of stock
options held by those individuals and issued under the Company's 1996
Stock Plan;
. An aggregate of 99,696 shares of common stock in February and March 1999
at a price of $3.26 per share to four warrant holders upon the exercise
of warrants issued to those warrant holders as part of the Company's
February 1997 $500,000 debt financing; and
. An aggregate of 345,535 shares of common stock between March 1999 and
October 1999 at a price of $.01 per share to ten warrant holders upon
the exercise of warrants issued as part of the Company's November 1997
$75 million bond financing.
A-15
<PAGE>
Each of the sales described above were completed without registration under
the Securities Act in reliance on one or more of the following exemptions:
. Section 4(2) of the Securities Act of 1933 or Rule 506 of Regulation D
promulgated under the Securities Act of 1933 for transactions not
involving a public offering; and
. Rule 701 promulgated under the Securities Act of 1933 with respect to
certain of the options and shares of common stock issued to the
Company's employees and consultants.
ITEM 6. SELECTED FINANCIAL DATA.
Contemporaneously with the closing of the November 1997 bond financing,
VIALOG consummated agreements to acquire six private conference service
bureaus, 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, 1998 and 1999 have been derived from its audited consolidated
financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998 1999
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues....................... $ -- $ 4,816 $ 46,820 $ 68,629
Cost of revenues, excluding depre-
ciation........................... -- 2,492 24,321 32,387
Selling, general and administrative
expenses.......................... 1,308 7,178 15,196 23,442
Depreciation expense............... 0 273 2,835 4,190
Amortization of goodwill and intan-
gibles............................ 0 306 2,490 4,060
Non-recurring charges.............. 0 8,000 1,200 2,982
--------- --------- --------- ---------
Operating income (loss)............ (1,308) (13,433) 788 1,568
Interest income (expense), net..... 1 (1,866) (12,629) (13,524)
--------- --------- --------- ---------
Loss before income taxes........... (1,307) (15,299) (11,851) (11,956)
Income tax benefit (expense)....... 522 (522) (26) (164)
--------- --------- --------- ---------
Net loss........................... $ (785) $ (15,821) $ (11,877) $ (12,120)
========= ========= ========= =========
Net loss per share--basic and di-
luted............................. $ (0.38) $ (5.48) $ (3.27) $ (1.53)
========= ========= ========= =========
Weighted average shares outstand-
ing............................... 2,088,146 2,889,005 3,632,311 7,947,333
========= ========= ========= =========
OTHER FINANCIAL DATA:
EBITDA(1).......................... $ (1,308) $ (4,854) $ 6,103 $ 9,818
Cash flows provided by (used in)
operating activities.............. (178) (4,148) (5,418) 149
Cash flows used in investing activ-
ities............................. (7) (53,762) (7,848) (37,455)
Cash flows provided by financing
activities........................ 522 67,140 3,931 37,621
<CAPTION>
DECEMBER 31,
------------------------------------------
1996 1997 1998 1999
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 337 $ 9,567 $ 232 $ 547
Working capital (deficit).......... (249) 7,259 (2,378) (3,923)
Total assets....................... 1,263 75,083 69,266 99,221
Total long-term debt, including
current portion(2)................ -- 71,936 75,654 78,159
Stockholders' equity (deficit)..... 287 (4,882) (16,592) 5,043
</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
A-16
<PAGE>
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, $3.1 million
and $2.0 million at December 31, 1997, 1998, and 1999, 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,
Telephone Business Meetings, Inc. ("Access") and Conference Source
International, Inc. ("CSI"). The selected data as of December 31, 1995 and
1996 and for the years ended December 31, 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 data presented below is neither comparable to
nor indicative of the Company's post-acquisition financial position or results
of operations.
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED DECEMBER 31, 1997 TO
---------------------------------- NOVEMBER 12,
1995 1996 1997
--------------- ----------------- ----------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
ACCESS STATEMENT OF OPERA-
TIONS DATA:
Net revenues.............. $ 6,508 $ 9,073 $ 10,945
Cost of revenues, exclud-
ing depreciation......... 3,021 3,564 4,791
Selling, general and ad-
ministrative expenses.... 2,484 3,332 4,124
Depreciation and amortiza-
tion expense............. 496 630 823
--------------- ----------------- --------------
Operating income.......... 507 1,547 1,207
Interest expense, net..... 152 174 132
--------------- ----------------- --------------
Earnings before income
taxes.................... 355 1,373 1,075
Income tax expense (bene-
fit)..................... (48) -- --
--------------- ----------------- --------------
Net income................ $ 403 $ 1,373 $ 1,075
=============== ================= ==============
Net income per share--ba-
sic and diluted.......... $ 644.80 $ 2,746.00 $ 2,150.00
=============== ================= ==============
Weighted average shares
outstanding.............. 625 500 500
=============== ================= ==============
ACCESS OTHER FINANCIAL
DATA:
EBITDA(1)................. $ 1,003 $ 2,177 $ 2,030
Cash flows provided by op-
erating activities....... 821 2,048 2,932
Cash flows used in invest-
ing activities........... (1,432) (795) (1,704)
Cash flows provided by
(used in) financing ac-
tivities................. 771 (839) (1,549)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------- ---------
(IN THOUSANDS)
<S> <C> <C>
ACCESS BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 390 $ 804
Working capital.............................................. 141 759
Total assets................................................. 3,672 4,605
Total long-term debt, including current portion.............. 2,416 2,052
Stockholders' equity......................................... 872 1,770
</TABLE>
A-17
<PAGE>
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED DECEMBER 31, 1997 TO
---------------------------------- NOVEMBER 12,
1995 1996 1997
--------------- ----------------- ----------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
CSI STATEMENT OF
OPERATIONS DATA:
Net revenues.............. $ 3,808 $ 5,868 $ 5,579
Cost of revenues, exclud-
ing depreciation......... 1,617 2,438 2,052
Selling, general and ad-
ministrative expenses.... 905 998 831
Depreciation expense...... 292 393 356
--------------- ----------------- --------------
Operating income.......... 994 2,039 2,340
Interest expense, net..... 160 165 120
--------------- ----------------- --------------
Net income................ $ 834 $ 1,874 $ 2,220
=============== ================= ==============
Net income per share--ba-
sic and diluted.......... $ 834.00 $ 1,874.00 $ 2,220.00
=============== ================= ==============
Weighted average shares
outstanding.............. 1,000 1,000 1,000
=============== ================= ==============
CSI OTHER FINANCIAL DATA:
EBITDA(1)................. $ 1,286 $ 2,432 $ 2,696
Cash flows provided by op-
erating activities....... 721 2,128 2,897
Cash flows used in invest-
ing activities........... (225) (41) (311)
Cash flows provided by
(used in) financing ac-
tivities................. (144) (2,144) (2,801)
<CAPTION>
DECEMBER 31,
----------------------------------
1995 1996
--------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
CSI BALANCE SHEET DATA:
Cash and cash equiva-
lents.................... $ 375 $ 318
Working capital (defi-
cit)..................... (322) 445
Total assets.............. 2,037 2,293
Total long-term debt, in-
cluding current portion.. 1,446 1,405
Stockholders' equity (def-
icit).................... 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. Prior to the original acquisitions, VIALOG Corporation did not
conduct any operations, and all activities conducted by it were related to 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 the years ended December 31, 1997, 1998 and 1999 and
the financial statements and related notes thereto of certain operating
centers prior to their acquisition for the years ended December 31, 1995,
1996, 1997 and 1998 and "Selected Financial Data" appearing elsewhere in this
Report.
A-18
<PAGE>
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 conference 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 issuance of
senior notes and the acquisitions), has integrated several of its operations,
including sales, marketing, human resources, benefits administration,
accounting and finance, excluding billing. Within the next six months, the
Company plans to complete the migration of the reservations process to one
common reservation system. Additionally, the Company is in the process of
implementing a new, state of the art billing system and expects to complete
the implementation over the next 6 to 9 months. The Company estimates that the
cost to implement the new billing system will be approximately $1.0 million.
Once implemented, the system is expected to reduce costs through enhanced
billing efficiencies. Additional cost reduction opportunities exist with the
Company's long distance costs as a result of new agreements recently entered
into by the Company. It is anticipated that increased marketing costs will be
required to further establish the Company's brand name in the marketplace. As
a result of these various costs and cost-savings, comparisons of historical
operating results may not be meaningful, and such results may not be
indicative of future performance.
The Company's largest outsourcing customer acquired a competitor of the
Company in 1998. The customer, representing approximately 7% of the Company's
1998 consolidated net revenues and 2% of the Company's 1999 consolidated net
revenues, honored its outsourcing contract with the Company, which expired in
July 1999. Although the significant reduction in net revenues from this
customer has reduced the Company's 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.
VIALOG CORPORATION
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net revenue. Net revenue for fiscal 1999 increased to $68.6 million as
compared to $46.8 million for fiscal year 1998, an increase of 47%. The
increase was primarily due to increased call volumes for audioconferencing and
videoconferencing services, as well as the acquisition of three private
conference service bureaus on February 10, 1999. The major components of the
increase were (i) an increase in the Reston operating centers' net revenues
from $18.4 million to $27.4 million, an increase of 49% (ii) and an increase
of $15.8 million related to the Chanhassen (formerly Chaska), 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.
These increases were partially offset by a revenue decrease of approximately
$3.3 million from the loss of two outsourcing customers that merged with
competitors of the Company.
A-19
<PAGE>
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation, increased approximately $8.1 million, or 33%, from $24.3 million
in 1998 to $32.4 million in 1999, but decreased as a percentage of revenue
from 51.9%, in 1998 to 47.2% in 1999. The dollar increase was primarily due to
(i) an increase in the Reston Center's cost of revenues of $3.9 million
related to increased volume, and (ii) an increase of $5.9 million 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. These increases were offset by a cost of revenue
decrease of $1.2 million in the Montgomery operating center caused primarily
by the loss of two major customers that merged with competitors of the
Company. The decrease as a percentage of revenues was primarily due to an
overall reduction in telecommunications cost per minute resulting from the
negotiation of lower cost telecommunication contracts 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 increased $8.2 million, or 54%, from $15.2 million in
1998 to $23.4 million in 1999. The increase primarily reflects the increases
in (i) personnel, commissions and related expenses associated with higher
sales volume, (ii) expansion of the Company's marketing, market research and
communications programs, (iii) investments in the Ready-to-Meet and
WebConferencing segments, (iv) increased staffing and outside services in the
general and administrative area and (v) $1.2 million of costs associated with
the departure of the former Chief Executive Officer and other management
staff.
Depreciation and amortization expense. Depreciation expense increased $1.4
million from $2.8 million in 1998 to $4.2 million in 1999. The increase was
primarily due to additions to property and equipment as well as the acquired
property and equipment related to the acquisition of the three operating
centers on February 10, 1999. In addition, amortization of goodwill and
intangibles increased $1.6 million from $2.5 million to $4.1 million which
represents amortization expense related to the three operating centers
acquired on February 10, 1999.
Non-recurring charges. The results for the year ended December 31, 1999
include a non-recurring charge of approximately $3.0 million, which was
incurred during the second quarter of 1999 and 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 were closed in in the fourth quarter of 1999. In conjunction
with these closings, the Company expanded its other facilities to accommodate
the transitioned business. The Company anticipates that it will realize annual
cost savings beginning in 2000 of approximately $2.0 million as a result of
the consolidation. In addition, the Company plans to combine its corporate
offices and its Cambridge operating center by the end of the third quarter of
2000. The non-recurring charge includes (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 leasehold improvements. During 1999, the
Company paid out approximately $546,000 related primarily to personnel
reductions and facility closings and wrote off approximately $246,000 of
intangible assets and leasehold improvements related to the Oradell and
Danbury operating centers. In December, the Company paid out approximately
$144,000 related primarily to personnel reductions and facility closings and
wrote off approximately $449,000 of intangible assets related to the Houston
and Palm Springs operating centers.
A-20
<PAGE>
Components of the non-recurring charge recorded in 1999 and amounts incurred
through December 31, 1999 are as follows:
<TABLE>
<CAPTION>
AMOUNT
1999 INCURRED BALANCE
CHARGE 1999 12/31/99
------ -------- --------
($000'S)
<S> <C> <C> <C>
People Related Costs.................................. $ 860 $ 401 $ 459
Facility Related Costs................................ 1,175 139 1,036
Other Related Costs................................... 150 150 --
Impairment of intangible assets and leasehold
improvements......................................... 797 695 102
------ ------ ------
Total............................................... $2,982 $1,385 $1,597
====== ====== ======
</TABLE>
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 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 twelve months ended December 31, 1999, the Company paid
out approximately $166,000 related to personnel reductions and the facility
closing.
Components of the non-recurring charge recorded in 1998, amounts incurred
through December 31, 1999, and adjustments to the charge are as follows:
<TABLE>
<CAPTION>
AMOUNT AMOUNT
1998 INCURRED BALANCE INCURRED ADJUSTMENTS BALANCE
CHARGE 1998 12/31/98 1999 TO CHARGE 12/31/99
------ -------- -------- -------- ----------- --------
($000'S)
<S> <C> <C> <C> <C> <C> <C>
People Related Costs.... $ 373 $315 $ 58 $ 4 $(54) $--
Facility Related Costs.. 400 -- 400 159 202 443
Other Related Costs..... 135 8 127 3 (124) --
Impairment of intangible
assets and leasehold
improvements........... 292 1 291 267 (24) --
------ ---- ---- ---- ---- ----
Totals................ $1,200 $324 $876 $433 $-- $443
====== ==== ==== ==== ==== ====
</TABLE>
Of the remaining balance from the 1998 and 1999 restructurings approximately
$964,000 is included in short-term liabilities at December 31, 1999.
Interest expense, net. Interest expense, net increased $895,000 from $12.6
million in 1998 to $13.5 million in 1999. The increase was primarily due to
$539,000 of interest expense related to borrowings from the Company's
revolving credit facility executed in the fourth quarter of 1998, $130,000 in
increased loan fees related to the credit facility and decreased interest
income of $230,000 related to reduced cash balances.
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 revenues, honored its outsourcing contract with the Company,
which expired in July 1999. The second customer, representing approximately 3%
of the Company's 1998 consolidated net revenues, moved its conferencing
business to a conferencing company it acquired.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $8.0 million, or 112%, from $7.2 million in
1997 to $15.2 million in 1998. 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
A-21
<PAGE>
business combination agreements with the acquisitions of six private
conference service bureaus prior to November 12, 1997 and consolidated
selling, general and administrative expenses of the Company including the six
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 six
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 six 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 six 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 relocated its Montgomery operating center
into a new leased facility in May 1999. The Company believes that, over the
long term, the consolidation of the two operating centers will provide
operational efficiencies as well as reduce operating costs. During the period
that the Atlanta operating center remained staffed, the Company incurred a
modest amount of incremental costs associated with increased staffing in the
Montgomery operating 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.
Components of the non-recurring charge recorded in 1998, amounts incurred
through December 31, 1999, and adjustments to the charge are as follows:
<TABLE>
<CAPTION>
AMOUNT AMOUNT
1998 INCURRED BALANCE INCURRED ADJUSTMENTS BALANCE
CHARGE 1998 12/31/98 1999 TO CHARGE 12/31/99
------ -------- -------- -------- ----------- --------
($000'S)
<S> <C> <C> <C> <C> <C> <C>
People Related Costs.... $ 373 $315 $ 58 $ 4 $(54) $--
Facility Related Costs.. 400 -- 400 159 202 443
Other Related Costs..... 135 8 127 3 (124) --
Impairment of intangible
assets and leasehold
improvements........... 292 1 291 267 (24) --
------ ---- ---- ---- ---- ----
Totals................ $1,200 $324 $876 $433 $-- $443
====== ==== ==== ==== ==== ====
</TABLE>
A-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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through, a senior debt
offering in 1997, a credit facility initiated in 1998 and its initial public
stock offering in February 1999.
The Company generated positive cash flows from operating activities of
$149,000 in 1999 versus a negative $5.4 million in 1998 and a negative $4.1
million in 1997 primarily due to increased depreciation and amortization as
well as working capital improvements. Cash used in investing activities of
$37.5 million, $7.8 million and $53.8 million for the years ended December 31,
1999, 1998 and 1997, respectively, represent cash paid in connection with the
acquisitions of operating centers of $29.1 million, $0 and $53.3 million,
respectively, purchases of property, plant and equipment of $8.4 million, $7.4
million and $454,000, respectively, and $493,000 related to deferred
acquisition costs for the year ended December 31, 1998. Cash provided by
financing activities of $37.6 million, $3.9 million, and $67.1 million for the
years ended December 31, 1999, 1998 and 1997, respectively, represent issuance
of common stock and long-term debt and net advances on the Company's line of
credit, offset by payments of previously issued debt and payments of
indebtedness of the original six acquired private conference service bureaus.
On November 12, 1997, VIALOG completed a private placement of $75.0 million
of senior notes. The senior notes bear interest at 12.75% 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 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. At December 31, 1999 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 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 1.5%, 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
A-23
<PAGE>
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, 1999, the Company was in compliance with
such financial ratios and tests. As of December 31, 1999, the Company had
borrowed $875,000 on the term loan, $3.8 million on the equipment term loan,
and $4.8 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 outstanding capital
stock of A Business Conference-Call, Inc. ("ABCC"), Conference Pros
International, Inc. ("CPI"), and A Better Conference, Inc. ("ABCI"). 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 were used for working capital and general corporate purposes.
The Company anticipates that its cash flows from operations, 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 filed a current report on Form 8-K, dated February 28, 2000,
indicating that the Company had received signed lock-up agreements from the
holders of approximately 80% of the aggregate principal amount of its 12 3/4%
Senior Notes due 2001 under which, subject to the Company's obtaining
favorable senior credit financing, such noteholders would exchange their
existing notes for cash and newly issued convertible preferred stock of the
Company. The Company has had substantial discussions with lenders to arrange
such favorable financing.
The Company is highly leveraged. 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.
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.
A-24
<PAGE>
COMBINED OPERATING CENTERS AND VIALOG CORPORATION
The combined operating centers' and VIALOG Corporation's Statements of
Operations data for the years ended December 31, 1997, 1998 and 1999 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 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,
-------------------------------------------
1997 1998 1999
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues...................... $45,583 100.0% $59,819 100.0% $70,539 100.0%
Cost of revenues, excluding depre-
ciation.......................... 22,296 48.9% 29,096 48.6% 33,032 46.8%
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net revenues. Revenues from all operating centers reflect an increase from
$59.8 million in 1998 to $70.5 million in 1999, an increase of $10.7 million,
or 18%. Overall, the increase was primarily due to increased call volumes for
audio and video conferencing services. The major components of the increase
were (i) an increase in the Reston operating center's net revenues of $9.0
million, or 49.4%, from $18.4 million in 1998 to $27.4 million in 1999, (ii) a
decrease in the Montgomery operating center's net revenues of $1.9 million, or
11.4%, from $17.1 million in 1998 to $15.2 million in 1999, caused primarily
by the loss of two major customers who merged with competitors of the Company,
(iii) an increase in the Chanhassen operating center's net revenues of $2.8
million, or 37.7%, from $7.5 million in 1998 to $10.3 million in 1999, and
(iv) an increase in the Cambridge operating center's net revenues of $922,000,
or 15.5% from $5.9 million in 1998 to $6.9 million in 1999.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation for the year ended December 31, 1999 increased $3.9 million, or
13.6%, from $29.1 million in 1998 to $33.0 million in 1999, while decreasing
as a percent of revenues from 48.6% in 1998 to 46.8% in 1999. The dollar
increase was primarily attributable to (i) an increase in the Reston operating
center's cost of revenues, excluding depreciation, of $3.9 million, or 46.5%
from $8.5 million in 1998 to $12.4 million in 1999 resulting from increased
telecommunications costs and personnel and related costs associated with
increased call volumes, (ii) an increase in the Chanhassen operating center's
cost of revenues, excluding depreciation, of $994,000 or 41.8%, 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, and (iii) a decrease in the Montgomery operating
center's cost of revenues, excluding depreciation, of $1.3 million or 13.0%,
caused primarily by the loss of two major customers who merged with
competitors of the Company. The decrease as a percentage of revenues was
primarily due to an overall reduction in telecommunications cost per minute
resulting from the negotiation of lower cost telecommunication contracts and
the favorable impact resulting from the acquisition of the three operating
centers on February 10, 1999.
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
A-25
<PAGE>
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 operating 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 operating 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
Chanhassen operating 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 operating
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 operating center's net revenues for the years ended
December 31, 1997 and 1998, respectively, and (v) an increase in the
Montgomery operating 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 operating 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
operating 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 operating 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 operating 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.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for
internal use, and is effective for fiscal years beginning after December 31,
1998, with earlier application encouraged. The Company adopted SOP 98-1 on
January 1, 1999, the adoption of which did not 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 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.
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
A-26
<PAGE>
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,
1995 1996 1997 1997
------------ ------------ ------------- ---------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $6,508 100.0% $9,073 100.0% $10,945 100.0% $ 1,620 100.0 %
Cost of revenues, ex-
cluding depreciation... 3,021 46.4% 3,564 39.3% 4,791 43.8% 709 43.8 %
Selling, general and ad-
ministrative expenses.. 2,484 38.2% 3,332 36.7% 4,124 37.7% 2,603 160.6 %
Depreciation and amorti-
zation expense......... 496 7.6% 630 6.9% 823 7.5% 183 11.3 %
------ ----- ------ ----- ------- ----- ------- ------
Operating income
(loss)................. $ 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% 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
A-27
<PAGE>
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.
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
1995 1996 NOVEMBER 12, 1997
------------ ----------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by (used in):
Operating activities........... $ 821 $ 2,048 $ 2,932
Investing activities........... (1,432) (795) (1,704)
Financing activities........... 771 (839) (1,549)
------------ ----------- -------
Net increase (decrease) in cash
and cash equivalents............ $ 160 $ 414 $ (321)
============ =========== =======
</TABLE>
A-28
<PAGE>
Access had positive cash flow from operations in each year ended December
31, 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 $0, $475,000 and
$1,284,000 for the years ended December 31, 1995 and 1996 and the period
January 1, 1997 to November 12, 1997, respectively.
CSI
Founded in 1992, CSI specialized in providing audioconferencing services and
enhanced services to certain facilities-based and non-facilities-based
telecommunications providers. CSI maintained its operations center in Atlanta,
Georgia until 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.
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,
1995 1996 1997 1997
------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $3,808 100.0% $5,868 100.0% $5,579 100.0% $ 854 100.0 %
Cost of revenues,
excluding
depreciation........... 1,617 42.5% 2,438 41.6% 2,052 36.8% 322 37.7 %
Selling, general and
administrative
expenses............... 905 23.8% 998 17.0% 831 14.9% 3,493 409.0 %
Depreciation and
amortization expense... 292 7.6% 393 6.7% 356 6.4% 168 19.7 %
------ ----- ------ ----- ------ ----- ------- ------
Operating income
(loss)................. $ 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.
A-29
<PAGE>
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, 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.
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
1995 1996 NOVEMBER 12, 1997
------ ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by (used in):
Operating activities....................... $ 721 $ 2,128 $2,897
Investing activities....................... (225) (41) (311)
Financing activities....................... (144) (2,144) (2,801)
----- ------- ------
Net increase (decrease) in cash and cash
equivalents................................. $ 352 $ (57) $ (215)
===== ======= ======
</TABLE>
CSI had a positive cash flow from operations in each year ended December 31,
1995, 1996 and the period January 1, 1997 to November 12, 1997. Cash used in
investing activities in 1995, 1996 and the period January 1, 1997 to November
12, 1997 related solely to the acquisition of property and equipment. Cash
provided by financing activities consisted of the proceeds of borrowings on
long-term debt and from the refinancing of capital lease obligations. Cash
used in financing activities consisted of repayments of long-term debt and
capital lease obligations and distributions to stockholders. Stockholder
distributions totaled $1.6 million and $2.6 million for the year ended
December 31, 1996 and the period January 1, 1997 through November 12, 1997,
respectively. There were no stockholder distributions in 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
A-30
<PAGE>
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 the Company acquired its original six private
conference service bureaus. 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.
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, 1999, the total indebtedness of
the Company was approximately $78.2 million, net of unamortized original issue
discount of $2.0 million. In October 1998, the Company closed a senior credit
facility for a principal amount of up to $15.0 million. As of December 31,
1999, the Company had approximately $9.4 million of borrowings outstanding
under its 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 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.
A-31
<PAGE>
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. Several 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 including Internet-based
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 8% of its 1999 pro forma net revenues from
IXCs and LECs which outsource teleconferencing services provided to their
respective customers. These telecommunications companies have the financial
capability and expertise to deliver such services internally. There can be no
assurance that the Company's current IXC and LEC customers will not begin to
provide the teleconferencing services currently provided by the Company and
pursue such market actively and in direct competition with the Company.
Moreover, the Company expects to derive a portion of its future revenues from
RBOCs that enter the long distance market and outsource their teleconferencing
services. There can be no assurance that the RBOCs will be able to enter the
long distance market on a timely basis, if at all; that any RBOC entering the
long distance market will offer teleconferencing services; or that any IXC,
LEC or RBOC offering such services will outsource services or choose the
Company as the provider of such outsourced teleconferencing services. The
failure of any such event to occur could have a material adverse effect on the
Company's business, financial condition, results of operations and prospects
and could adversely impact the market for the Company's common stock.
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."
A-32
<PAGE>
Recent entry into internet conferencing markets. Only two of the operating
centers offered Internet conferencing services in 1999, and to date no
material revenues have been generated from Internet conferencing services.
Sales people, reservationists, operators and technical support people are
involved in ongoing training programs. There can be no assurance that the
Company will be able to obtain significant business from Internet conferencing
services or, if obtained, that the Company has the ability to service such
business. See "Business--The Company's Conferencing Services."
Technological considerations. The Company currently derives a substantial
portion of its net revenues from the sale of audio teleconferencing services.
If the manufacturers of private branch exchanges ("PBXs"), the equipment used
by most businesses and institutions to handle their internal telephone
requirements, develop improved, cost-effective PBX capabilities for handling
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 "Business--Competition".
Long Distance Services Contracts. A significant portion of the Company's
direct costs are attributable to the purchase of local and long distance
telephone services. It has been management's experience that the costs of long
distance services have been decreasing over the past several years. If,
however, the costs of long distance services increase over time, the Company's
current purchasing strategy, which calls for shorter-term contracts, may place
it at a competitive disadvantage with respect to competitors that have entered
into longer-term contracts for long distance services. There can be no
assurance that competition in the long distance services market will continue
to increase, that any increased competition will reduce the cost of long
distance services or that the Company's purchasing strategy will result in
cost savings. In addition, if the Company experiences a shortfall in projected
volume, it may be required to pay a penalty under one or more of its
contracts. There can be no assurance that the Company's analysis of the future
costs of long distance services will be accurate, and the failure to predict
future cost trends accurately could have a material adverse effect on the
Company's business, financial condition, results of operations and prospects
and could adversely impact the market for the Company's common stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Suppliers."
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. Additionally, 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 certain events causing a change of
control of the Company (as defined in the Indenture) 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
A-33
<PAGE>
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."
ITEM 7A. QUANTITATIVE AND QUALITATIVE 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 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 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 December 31, 1999, 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 December 31, 1999, 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 December 31, 1999,
approximately 11.4% of the Company's credit facility and long-term obligations
were floating rate obligations. The deterimental effect on the Company's
earnings of the hypothetical 50 basis point and 100 basis point increase in
interest rates described above would be approximately $32,000 and $65,000,
respectively, before income taxes.
The Company does not have any other material market risk exposure.
A-34
<PAGE>
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>
HISTORICAL FINANCIAL STATEMENTS
VIALOG CORPORATION
Report of Management.................................................. 36
Independent Auditors' Report.......................................... 37
Consolidated Balance Sheets........................................... 38
Consolidated Statements of Operations................................. 39
Consolidated Statements of Stockholders' Equity (Deficit)............. 40
Consolidated Statements of Cash Flows................................. 41
Notes to Consolidated Financial Statements............................ 42
TELEPHONE BUSINESS MEETINGS, INC. ("ACCESS")--THE RESTON CENTER
Independent Auditors' Report.......................................... 61
Balance Sheets........................................................ 62
Statements of Operations.............................................. 63
Statements of Stockholders' Equity.................................... 64
Statements of Cash Flows.............................................. 65
Notes to Financial Statements......................................... 66
CONFERENCE SOURCE INTERNATIONAL, INC. ("CSI")--THE ATLANTA CENTER
Independent Auditors' Report.......................................... 71
Balance Sheets........................................................ 72
Statements of Operations.............................................. 73
Statements of Stockholders' Equity.................................... 74
Statements of Cash Flows.............................................. 75
Notes to Financial Statements......................................... 76
A BUSINESS CONFERENCE CALL, INC. ("ABCC")--THE CHANHASSEN (FORMERLY
CHASKA) CENTER
Independent Auditors' Report.......................................... 81
Balance Sheets........................................................ 82
Statements of Income and Retained Earnings............................ 83
Statements of Cash Flows.............................................. 84
Notes to Financial Statements......................................... 85
</TABLE>
A-35
<PAGE>
REPORT OF MANAGEMENT
The accompanying consolidated financial statements and related information
of VIALOG Corporation and subsidiaries (the "Company") have been prepared by
management, which is responsible for their integrity and objectivity. The
statements have been prepared in conformity with generally accepted accounting
principles and necessarily include some amounts based on management's best
estimates and judgments.
Management is also responsible for maintaining a system of internal controls
as a fundamental requirement for the operational and financial integrity of
results. The Company has established and maintains a system of internal
controls designed to provide reasonable assurance that the books and records
reflect the transactions of the Company and that its established policies and
procedures are carefully followed. The Company's internal control system is
based upon standard procedures, policies and guidelines and organizational
structures that provide an appropriate division of responsibility and the
careful selection and training of qualified personnel.
The Company's accompanying consolidated financial statements have been
audited by KPMG LLP, independent certified public accountants, whose audit was
made in accordance with generally accepted auditing standards. Management has
made available to KPMG 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 LLP
during its audit were valid and appropriate. The Report of Independent
Auditors appears below.
Kim A. Mayyasi Michael E. Savage
Chief Executive Officer Senior Vice President and CFO
and President
A-36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
VIALOG Corporation:
We have audited the accompanying consolidated balance sheets of VIALOG
Corporation and subsidiaries as of December 31, 1998 and 1999, 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, 1999.
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, 1998 and 1999, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Boston, Massachusetts
February 29, 2000
A-37
<PAGE>
VIALOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 232 $ 547
Accounts receivable, net of allowance for doubtful
accounts of $164 and $579, respectively........... 7,391 11,637
Prepaid expenses................................... 425 435
Deferred offering costs............................ 596 --
Other current assets............................... 165 310
-------- --------
Total current assets............................. 8,809 12,929
Property and equipment, net.......................... 11,987 17,814
Deferred debt issuance costs......................... 5,429 3,801
Goodwill and intangible assets, net.................. 41,679 64,094
Other assets......................................... 1,362 583
-------- --------
Total assets..................................... $ 69,266 $ 99,221
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit........................... $ 2,057 $ 4,770
Current portion of long-term debt.................. 1,465 2,332
Accounts payable................................... 3,064 5,216
Accrued interest expense........................... 1,215 1,215
Accrued expenses and other liabilities............. 3,386 3,319
-------- --------
Total current liabilities........................ 11,187 16,852
Long-term debt, less current portion................. 74,189 75,827
Other long-term liabilities.......................... 482 1,499
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; none issued or outstanding............ -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized; issued: 3,693,672 and 9,144,200
shares, respectively; outstanding: 3,693,672 and
9,133,569 shares, respectively.................... 37 91
Additional paid-in capital......................... 11,854 45,602
Accumulated deficit................................ (28,483) (40,603)
Treasury stock, at cost; 0 and 10,631 shares,
respectively...................................... -- (47)
-------- --------
Total stockholders' equity (deficit)............. (16,592) 5,043
-------- --------
Total liabilities and stockholders' equity
(deficit)....................................... $ 69,266 $ 99,221
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
A-38
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net revenues................................... $ 4,816 $ 46,820 $ 68,629
Cost of revenues, excluding depreciation....... 2,492 24,321 32,387
Selling, general and administrative expense.... 7,178 15,196 23,442
Depreciation expense........................... 273 2,835 4,190
Amortization of goodwill and intangibles....... 306 2,490 4,060
Non-recurring charge........................... 8,000 1,200 2,982
--------- --------- ---------
Operating income (loss)...................... (13,433) 778 1,568
Interest expense, net.......................... (1,866) (12,629) (13,524)
--------- --------- ---------
Loss before income tax expense............... (15,299) (11,851) (11,956)
Income tax expense............................. (522) (26) (164)
--------- --------- ---------
Net loss..................................... $(15,821) $(11,877) $(12,120)
========= ========= =========
Net loss per share--basic and diluted.......... $ (5.48) $ (3.27) $ (1.53)
========= ========= =========
Weighted average shares outstanding............ 2,889,005 3,632,311 7,947,333
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
A-39
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------- PAID-IN ACCUMULATED TREASURY EQUITY
SHARES PAR VALUE CAPITAL DEFICIT STOCK (DEFICIT)
--------- --------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
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.................. 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)
Options exercised....... 405,297 3 329 -- (47) 285
Options granted to
employees.............. -- -- 511 -- -- 511
Warrants related to 8%
Notes Payable dated
February 24, 1997...... 99,696 1 324 -- -- 325
Warrants related to 12
3/4% Senior Notes due
2001................... 345,535 4 -- -- -- 4
Issuance of common stock
in connection with
initial public
offering, net of
offering costs......... 4,600,000 46 32,584 -- -- 32,630
Net loss................ -- -- -- (12,120) -- (12,120)
--------- ---- ------- -------- ---- --------
Balance at December 31,
1999................... 9,144,200 $ 91 $45,602 $(40,603) $(47) $ 5,043
========= ==== ======= ======== ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
A-40
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(15,821) $(11,877) $(12,120)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation.................................... 273 2,835 4,190
Amortization of goodwill and intangibles........ 306 2,490 4,060
Amortization of debt issuance costs and debt
discount....................................... 545 2,994 3,170
Provision for doubtful accounts................. 32 216 413
Deferred income taxes........................... 522 -- --
Write-off of deferred offering costs............ 377 -- --
Compensation expense for issuance of common
stock and options.............................. 958 47 52
Non-cash portion of non-recurring charges....... 8,000 292 797
Changes in operating assets and liabilities, net
of effects from acquisitions of businesses:
Accounts receivable............................. (576) (1,921) (3,014)
Prepaid expenses and other current assets....... (68) (333) (80)
Other assets.................................... (64) (293) 1,599
Accounts payable................................ (351) 949 1,613
Accrued expenses................................ 1,716 (1,124) (373)
Other long-term liabilities..................... 3 307 (158)
-------- -------- --------
Cash flows provided by (used in) operating
activities..................................... (4,148) (5,418) 149
-------- -------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash
acquired....................................... (53,308) -- (29,095)
Additions to property and equipment............. (454) (7,355) (8,360)
Deferred acquisition costs...................... -- (493) --
-------- -------- --------
Cash flows used in investing activities......... (53,762) (7,848) (37,455)
-------- -------- --------
Cash flows from financing activities:
Advances on line of credit, net................. -- 2,057 2,713
Proceeds from issuance of long-term debt and
warrants....................................... 75,755 3,306 2,806
Payments of long-term debt...................... (2,772) (676) (2,021)
Proceeds from issuance of common stock.......... 2 106 34,299
Deferred offering costs......................... -- (596) --
Deferred debt issuance costs.................... (5,845) (266) (176)
-------- -------- --------
Cash flows provided by financing activities..... 67,140 3,931 37,621
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 9,230 (9,335) 315
Cash and cash equivalents at beginning of
period.......................................... 337 9,567 232
-------- -------- --------
Cash and cash equivalents at end of period....... $ 9,567 $ 232 $ 547
======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest........................................ $ 72 $ 9,917 $ 10,369
======== ======== ========
Taxes........................................... $ 1 $ 8 $ 4
======== ======== ========
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 $ -- $ 31,041
Liabilities assumed and issued.................. (9,096) -- (1,855)
Common stock issued............................. (3,217) -- --
======== ======== ========
Cash paid....................................... 54,210 -- 29,186
Less cash acquired.............................. (902) -- (91)
======== ======== ========
Net cash paid for acquisitions of businesses.... $ 53,308 $ -- $ 29,095
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
A-41
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
VIALOG Corporation ("the Company") was incorporated in Massachusetts on
January 1, 1996. In January 1997, the Company changed its name to VIALOG
Corporation. For purposes of these Notes to Consolidated Financial Statements,
"the Company" 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. 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
conference 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
(See Note 2 "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 2 "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.
(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 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 all other 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 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.
A-42
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
The Company capitalizes costs related to software obtained for internal use.
These costs are included in computer equipment and amortized accordingly.
During 1997, 1998 and 1999, these costs were not significant.
(g) Goodwill and Intangible Assets
Goodwill and identifiable intangible assets, which consisted of assembled
workforce, developed technology, non-compete agreements and computer software
result from the excess of the purchase price over the net assets of businesses
acquired. Goodwill and intangibles are being amortized on a straight-line
basis over the following periods: 6 years for developed technology, 8 years
for assembled workforce, 3 years for computer software and 20 years for
goodwill, which represent their estimated useful lives. The non-compete
agreements are being amortized over their specified terms of 3 years. The
Company 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) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
(i) Research and Development
The Company 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", the Company
charges to expense when incurred (included in cost of revenues) that portion
of the department costs which relate to research and development activities.
The remaining costs of these departments are charged to expense as incurred
and are included in cost of revenues and selling, general and administrative
expense. Prior to the acquisition of the businesses described in Note 2
"Acquisitions", the Company 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 years ended December 31, 1998 and 1999 were approximately
$961,000 and $1.5 million.
(j) Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation", the Company 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").
A-43
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
(k) 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.
(l) Loss Per Share
The Company follows 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 the Company has been in a net loss position for the
years ended December 31, 1997, 1998 and 1999, common stock equivalents of
896,900, 1,994,209 and 1,332,327 for the years ended December 31, 1997, 1998
and 1999, respectively, were excluded from the diluted loss per share
calculation as they would be antidilutive. As a result, diluted loss per share
is the same as basic loss per share, and has not been presented separately.
(2) ACQUISITIONS
On November 12, 1997, the Company 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 the
Company.
<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.
A-44
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(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>
<CAPTION>
($000'S)
--------
<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, the Company repaid $2.2 million of long-term debt of
the Acquired Companies.
In connection with the acquisitions, the Company 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. At the time of
acquisition, the Acquired Companies were working on projects that were
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 had no alternative future uses, there could 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.
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. The total purchase price was allocated
as follows (in thousands):
<TABLE>
<CAPTION>
($000'S)
--------
<S> <C>
Working capital....................................................... $ 967
Property and equipment, net........................................... 1,657
Goodwill and intangible assets........................................ 27,422
Other assets.......................................................... 78
Long-term liabilities................................................. (1,010)
-------
$29,114
=======
</TABLE>
A-45
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
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.
The results of all the acquired companies have been included in the
Consolidated Statements of Operations from their date of acquisition. The
unaudited pro forma consolidated historical results for the years ended
December 31, 1997, 1998 and 1999 below assume the original acquisitions
occurred at the beginning of fiscal 1997 and the additional acquisitions
occurred at the beginning of fiscal 1998.
<TABLE>
<CAPTION>
1997 1998 1999
-------- ------- --------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues....................................... $ 35,917 $59,819 $ 70,539
Net loss........................................... $(15,752) $(9,300) $(11,511)
Net loss per share................................. $ (4.68) $ (1.13) $ (1.33)
</TABLE>
The pro forma results include amortization of the goodwill and intangible
assets described above, interest expense on debt assumed issued to finance the
acquisitions and reductions to selling, general and administrative expenses
related to certain royalties, compensation and benefits that were eliminated
or reduced as a result of the acquisitions. The pro forma results do not
include the write-off of in-process research and development expenses at the
date of acquisition. The pro forma results are not necessarily indicative of
the results that would have been obtained had these events actually occurred
at the beginning of the periods presented, nor are they necessarily indicative
of future consolidated results.
(3) CASH, CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS
The Company classifies all investments with an original maturity of less
than ninety days as cash equivalents and values them at cost which
approximates market. The Company's policy is to invest cash primarily in
income producing short-term instruments and to keep uninvested cash balances
at minimum levels.
The Company'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, 1999 is based on quoted
market values. The fair value of the senior notes included in long term debt
at March 29, 2000 is estimated at 75% of face value. The estimated fair value
has been determined by the Company using available market information. This
estimate is not necessarily indicative of the amounts that the Company would
realize in the event of debt retirement.
(4) ACCOUNTS RECEIVABLE--ALLOWANCE FOR DOUBTFUL ACCOUNTS
Prior to the acquisitions discussed in Note 2 "Acquisitions", the Company
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.
The Company'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, 1999 is based on quoted
market values. The fair value of long-term debt was not materially different
from its carrying amount.
A-46
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
(4) ACCOUNTS RECEIVABLE--ALLOWANCE FOR DOUBTFUL ACCOUNTS
Prior to the acquisitions discussed in Note 2 "Acquisitions", the Company
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 INCREASE/
AT PROVISION DEDUCTIONS BALANCE
BEGINNING CHARGED TO FROM AT END
OF PERIOD OPERATIONS ALLOWANCE OF PERIOD
--------- ---------- ------------- ---------
($000'S)
<S> <C> <C> <C> <C>
Year Ended December 31,
1999................... $ 164 $ 413 $ 2 $ 579
Year Ended December 31,
1998................... $ 32 $ 216 $ (84) $ 164
Year Ended December 31,
1997................... $ -- $ 32 $ -- $ 32
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------- -------
($000'S)
<S> <C> <C>
Office furniture and equipment............................. $ 1,392 $ 2,680
Conferencing equipment..................................... 9,926 13,913
Computer equipment......................................... 2,672 4,263
Capitalized lease equipment................................ 747 825
Leasehold improvements..................................... 343 1,613
------- -------
15,080 23,294
Less: accumulated depreciation............................. (3,093) (5,480)
------- -------
$11,987 $17,814
======= =======
</TABLE>
(6) GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------- -------
($000'S)
<S> <C> <C>
Goodwill................................................... $41,457 $66,833
Developed technology....................................... 1,930 1,930
Assembled workforce........................................ 1,088 870
Non-compete agreements..................................... -- 1,173
Computer software.......................................... -- 144
------- -------
44,475 70,950
Less: accumulated amortization............................. (2,796) (6,856)
------- -------
$41,679 $64,094
======= =======
</TABLE>
A-47
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
(7) REVOLVING LINE OF CREDIT
On October 6, 1998, the Company 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. The Company is required to maintain compliance with
certain financial ratios and tests, including a debt service coverage ratio
and minimum net worth level. The Company is in compliance with all covenants
contained in the Credit Facility at December 31, 1999.
The average amount of short-term borrowings outstanding during 1999 was
approximately $3.3 million with a maximum outstanding of approximately $4.8
million. The weighted average interest rate on December 31, 1999 and for the
year then ended was 9.52%.
(8) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
($000'S)
<S> <C> <C>
12 3/4% Senior Notes Payable, due November 15,
2001, net of unamortized discount of $3,115 and
$2,027, respectively............................. $71,885 $72,973
Term loans........................................ 3,030 4,655
Capitalized lease obligations..................... 669 525
Other long-term debt.............................. 70 6
------- -------
Total long-term debt.............................. 75,654 78,159
Less current portion.............................. 1,465 2,332
------- -------
Total long-term debt, less current portion........ $74,189 $75,827
======= =======
</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. An aggregate of 99,696 shares of
common stock were issued in February and March 1999 at a price of $3.26 per
share upon the exercise of warrants by note holders.
A-48
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
CONVERTIBLE BRIDGE FACILITY
In October, 1997, the Company 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 the
Company'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 the Company's common stock as determined by dividing
the aggregate unpaid principal amount of the notes by the conversion price of
$2.00 per share, subject to adjustment pursuant to the terms of the notes. The
conversion price of $2.00 per share was equal to the estimated fair market
value of the Company's common stock on the date of issuance. In November 1997,
the notes were converted into 127,750 shares of the Company'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 "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, 1999. 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
A-49
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
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,
---------------------------
1997 1998 1999
------- -------- --------
($000'S)
<S> <C> <C> <C>
Interest income................................ $ 56 $ 233 $ 69
Interest expense............................... (1,922) (12,862) (13,593)
------- -------- --------
Interest income (expense), net............... $(1,866) $(12,629) $(13,524)
======= ======== ========
</TABLE>
(9) ACCRUED EXPENSES
Accrued expenses consist primarily of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
($000'S)
<S> <C> <C>
Accrued payroll and related costs................. 692 913
Accrued acquisition and financing related costs... 1,122 --
Accrued restructuring and severance related
costs............................................ -- 964
Accrued other..................................... 1,572 1,442
------ ------
$3,386 $3,319
====== ======
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments
The Company 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
------------------------ -------------- ----------------
($000'S)
<S> <C> <C>
2000........................................ $428 $ 2,716
2001........................................ 140 2,490
2002........................................ 1 2,353
2003........................................ -- 2,215
2004........................................ -- 2,073
Thereafter.................................. -- 1,549
---- -------
Total minimum lease payments................ 569 $13,396
=======
Less: Amount representing interest on capi-
tal leases................................. (44)
----
Present value of minimum lease payments at
December 31, 1999.......................... $525
====
</TABLE>
A-50
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
Total operating lease rental expense for VIALOG for the years ended December
31, 1997, 1998 and 1999 were $198,000, $1.5 million, and $2.2 million
respectively.
(b) Subsequent Event (Unaudited)
The Company is in the process of combining its corporate offices and its
Cambridge, Massachusetts operating center into a new leased facility located
in Bedford, Massachusetts. The Company anticipates relocating into the new
leased facility during the second and third quarters of 2000. The lease for
the Bedford facility, which was signed on March 3, 2000, provides for a total
of approximately 27,868 square feet at a base rate of $24.00 per square foot
(escalating to $25.00 per square foot in years four through five of the lease)
with an expiration date of May 15, 2005. The effect of this lease will be to
increase the annual lease payments as follows:
<TABLE>
<CAPTION>
YEAR
ENDING
DECEMBER
31, ($000'S)
-------- --------
<S> <C>
2000 $ 501
2001 669
2002 669
2003 690
2004 697
Thereafter 174
------
$3,400
======
</TABLE>
(11) NON-RECURRING CHARGES
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 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 Center as well as other Operating Centers. 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. During the
years ended December 31, 1998 and 1999, the Company paid out approximately
$324,000 and $166,000, respectively. At December 31, 1999, approximately
$443,000 of the original accrual for the non-recurring charge was remaining
for estimated costs still to be incurred related to the consolidation.
Components of the non-recurring charge recorded in 1998, amounts incurred
through December 31, 1999, and adjustments to the charge are as follows:
<TABLE>
<CAPTION>
AMOUNT AMOUNT
1998 INCURRED BALANCE INCURRED ADJUSTMENTS BALANCE
CHARGE 1998 12/31/98 1999 TO CHARGE 12/31/99
------ -------- -------- -------- ----------- --------
($000'S)
<S> <C> <C> <C> <C> <C> <C>
People Related Costs.... $ 373 $315 $ 58 $ 4 $(54) $--
Facility Related Costs.. 400 -- 400 159 202 443
Other Related Costs..... 135 8 127 3 (124) --
Impairment of intangible
assets and leasehold
improvements........... 292 1 291 267 (24) --
------ ---- ---- ---- ---- ----
Totals................ $1,200 $324 $876 $433 $-- $443
====== ==== ==== ==== ==== ====
</TABLE>
A-51
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
The results for the year ended December 31, 1999 include 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 these closings, the
Company expanded its other facilities to accommodate the transitioned
business. In addition, the Company plans to combine its Corporate offices and
its Cambridge Center in the first half of 2000. The non-recurring charge
includes (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
leasehold improvements. During the year ended December 31, 1999, the Company
paid out approximately $690,000 related primarily to personnel reductions and
facility closings, and wrote off approximately $695,000 of intangible assets
and leasehold improvements related to the closed Operating Centers. At
December 31, 1999, approximately $1.6 million of the original accrual for the
non-recurring charge was remaining for estimated costs still to be incurred
related to the consolidation.
Components of the non-recurring charge recorded in 1999 and amounts incurred
through December 31, 1999 are as follows:
<TABLE>
<CAPTION>
AMOUNT
1999 INCURRED BALANCE
CHARGE 1999 12/31/99
------ -------- --------
(000'S)
<S> <C> <C> <C>
People Related Costs.................................. $ 860 $ 401 $ 459
Facility Related Costs................................ 1,175 139 1,036
Other Related Costs................................... 150 150 --
Impairment of intangible assets and leasehold
improvements......................................... 797 695 102
------ ------ ------
Total............................................... $2,982 $1,385 $1,597
====== ====== ======
</TABLE>
Of the remaining balance from the 1998 and 1999 restructurings,
approximately $964,000 is included in short-term liabilities at December 31,
1999.
(12) PROVISION FOR INCOME TAXES
Income tax (expense) benefit for the years ended December 31, 1997, 1998 and
1999 consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
(000'S)
<S> <C> <C> <C>
December 31, 1997
Federal............................................ $ -- $(398) $(398)
State.............................................. -- (124) (124)
----- ----- -----
$ -- $(522) $(522)
===== ===== =====
December 31, 1998
Federal............................................ $ -- $ -- $ --
State.............................................. (125) 99 (26)
----- ----- -----
$(125) $ 99 $ (26)
===== ===== =====
December 31, 1999
Federal............................................ $ -- $ -- $ --
State.............................................. (53) (111) (164)
----- ----- -----
$ (53) $(111) $(164)
===== ===== =====
</TABLE>
A-52
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
Income tax (expense) benefit differed from the amounts computed by applying
the U.S. statutory federal income tax rate of 34% as a result of the
following:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
($000'S)
<S> <C> <C> <C>
Computed "expected" tax benefit.................. $ 5,202 $ 4,029 $ 4,065
State and local income taxes, net of federal tax
benefit......................................... 918 754 (102)
Nondeductible amounts and other differences...... (167) (186) (338)
Change in valuation allowance for deferred taxes
allocated to Federal income tax expense......... (6,469) (4,772) (3,789)
Other............................................ (6) 149 --
------- ------- -------
Tax (expense) benefit.......................... $ (522) $ (26) $ (164)
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portion of deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
1998 1999
-------- --------
($000'S)
<S> <C> <C>
Deferred tax assets (liabilities)
Organizational expenditures and start-up costs........ $ 1,795 $ 1,280
Accrual to cash accounting adjustment................. (126) (115)
Purchased in-process R&D and other intangibles
amortized for tax purposes over 15 years............. 3,031 2,236
Federal and state net operating loss carryforwards.... 6,198 11,215
Capital loss and charitable contribution
carryforwards........................................ 3 5
Property and equipment................................ (441) (1,231)
Bad debts............................................. 66 375
Original issue discount amortization.................. 96 126
Non-recurring charge.................................. 246 92
Deferred compensation................................. 409 274
Other................................................. 63 1,398
Valuation allowance................................... (11,241) (15,606)
-------- --------
Net deferred tax asset.............................. $ 99 $ 49
======== ========
</TABLE>
VIALOG had net operating loss carryforwards of $28.8 million at December 31,
1999, of which $3.9 million expires in 2013 and $24.9 million expires between
2018 and 2020. 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, the Company 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, 1999, $144,000 of the Company's net operating loss
carryforward deferred tax asset of $11.2 million pertains to the Acquired
Companies and $2,000 of the
A-53
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
Company's $5,000 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) 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.
(b) 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.
(c) 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 1999 Stock Plan
On April 29, 1999 and July 29, 1999, the Board of Directors and VIALOG's
stockholders, respectively, approved VIALOG's 1999 Stock Plan (the "1999
Plan"). The purpose of the 1999 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) stock purchases or awards.
The Compensation Committee administers the 1999 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 1,500,000 shares as of December 31, 1999. 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 1999 Plan will remain in effect until April 29, 2009 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.
(b) The 1996 Stock Plan
On February 14, 1996, the Board of Directors and VIALOG's stockholders
approved VIALOG's 1996 Stock Plan (the "1996 Plan"). The purpose of the 1996
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.
A-54
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
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, 1998 and 1999. 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 1996 Plan will remain in effect until February 14, 2006 unless
terminated earlier by the Board of Directors. The Plan may be amended by the
Board of Directors without the consent of the stockholders of VIALOG, except
that any amendment, although effective when made, will be subject to
stockholder approval if required by any Federal or state law or regulation by
the rules of any stock exchange or automated quotation system on which the
common stock may then be listed or quoted.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding at December 31, 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
Granted........................................ 1,440,878 5.49
Exercised...................................... (410,240) 1.00
Cancelled...................................... (678,658) 6.03
--------- -----
Options outstanding at December 31, 1999......... 1,947,542 $5.18
========= =====
</TABLE>
The options generally vest in equal quarterly installments over 3 years and
have a 10 year term. At December 31, 1997, 1998 and 1999, 467,771, 551,704,
and 747,100 options, respectively, were exercisable at weighted average
exercise prices of $1.03, $1.79, and $5.17 per share, respectively. At
December 31, 1999, there were 1,754,048 additional shares available for grant
under the Plans.
The following is a summary of options outstanding and exercisable at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
RANGE OF NUMBER WEIGHTED AVERAGE NUMBER
EXERCISE OUTSTANDING WEIGHTED AVERAGE REMAINING EXERCISABLE WEIGHTED AVERAGE
PRICES AT 12/31/99 EXERCISE PRICE CONTRACTUAL LIFE AT 12/31/99 EXERCISE PRICE
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.025-$2.00 221,000 $ 1.88 7.1 years 192,588 $1.86
$3.11-$3.56 582,288 3.39 9.6 43,578 3.33
$4.03-$4.63 166,250 4.08 9.3 22,500 4.03
$5.75 748,538 5.75 8.5 332,305 5.75
$7.00-$10.00 450,504 8.38 9.0 156,129 8.69
--------- -------
1,947,542 5.18 8.8 747,100 5.17
========= =======
</TABLE>
In 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.
A-55
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
VIALOG applies APB Opinion No. 25 accounting for stock issued to employees
in accounting for its Plan and, accordingly, compensation cost is only
recognized in the financial statements for stock options granted to employees
when the fair value on the grant date exceeds the exercise price. Had VIALOG
determined compensation cost based on the fair value at grant date for its
stock options under SFAS No. 123, its net loss would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999
-------- -------- --------
($000'S EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net loss
As reported.................................. $(15,821) $(11,877) $(12,120)
Pro forma.................................... $(15,901) $(12,588) $(13,078)
Loss per share
As reported.................................. $ (5.48) $ (3.27) $ (1.53)
Pro forma.................................... $ (5.50) $ (3.47) $ (1.65)
</TABLE>
The per share weighted-average fair value of stock options granted during
1997, 1998 and 1999, respectively, were $1.00, $4.40, and $3.69 for ISOs and
$1.30, $6.42 and $4.78 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 1997 and 1998 based on comparable
companies and 93% for 1999 based on the Company's average trading price since
the IPO; (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
5.88%, 4.45% and 5.08% in 1997, 1998 and 1999, respectively, and (iv) an
average option life of five years for all periods.
(c) 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.
(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, 1998 and 1999, VIALOG paid approximately $1.8 million,
$845,000 and $692,000, 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, 1998,
and 1999 one of VIALOG's stockholders provided consulting services to
VIALOG for a monthly fee of $10,000.
(c) In 1999, TCC generated revenues of $178,184 for teleconferencing
services provided to customers of a company owned by the spouse of a
stockholder of VIALOG.
A-56
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
(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.
(16) 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, 1998 and 1999. Separate financial
statements and other disclosures concerning the guarantor subsidiaries are not
presented because management has determined that they are not material to
investors.
A-57
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
<TABLE>
<CAPTION>
VIALOG CALL
CORP. ACCESS CSI POINTS TCC AMERICO CDC ELIMINATIONS CONSOLIDATED
------- ------- ------- ------- ------ ------- ------ ------------ ------------
($000'S)
<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
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, ex-
cluding Depreciation.... -- 709 322 806 279 212 174 (10) 2,492
Selling, general and ad-
ministrative 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 Develop-
ment.................... -- 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 (ex-
pense), 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 ac-
tivities................ $(7,072) $ 1,663 $ 407 $ 320 $ 65 $ 264 $ 205 $ -- $ (4,148)
Cash flows provided by
(used in) investing ac-
tivities................ (54,281) 192 90 169 56 (8) 20 -- (53,762)
Cash flows provided by
(used in) financing ac-
tivities................ 69,412 (1,415) (546) 7 (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 equiva-
lents at the beginning
of year................. 337 -- -- -- -- -- -- -- 337
------- ------- ------- ------- ------ ------ ------ -------- --------
Cash and cash equiva-
lents at the end of
Year.................... $ 8,396 $ 440 $ (49) $ 489 $ 46 $ 67 $ 178 $ -- $ 9,567
======= ======= ======= ======= ====== ====== ====== ======== ========
</TABLE>
- -----
(1) Represents operating results of the Acquired Companies from the date of
Acquisition on November 12, 1997.
A-58
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
<TABLE>
<CAPTION>
VIALOG CALL
CORP. ACCESS CSI POINTS TCC AMERICO CDC ELIMINATIONS CONSOLIDATED
-------- ------- ------- ------- ------ ------- ------ ------------ ------------
($000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 subsidiar-
ies..................... 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, exclud-
ing 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
======== ======= ======= ======= ====== ====== ====== ======== ========
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, ex-
cluding
depreciation............ 3 8,506 3,225 6,749 3,189 1,712 1,658 (721) 24,321
Selling, general and ad-
ministrative 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 (ex-
pense), net............. (12,521) 8 (63) -- (35) (25) 7 -- (12,629)
-------- ------- ------- ------- ------ ------ ------ -------- --------
Loss before income tax
expense................ (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 ac-
tivities................ $(11,980) $ 3,992 $ 1,525 $ 459 $ 459 $ 98 $ 29 $ -- $ (5,418)
Cash flows used in in-
vesting activities...... (1,065) (4,066) (1,171) (887) (363) (109) (187) -- (7,848)
Cash flows provided by
(used in) financing ac-
tivities................ 4,739 (366) (244) -- (142) (56) -- -- 3,931
-------- ------- ------- ------- ------ ------ ------ -------- --------
Net increase (decrease)
in cash and cash equiva-
lents................... (8,306) (440) 110 (428) (46) (67) (158) -- (9,335)
Cash and cash equiva-
lents at the beginning
of period............... 8,396 440 (49) 489 46 67 178 -- 9,567
-------- ------- ------- ------- ------ ------ ------ -------- --------
Cash and cash equiva-
lents at the end of pe-
riod.................... $ 90 $ -- $ 61 $ 61 $ -- $ -- $ 20 $ -- $ 232
======== ======= ======= ======= ====== ====== ====== ======== ========
</TABLE>
A-59
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(CONTINUED)
<TABLE>
<CAPTION>
VIALOG CALL ELIMIN- CONSOL-
CORP. ACCESS CSI(1) POINTS TCC AMERICO CDC ABCC CPI ABCI ATIONS IDATED
-------- ------- ------- ------- ------ ------- ------ ------- ------ ------ -------- --------
($000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
INFORMATION AS
OF DECEMBER 31,
1999
Total current
assets.......... $(17,906) $13,891 $ -- $ 8,026 $3,739 $(1,072) $ 327 $ 4,222 $ 765 $1,078 $ (141) $ 12,929
Property and
equipment, net.. 904 7,774 -- 4,541 981 526 119 2,235 371 363 -- 17,814
Investment in
subsidiaries.... 85,696 -- -- -- -- -- -- -- -- -- (85,696) --
Goodwill and
intangible
assets, net..... -- 13,881 -- 16,635 3,532 2,513 2,156 14,409 5,556 5,412 -- 64,094
Other assets..... 4,841 134 -- 64 10 65 6 -- -- 25 (761) 4,384
-------- ------- ------- ------- ------ ------- ------ ------- ------ ------ -------- --------
Total assets.... $ 73,535 $35,680 $ -- $29,266 $8,262 $ 2,032 $2,608 $20,866 $6,692 $6,878 $(86,598) $ 99,221
======== ======= ======= ======= ====== ======= ====== ======= ====== ====== ======== ========
Current
liabilities..... $ 10,571 $ 1,721 $ -- $ 854 $ 434 $ (1) $ 9 $ 574 $ 164 $ 150 $ 2,376 $ 16,852
Long-term debt,
excluding
current
portion......... 77,628 -- -- 57 29 45 -- -- -- 127 (2,059) 75,827
Other
liabilities..... 525 -- -- 419 -- 589 222 -- 735 49 (1,040) 1,499
Stockholders'
equity
(deficit)....... (15,189) 33,959 -- 27,936 7,799 1,399 2,377 20,292 5,793 6,552 (85,875) 5,043
-------- ------- ------- ------- ------ ------- ------ ------- ------ ------ -------- --------
Total
liabilities and
stockholders'
equity
(deficit)...... $ 73,535 $35,680 $ -- $29,266 $8,262 $ 2,032 $2,608 $20,866 $6,692 $6,878 $(86,598) $ 99,221
======== ======= ======= ======= ====== ======= ====== ======= ====== ====== ======== ========
STATEMENT OF
OPERATIONS
INFORMATION FOR
THE YEAR ENDED
DECEMBER 31,
1999
Net revenues..... $ -- $27,425 $ 374 $15,178 $6,858 $ 1,385 $2,124 $ 9,248 $3,207 $3,350 $ (520) $ 68,629
Cost of revenues,
excluding
depreciation.... -- 12,480 236 8,435 3,326 857 1,635 3,079 1,580 1,279 (520) 32,387
Selling, general
and
administrative
expenses........ 15,075 2,060 26 1,520 988 261 359 1,440 782 931 -- 23,442
Depreciation
expense......... 202 1,761 40 1,125 263 120 168 229 136 146 -- 4,190
Amortization of
goodwill and
intangibles..... -- 875 72 1,033 204 150 129 852 374 371 -- 4,060
Non-recurring
charge.......... 454 -- -- -- -- 911 567 -- 721 329 -- 2,982
-------- ------- ------- ------- ------ ------- ------ ------- ------ ------ -------- --------
Operating income
(loss)......... (15,731) 10,249 -- 3,065 2,077 (914) (734) 3,648 (386) 294 -- 1,568
Interest income
(expense), net.. (13,426) 3 (4) (30) (20) (13) -- -- 8 (42) -- (13,524)
-------- ------- ------- ------- ------ ------- ------ ------- ------ ------ -------- --------
Loss before
income tax
expense........ (29,157) 10,252 (4) 3,035 2,057 (927) (734) 3,648 (378) 252 -- (11,956)
Income tax
expense......... -- (164) -- -- -- -- -- -- -- -- -- (164)
-------- ------- ------- ------- ------ ------- ------ ------- ------ ------ -------- --------
Net income
(loss)......... $(29,157) $10,088 $ (4) $ 3,035 $2,057 $ (927) $ (734) $ 3,648 $ (378) $ 252 $ -- $(12,120)
======== ======= ======= ======= ====== ======= ====== ======= ====== ====== ======== ========
CASH FLOW
INFORMATION FOR
THE YEAR ENDED
DECEMBER 31,
1999
Cash flows
provided by
(used in)
operating
activities...... $ (8,433) $ 3,580 $(1,454) $ 3,673 $ 291 $ (4) $ 132 $ 1,715 $ 103 $ 546 $ -- $ 149
Cash flows used
in investing
activities...... (29,641) (3,621) 1,602 (3,612) (250) (41) (70) (1,701) (70) (51) -- $(37,455)
Cash flows
provided by
(used in)
financing
activities...... 38,370 (8) (209) (31) (41) 45 -- -- -- (505) -- 37,621
-------- ------- ------- ------- ------ ------- ------ ------- ------ ------ -------- --------
Net increase
(decrease) in
cash and cash
equivalents..... 296 (49) (61) 30 -- -- 62 14 33 (10) -- 315
Cash and cash
equivalents at
the beginning of
period.......... 90 -- 61 61 -- -- 20 -- -- -- -- 232
-------- ------- ------- ------- ------ ------- ------ ------- ------ ------ -------- --------
Cash and cash
equivalents at
the end of
period.......... $ 386 $ (49) $ -- $ 91 $ -- $ -- $ 82 $ 14 $ 33 $ (10) $ -- $ 547
======== ======= ======= ======= ====== ======= ====== ======= ====== ====== ======== ========
</TABLE>
- ------
(1) On January 31, 1999 this operating center was closed and merged into Call
Points. The Statement of Operations and Cash Flow data for this operating
center represents activity from January 1, 1999 through January 31, 1999.
A-60
<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
A-61
<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.
A-62
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD PERIOD JANUARY 1,
YEAR ENDED JANUARY 1, APRIL 10, TO YEAR ENDED 1997 TO
DECEMBER 31, TO APRIL 9, DECEMBER 31, DECEMBER 31, NOVEMBER 12,
1994 1995 1995 1996 1997
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues............ $ 5,114 $ 1,590 $ 4,918 $ 9,073 $ 10,945
Cost of revenues,
excluding
depreciation........... 2,608 760 2,261 3,564 4,791
Selling, general and
administrative
expenses............... 1,691 498 1,986 3,332 4,124
Depreciation and
amortization expense... 269 121 375 630 823
------- ------- ------- --------- ---------
Income from
operations........... 546 211 296 1,547 1,207
Interest expense, net... 49 12 140 174 132
------- ------- ------- --------- ---------
Income before income
tax expense
(benefit)............ 497 199 156 1,373 1,075
Income tax expense
(benefit).............. 52 8 (56) -- --
------- ------- ------- --------- ---------
Net income............ $ 445 $ 191 $ 212 $ 1,373 $ 1,075
======= ======= ======= ========= =========
Net income per share--
basic and diluted.... $445.00 $191.00 $424.00 $2,746.00 $2,150.00
======= ======= ======= ========= =========
Weighted average
shares outstanding... 1,000 1,000 500 500 500
======= ======= ======= ========= =========
</TABLE>
See accompanying notes to financial statements.
A-63
<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.
A-64
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD PERIOD JANUARY 1,
YEAR ENDED JANUARY 1, APRIL 10, 1995 YEAR ENDED 1997 TO
DECEMBER 31, TO APRIL 9, TO DECEMBER 31, DECEMBER 31, NOVEMBER 12,
1994 1995 1995 1996 1997
------------ ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ $445 $ 191 $ 212 $1,373 $1,075
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 269 121 375 630 823
Deferred income
taxes................ 24 -- (62) -- --
Compensation expense
for issuance of
common stock......... -- -- -- 148 402
Changes in operating
assets and
liabilities:
Trade accounts
receivable, net..... (71) (170) (108) (301) (589)
Prepaid expenses and
other current
assets.............. (58) 62 (5) (53) 146
Accounts payable and
accrued expenses.... (17) 90 22 227 711
Income taxes
payable............. -- -- -- (10) --
Deferred rent........ -- -- 93 34 --
Other non current
liabilities......... -- -- -- -- 364
---- ------ ------ ------ ------
Net cash provided by
operating
activities......... 592 294 527 2,048 2,932
---- ------ ------ ------ ------
Cash flows from
investing activities:
Additions to property
and equipment........ (560) (123) (1,227) (783) (1,704)
Restricted cash....... -- -- (105) (5) --
Other assets.......... 3 (40) 63 (7) --
---- ------ ------ ------ ------
Net cash used in
investing
activities......... (557) (163) (1,269) (795) (1,704)
---- ------ ------ ------ ------
Cash flows from
financing activities:
Proceeds from long-
term debt............ 484 2,149 -- 587 (765)
Principal repayments
of long-term debt.... (338) (626) (389) (814)
Principal repayments
of notes payable to
stockholders......... (85) -- (51) (109) 500
Principal payments
under capital lease
obligations.......... -- -- (12) (28) --
Cash portion of
consideration paid to
former stockholder... -- -- (300) -- --
Distributions to
stockholders......... (39) -- -- (475) (1,284)
---- ------ ------ ------ ------
Net cash provided by
(used in) financing
activities......... 22 1,523 (752) (839) (1,549)
---- ------ ------ ------ ------
Net increase
(decrease) in cash
and cash
equivalents.......... 57 1,654 (1,494) 414 (321)
Cash and cash
equivalents at
beginning of period.. 173 230 1,884 390 804
---- ------ ------ ------ ------
Cash and cash
equivalents at end of
period............... $230 $1,884 $ 390 $ 804 $ 483
==== ====== ====== ====== ======
Supplemental
disclosures of cash
flow information:
Cash paid during the
period for:
Interest............. $ 49 $ 18 $ 169 $ 191 $ 108
==== ====== ====== ====== ======
Income taxes......... $ 22 $ -- $ -- $ 10 $ --
==== ====== ====== ====== ======
Supplemental disclosure
of noncash investing
and financing
activities:
Capital lease
obligations.......... $-- $ -- $ 120 $ -- $ --
==== ====== ====== ====== ======
Issuance of note
payable in partial
consideration to
former stockholder... $-- $ -- $ 599 $ -- $ --
==== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
A-65
<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.
A-66
<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>
A-67
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Note payable to a bank, interest at the prime rate plus 0.75%
(9.25% at September 30, 1997), monthly principal payments of
13,890 plus interest, balance due in May 2000............... $ -- $ --
Note payable to a bank, interest only at 9.33% payable
monthly through October 1995 and then monthly principal
payments of $38,095 plus interest until February 1999, with
the balance due in March 1999............................... 1,486 1,029
Note payable to a bank, interest at the prime rate plus 0.75%
(9.25% at September 30, 1997), monthly principal payments of
$7,000 plus interest, balance due in March 1999............. -- 187
Note payable to a bank, interest at 9.5%, monthly principal
payments of $9,400 plus interest, balance due in October
1999........................................................ -- 318
Note payable to a bank, interest at 9.33%, repaid in full in
September 1996.............................................. 275 --
------- ------
Total long-term debt....................................... 1,761 1,534
Less current installments.................................... 732 654
------- ------
Long-term debt, excluding current installments............. $ 1,029 $ 880
======= ======
</TABLE>
All of Access' assets are collateral for the bank notes. In addition,
Access' majority stockholder is a guarantor of each of the bank notes. The
terms of each of the bank notes include certain financial and other covenants.
As of December 31, 1996, as a result of the stock awards discussed in note 5,
Access was not in compliance with a covenant which limits the amount of the
annual increase in executive compensation. Subsequent to December 31, 1996,
Access obtained a waiver of the noncompliance from the lender.
The aggregate maturities of all notes payable, including the note payable to
the former stockholder (see note 4), are as follows (in thousands):
<TABLE>
<S> <C>
1997................................................................ $ 770
1998................................................................ 777
1999................................................................ 357
2000................................................................ 69
------
$1,973
======
</TABLE>
In November 1997, all of the bank notes were repaid in full. On November 12,
1997, Access became a joint and several guarantor of VIALOG's $75.0 million
Senior Notes.
(4) RELATED PARTY TRANSACTIONS
On April 10, 1995, under a Share Purchase Agreement, as amended, all of the
common stock, 500 shares, of one of Access' founding stockholders
(representing a 50 percent interest in Access) was repurchased by Access for
total consideration of $899,000. The consideration consisted of $300,000 of
cash paid at closing and a note payable of $599,000 due May 2000, bearing
interest at 6%, with equal quarterly principal and interest payments. As of
the date of the repurchase, Access experienced a change in control and,
accordingly, the acquired 50% interest in the net assets of Access was
recognized at fair market value, which approximated book value. The excess
consideration paid over the fair market value of the interest in the net
assets of the former stockholder was approximately $240,000.
A-68
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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.
A-69
<PAGE>
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
<S> <C> <C>
Accrued salaries, wages and benefits........................ $ 86 $ 215
Accrued fees and other expenses............................. 190 151
------ ------
$ 276 $ 366
====== ======
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
Operating Lease
Access leases office space for its teleconferencing facility under a
noncancelable operating lease in Reston, Virginia. The lease is for a total of
ten years expiring May 31, 2005.
Future minimum payments under this lease are approximately as follows (in
thousands):
<TABLE>
<S> <C>
1997................................................................ $ 362
1998................................................................ 373
1999................................................................ 384
2000................................................................ 396
2001................................................................ 407
Thereafter.......................................................... 1,485
------
$3,407
======
</TABLE>
Total rent expense was approximately $185,000, $51,000, $287,000, $396,000
and $363,000 for the year ended December 31, 1994, the period from January 1,
1995 to April 9, 1995, the period from April 10, 1995 to December 31, 1995,
the year ended December 31, 1996 and the period January 1, 1997 to November
12, 1997, respectively.
As of December 31, 1996, Access had an outstanding letter of credit in the
amount of $100,000 with a commercial bank which secures Access' obligations
under the office lease.
Capital Leases
Access has entered into noncancelable capital leases for various computer
equipment. The leases, which expire between June 1998 and June 2000, consist
of two 36 month leases and one 60 month lease. Interest rates range from 9.07%
to 10.31%.
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>
A-70
<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
A-71
<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, re-
spectively (note 6)........................................... 692 801
Due from stockholder (note 4).................................. 72 --
Prepaid expenses and other current assets...................... -- 24
------ ------
Total current assets......................................... 1,139 1,143
------ ------
Property and equipment, net (notes 2 and 5)...................... 866 1,059
Other assets..................................................... 32 91
------ ------
Total assets................................................. $2,037 $2,293
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 3)................ $1,089 $ 111
Current installments of obligations under capital leases (note
5)............................................................ 141 375
Accounts payable............................................... 201 121
Accrued expenses............................................... 30 91
------ ------
Total current liabilities.................................... 1,461 698
------ ------
Long-term debt, excluding current installments (note 3).......... 43 219
Obligations under capital leases, excluding current installments
(note 5)........................................................ 173 700
------ ------
Total liabilities............................................ 1,677 1,617
------ ------
Stockholders' equity:
Common stock, $1.00 par value. Authorized 100,000 shares; is-
sued and outstanding 1,000 shares............................. 1 1
Additional paid-in capital..................................... 349 349
Retained earnings.............................................. 10 326
------ ------
Total stockholders' equity................................... 360 676
------ ------
Commitments and contingencies (notes 5 and 7)
Total liabilities and stockholders' equity................... $2,037 $2,293
====== ======
</TABLE>
See accompanying notes to financial statements.
A-72
<PAGE>
CONFERENCE SOURCE INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, 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 deprecia-
tion.................................... 1,256 1,617 2,438 2,052
Selling, general and administrative ex-
penses.................................. 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 dilut-
ed.................................... $ 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.
A-73
<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.
A-74
<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 obliga-
tions under capital leases............ -- -- 142 --
Principal repayment of obligations un-
der capital leases.................... (126) (148) (290) (338)
Distributions to stockholder........... -- -- (1,558) (2,636)
----- ----- ------- -------
Net cash provided by (used in)
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 pe-
riod................................... $ 23 $ 375 $ 318 $ 103
===== ===== ======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest............................. $ 119 $ 162 $ 169 $ 127
===== ===== ======= =======
Noncash transaction:
Equipment purchased under capital
lease obligations................... $ 296 $ -- $ 545 $ --
===== ===== ======= =======
</TABLE>
See accompanying notes to financial statements.
A-75
<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.
A-76
<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>
A-77
<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.
A-78
<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.
A-79
<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.
(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
YEAR ENDED JANUARY 1,
DECEMBER 31, 1997 TO DECEMBER 31,
-------------- NOVEMBER 12, --------------
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>
A-80
<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
A-81
<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 install-
ments............................................... -- 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.
A-82
<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.
A-83
<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.
A-84
<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.
(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
A-85
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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
(a) 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 $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>
A-86
<PAGE>
A BUSINESS CONFERENCE-CALL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(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.
(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.
A-87
<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>
Kim A. Mayyasi(1)........ 43 President, Chief Executive Officer, and Director
Senior Vice President and Chief Financial
Michael E. Savage........ 41 Officer
Robert F. Saur........... 39 Chief Information Officer
Robert F. Moore.......... 45 Senior Vice President, Core Services
Joanna M. Jacobson(2).... 40 Director
David L. Lougee(1)(2).... 60 Director
Richard G. Hamermesh(1).. 52 Director
Edward M. Philip(2)...... 34 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
KIM A. MAYYASI has been President, Chief Executive Officer and a director
since July 1999. From June 1994 to June 1999, Mr. Mayyasi served as Managing
Partner of Hill, Holliday, Connors, Cosmopulos, Inc., a nationally recognized
advertising agency owned by The Interpublic Group of Companies, Inc.
MICHAEL E. SAVAGE has been Senior Vice President and Chief Financial Officer
since September 1999. From May 1997 to August 1999, Mr. Savage served as Chief
Financial Officer of Digital City, a subsidiary of American Online, Inc. From
May 1994 to May 1997, Mr. Savage served as Chief Financial Officer and Vice
President of World Corp., the holding company of World Airways, Inc. and
InteliData Technologies Corp.
ROBERT F. MOORE joined VIALOG in November 1997 as Vice President Marketing
and Business Development. In April 1999, Mr. Moore became Vice President, Core
Services. Mr. Moore served as Vice President Sales and Marketing for Citizens
Communication Corporation, a division of Citizens Utilities, Inc. from March
1997 to October 1997. From January 1994 to December 1996, Mr. Moore served as
a Senior Vice President of Hill, Holliday, Connors, Cosmopulos, Inc.
ROBERT F. SAUR has been Chief Information Officer since October 1999. From
May 1992 to October 1999, Mr. Saur was Chief Information Officer for Cambridge
Technology Partners, a management consulting and systems integration firm.
JOANNA M. JACOBSON served as a consultant to the Company prior to, and
became a director of, the Company in November 1997. Since November 1999, Ms.
Jacobson has been a Senior Lecturer in the Entrepreneurial Management/Service
Management Unit at the Harvard Business School. From April 1996 to July 1999,
Ms. Jacobson served as President of Keds Corp., 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. Ms. Jacobson currently serves as a director of Stride Rite
Corp.
A-88
<PAGE>
DAVID L. LOUGEE became a director of the Company in November 1997. Mr.
Lougee has been Managing Partner of the law firm of Mirick, O'Connell,
DeMallie & Lougee, LLP for more than the last five years. 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 the Company's outside general counsel.
RICHARD G. HAMERMESH became a director of the Company in June 1998. Dr.
Hamermesh is a founder and Managing Partner of The Center for Executive
Development ("CED"), an executive education consulting firm in Cambridge,
Massachusetts. Dr. Hamermesh currently serves on the Board of Directors of two
public companies--BE Aerospace, Inc. and Applied Extrusion Technologies, Inc.
EDWARD M. PHILIP became a director of the Company in February 1999. 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 Allscripts, Inc.
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. Ms.
Jacobson serves in the class whose terms expire in 2002, Mr. Mayyasi and Mr.
Lougee serves in the class whose terms expire in 2000, and Dr. Hamermesh and
Mr. Philip serve in the class whose terms expire in 2001. The executive
officers are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors or until their successors are elected.
The Board of Directors has 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 its
independent accountants, proposed changes in the Company's financial and
accounting standards and principles, and the Company's policies and procedures
with respect to 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 and 1999 Stock Plans,
and performs such other duties as may from time to time be determined by the
Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Due to an administrative error, the Company's November 11, 1999 grant to
Robert F. Saur of a stock option to purchase 50,000 shares of common stock was
not reported on a Form 3 until February 10, 2000.
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. Each
newly-elected director is granted an option to purchase 20,000 shares of
common stock upon the director's election. Following each annual meeting of
stockholders, each non-employee director then in office is granted an option
to purchase 5,000 shares of common stock. Each non-employee director receives
a $10,000 annual retainer payable quarterly in arrears. Additionally, each
non-employee director receives $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.
A-89
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Between January 1, 1999 and July 29, 1999, the Compensation Committee
consisted of Glenn D. Bolduc, Ms. Jacobson and Mr. Lougee. On July 30, 1999,
Mr. Hamermesh replaced Ms. Jacobson on the Compensation Committee. Mr. Bolduc,
who also served as the Company's Chief Executive Officer and President until
June 1999, resigned as director and member of the Compensation Committee
effective December 31, 1999. Mr. Lougee also serves as one of the Company's
directors and is Managing Partner of Mirick, O'Connell, DeMallie & Lougee,
llp, Vialog's legal counsel. None of Vialog's executive officers or directors
serves as a member of the board of directors or compensation committee of any
other entity that has an executive officer serving as a member of Vialog's
Board of Directors or Compensation Committee.
EXECUTIVE COMPENSATION
Summary compensation. The following table summarizes the compensation earned
by the two individuals who served as the Company's Chief Executive Officer in
1999 and the Company's executive officers who earned more than $100,000 in
salary and bonus in 1999 (the "named executive officers"). The compensation
summarized in this table does not include medical, group life insurance, or
other plan benefits that are available generally to all of the Company's
salaried employees, or perquisites or other personal benefits that do not in
the aggregate exceed the lesser of either $50,000 or 10% of the officer's
salary and bonus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS (#) COMPENSATION($)
- --------------------------- ---- --------- -------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Kim A. Mayyasi........... 1999 177,692 0 250,000 0
President and CEO
Glenn D. Bolduc(1)....... 1998 261,923 0 40,000 0
Former President and CEO 1999 121,846 50,000 0 149,153(2)
Michael E. Savage........ 1999 66,000 35,000 100,000 0
Senior Vice President
and Chief Financial
Officer
Robert F. Moore.......... 1998 163,269 0 25,000 0
Senior Vice President,
Core Services 1999 198,500 60,000 105,000 0
</TABLE>
- --------
(1) Mr. Bolduc resigned from his position as Chief Executive Officer and
President on June 30, 1999, and as a director on December 31, 1999. As of
December 31, 1999, Mr. Bolduc held an aggregate of 269,000 shares of
restricted common stock worth approximately $840,625.
(2) Under the terms of the Severance Agreement dated June 8, 1999 between
Vialog and Mr. Bolduc, Vialog paid Mr. Bolduc an aggregate of $149,153 in
severance-related compensation in 1999.
Option grants in 1999. The following table summarizes all options granted to
the named executive officers in 1999. Amounts reported in the last two columns
represent hypothetical values that the holder could realize by exercising the
options immediately before their expiration, assuming the value of the
Company's common stock appreciates at the specified compounded annual rates
over the terms of the options. These numbers are calculated based on the SEC's
rules and do not represent the Company's estimate of future stock price
growth. Actual gains, if any, on stock option exercises and common stock
holdings will depend on the timing of exercise and the future performance of
the Company's common stock. Vialog may not be able to achieve the rates of
appreciation assumed in this table and the named executive officers may not
receive the calculated amounts. This table does not take into account any
appreciation in the price of the common stock from the date of grant to the
current date. The values shown are net of the option exercise price, but do
not include deductions for taxes or other expenses associated with the
exercise.
A-90
<PAGE>
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
----------------------------------------------- ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES PRICE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ---- ----------- -------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Kim A. Mayyasi.......... 250,000 18.27 3.34 7/1/09 525,127 1,330,774
Glenn D. Bolduc......... 0 0 0 0 0
Michael E. Savage....... 100,000 7.31 3.56 11/11/09 224,075 567,850
Robert F. Moore......... 105,000 7.67 4.03 4/5/09 266,116 674,392
</TABLE>
The exercise price of these options is the fair market value on the date of
grant as determined under the Company's stock plans.
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 the named executive officer ceases to be
employed by the Company.
Fiscal year-end option values. The following table provides information
regarding the value of all unexercised options held by the named executive
officers at the end of 1999. The value of unexercised in-the-money options
represents the difference between the fair market value of the Company's
common stock on December 31, 1999 and the option exercise price, multiplied by
the number of shares underlying the option. The closing sale price of the
Company's common stock on December 31, 1999 was $3.125.
1999 AGGREGATED OPTION EXERCISES AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT FISCAL
OPTIONS AT FISCAL-YEAR END (#) YEAR END ($)
SHARES ACQUIRED ---------------------------------- -------------------------
NAME ON EXERCISE (#) VALUE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ------------------ -------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kim A. Mayyasi.......... 0 0 41,670 208,330 0 0
Glenn D. Bolduc......... 235,000 657,075 0 0 0 0
Michael E. Savage....... 0 0 0 0 0 0
Robert F. Moore......... 0 0 62,419 137,581 31,500 32,816
</TABLE>
EMPLOYMENT AGREEMENTS AND CHANGE-OF-CONTROL PROVISIONS
Mr. Mayyasi's employment offer letter provides for an annual base salary of
$350,000 and an annual bonus of up to $100,000. If Vialog terminates Mr.
Mayyasi's employment without cause, Vialog will pay Mr. Mayyasi or his estate
his base salary and health insurance benefits for six months.
Mr. Savage's employment agreement provides for an annual base salary of
$195,000, a signing bonus of $35,000, and an annual bonus of up to 50% of his
annual base salary. Vialog may terminate his employment immediately with or
without cause. Mr. Savage may terminate his employment agreement with 30 days
prior written notice. If Vialog terminates Mr. Savage's employment without
cause, or in the event of Mr. Savage's death or his termination of his
employment under certain circumstances set forth in the contract, Vialog will
pay Mr. Savage or his estate his base salary and health insurance benefits for
six months.
A-91
<PAGE>
Mr. Moore's annual compensation is currently $230,000. Either party may
terminate his employment without cause with 30 days prior written notice. If
Vialog terminates Mr. Moore's employment other than for cause, disability or
death, Vialog will pay Mr. Moore his base compensation and employee benefits
for twelve months subject to adjustment if he finds new employment during the
severance period. Mr. Moore is entitled to a $500 monthly automobile
allowance.
All unvested options held by Mssrs. Mayyasi, Savage and Moore will vest and
become immediately exercisable upon the occurrence of any of the following
events:
. Vialog's merger into or consolidation with another company,
. the sale of substantially all of Vialog's assets to another company, or
. the sale of more than 50% of Vialog's outstanding capital stock to an
unrelated person or group.
Mr. Bolduc resigned as Vialog's President and Chief Executive Officer on
June 30, 1999. Under the terms of Mr. Bolduc's severance agreement, Vialog
will continue to pay Mr. Bolduc his base salary and a $1,000 monthly car
allowance for eighteen months beginning June 30, 1999. Vialog also accelerated
the vesting of two of Mr. Bolduc's stock options.
STOCK PLANS
Vialog currently maintains the following stock plans:
<TABLE>
<CAPTION>
OUTSTANDING
STOCK AWARDS SHARES
OR OPTIONS AVAILABLE FOR
SHARES ISSUED UNDER ISSUANCE UNDER
RESERVED UNDER PLAN AS OF PLAN AS OF
PLAN NAME ADOPTION DATE EXPIRATION DATE PLAN MARCH 23, 2000 MARCH 23, 2000
--------- ------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1996 Stock Plan 2/14/96 2/14/06 3,250,000 1,751,776 865,314
1999 Stock Plan 4/29/99 4/29/09 1,500,000 980,000 520,000
</TABLE>
The purpose of the stock plans is to provide directors, officers, key
employees and consultants with additional incentives by increasing their
ownership interests in the Company. Individual awards under the stock plans
may take the form of one or more of (i) incentive stock options, (ii) non-
qualified stock options, (iii) stock appreciation rights and (iv) restricted
stock.
The Compensation Committee and Board of Directors administer the Plan and
generally select the individuals who will receive awards and the terms and
conditions of those awards. 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.
On April 15, 1999, Vialog registered with the Securities and Exchange
Commission 2,430,097 shares of common stock reserved for issuance under the
Company's 1996 Stock Plan. On September 1, 1999, Vialog registered with the
Securities and Exchange Commission 1,500,000 reserved for issuance under the
Company's 1999 Stock Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table provides information regarding the beneficial ownership
of Vialog's outstanding common stock as of March 13, 2000 for:
. each person or group that Vialog know owns more than 5% of the common
stock,
. each of Vialog's directors,
. each of Vialog's executive officers, and
. all of Vialog's directors and executive officers as a group.
A-92
<PAGE>
Beneficial ownership is determined under rules of the SEC and includes
shares over which the indicated beneficial owner exercises voting and/or
investment power. Shares of common stock that Vialog may issue upon the
exercise of options currently exercisable or exercisable within 60 days of
March 13, 2000 are deemed outstanding for computing the percentage ownership
of the person holding the options but are not deemed outstanding for computing
the percentage ownership of any other person. Except as otherwise indicated,
Vialog believes the beneficial owners of the common stock listed below, based
on information furnished by them, have sole voting and investment power over
the number of shares listed opposite their names. The address for each
stockholder below is c/o Vialog Corporation, 35 New England Business Center,
Suite 160, Andover, Massachusetts 01810.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED
SHARES ISSUABLE PURSUANT TO (INCLUDING THE NUMBER OF
OPTIONS EXERCISABLE WITHIN SHARES SHOWN IN THE FIRST PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER 60 DAYS OF MARCH 13, 2000 COLUMN) OUTSTANDING
- ------------------------ --------------------------- ------------------------- --------------------
<S> <C> <C> <C>
John J. Hassett......... 0 784,762 8.57%
Robert F. Moore......... 126,505 126,505 1.36%
Kim A. Mayyasi.......... 100,006 100,006 1.08%
David L. Lougee......... 15,678 66,178 *
Joanna M. Jacobson...... 17,010 17,010 *
Richard G. Hamermesh.... 14,346 14,346 *
Edward M. Philip........ 10,010 10,010 *
Michael E. Savage....... 4,170 4,170 *
Robert F. Saur.......... 0 0 *
All directors and
executive officers as a
group (8) persons...... 287,725 338,225 3.59%
</TABLE>
- --------
*Less than 1%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
David L. Lougee, one of Vialog's directors, is a partner of Mirick,
O'Connell, DeMallie & Lougee, LLP, the law firm Vialog currently retains as
legal counsel. In 1999, Vialog paid Mirick, O'Connell, DeMallie & Lougee, LLP
an aggregate of approximately $692,000 in legal fees and expenses for legal
services.
Vialog provides teleconferencing services to customers of a company owned by
Susan C. Hassett, spouse of John J. Hassett, for which Vialog recorded
revenues of $178,184 in 1999.
On November 6, 1997, we entered into a stockholder agreement with John J.
Hassett that provides, among other things, that while any senior notes or
other obligation of the Company or our operating centers (as subsidiary
guarantors) with respect to the senior notes remain outstanding:
. with respect to all matters submitted to a vote of our stockholders
regarding the appointment, election or removal of directors or officers
of the Company, Mr. Hassett will vote any shares of our voting stock
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 our other stockholders; and
. Mr. Hassett will not serve as a director or officer of the Company or
any subsidiary.
In 1999, Mr. Hassett provided consulting services to the Company in
consideration of fees totaling $30,000.
COMPANY POLICY
The Company has implemented a policy whereby neither the Company nor any
subsidiary will enter into contracts or business arrangements with persons or
entities owned in whole or in part by the Company's officers or directors or
any subsidiary except on an arms-length basis and with the approval of the
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.
A-93
<PAGE>
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
Vialog did not file any Form 8-Ks during the fourth quarter of 1999.
A-94
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1* Restated Articles of Organization of VIALOG Corporation.
3.2* Amended and Restated By-Laws of VIALOG Corporation.
4.1** Form of certificate evidencing ownership of Common Stock of the
Company.
4.2* Indenture Dated as of November 12, 1997 Among VIALOG Corporation,
Telephone Business Meetings, Inc., Conference Source International,
Inc., Kendall Square Teleconferencing, Inc., American Conferencing
Company, Inc., Communication Development Corporation Inc., Call
Points, Inc. and State Street Bank and Trust Company (including Forms
of Series A Security and Series B Security attached to the Indenture
as Exhibits A-1 and A-2, respectively).
4.3* Unit Agreement Dated as of November 12, 1997 By and Among VIALOG
Corporation, Telephone Business Meetings, Inc., Conference Source
International, Inc., Call Points, Inc., Kendall Square
Teleconferencing, Inc., American Conferencing Company, Inc.,
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.
10.1* 1996 Stock Plan.
10.2*** 1999 Stock Plan.
10.3**** Lease Dated April 7, 1998 between Connecticut General Life Insurance
Company, on behalf of its Separate Account R, and VIALOG Corporation.
10.4 Indenture of Lease Dated March 3, 2000 By and Between VIALOG
Corporation and EOP--Crosby Corporate Center, L.L.C.
10.5+ Lease Dated as of August 3, 1998 Agreement By and Between Executive
Park, T.I.C. and VIALOG Corporation.
10.6* Lease Dated February 15, 1996 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.).
10.7 Lease Agreement Dated August 3, 1999 By and Between Century 2000
Partners, LLP and A Business Conference Call, Inc.
10.8++ Assignment of Lease Dated as of March 13, 1998 Between Telephone
Business Meetings, Inc. and CMC Datacomm, Inc.
10.9* Lease dated December 6, 1994 between Aetna Life Insurance Company and
Access, as amended.
10.10 Deed of Lease dated September 30, 1999 by and between Royce, Inc. and
Telephone Business Meetings, Inc.
</TABLE>
A-95
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.11+++ 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.; Communication Development
Corporation and Coast Business Credit.
10.12+++ 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.
10.13+++ 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.
10.14+++ Security Agreement Dated September 30, 1998 by and Between VIALOG
Corporation and Coast Business Credit, a division of Southern Pacific
Bank.
10.15+++ Continuing Guaranty Dated September 30, 1998 executed by VIALOG
Corporation in favor of Coast Business Credit.
10.16 Employment Offer Letter Dated June 3, 1999 By and Between VIALOG
Corporation and Kim A. Mayyasi.
10.17 Employment Agreement Dated August 30, 1999 By and Between VIALOG
Corporation and Michael E. Savage.
10.18* Employment Agreement Dated October 20, 1997 By and Between VIALOG
Corporation and Robert F. Moore.
10.19 Severance Agreement Dated June 8, 1999 By and Between VIALOG
Corporation and Glenn P. Bolduc.
11.1 Statement Regarding Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
All non-marked Exhibits are filed with this Form 10-K.
* Incorporated by reference to the Exhibits to the Registration Statement
on Form S-4 filed with the Securities and Exchange Commission on January
9, 1998 (File No. 333-44041).
** Incorporated by reference to the Exhibits to Amendment No. 1 to the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on July 8, 1998 (File No. 333-53395).
*** Incorporated by reference to the Exhibits to the Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on
September 1, 1999 (File No. 333-86319).
**** 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 (File No. 333-53395).
+ Incorporated by reference 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 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 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 (File No.
000-24689).
A-96
<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/ Kim A. Mayyasi
By: _________________________________
KIM A. MAYYASI,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Date: March 30, 2000
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/ Kim A. Mayyasi President, Chief Executive March 30, 2000
By: __________________________________ Officer and Director
KIM A. MAYYASI
/s/ Michael E. Savage Senior Vice President, March 30, 2000
By: __________________________________ Chief Financial Officer
MICHAEL E. SAVAGE and Principal Accounting
Officer
/s/ Joanna M. Jacobson Director March 30, 2000
By: __________________________________
JOANNA M. JACOBSON
/s/ David L. Lougee Director March 30, 2000
By: __________________________________
DAVID L. LOUGEE
/s/ Patti R. Bisbano Director March 30, 2000
By: __________________________________
PATTI R. BISBANO
/s/ Richard G. Hamermesh Director March 30, 2000
By: __________________________________
RICHARD G. HAMERMESH
/s/ Edward M. Philip Director March 30, 2000
By: __________________________________
EDWARD M. PHILIP
</TABLE>
A-97
<PAGE>
ANNEX B:
LETTER OF TRANSMITTAL/
CONSENT FORM
B-1
<PAGE>
LETTER OF TRANSMITTAL/CONSENT FORM
to tender for exchange and give consents in respect of
12 3/4% Senior Notes due 2001 of
VIALOG CORPORATION
CUSIP # 92552X AE6
Pursuant to the Offering Memorandum and Solicitation Document
Dated May 3, 2000
THE WITHDRAWAL DEADLINE FOR THE EXCHANGE OFFER IS 5:00 P.M., NEW
YORK CITY TIME, ON JUNE 1, 2000. THE EXCHANGE OFFER WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON JUNE 1, 2000, UNLESS EXTENDED.
THE EXCHANGE AGENT:
State Street Bank and Trust Company will act as Exchange Agent for the
Exchange Offer. All correspondence in connection with the Exchange Offer and
the Letter of Transmittal should be addressed to the Exchange Agent as
follows:
By Mail: By, Hand and Overnight Courier:
State Street Bank and Trust Company
State Street Bank and Trust Company Corporate Trust Department, 5th Floor
Corporate Trust Department Attn: Susan Lavey
Attn: Susan Lavey 2 Avenue de Lafayette
P.O. Box 778 Boston, MA 02111-1724
Boston, MA 02102
For Information Call:
(617) 662-1544
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE, OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA A FACSIMILE NUMBER
OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
IF YOU HAVE ANY QUESTIONS, OR NEED ADDITIONAL COPIES OF THIS LETTER OF
TRANSMITTAL, THE OFFERING MEMORANDUM AND SOLICITATION DOCUMENT OR ANY OTHER
EXCHANGE OFFER MATERIALS, PLEASE CONTACT THE COMPANY AT THE ADDRESS OR
TELEPHONE NUMBER AS LISTED BELOW.
Vialog Corporation
35 New England Business Center
Andover, Massachusetts 01810
Telephone: (978) 975-3700
Attention: Michael Savage
Chief Financial Officer
B-2
<PAGE>
This Letter of Transmittal is to be used (i) to tender 12 3/4% Senior Notes
due 2001 (the "Senior Notes") of Vialog Corporation, a Massachusetts
corporation (the "Company"), which are enclosed herewith, or (ii) to tender
Senior Notes in accordance with the guaranteed delivery procedures set forth
in the Offering Memorandum and Solicitation Document dated May 3, 2000 (the
"Offering Memorandum and Solicitation Document") under "PROCEDURE FOR
TENDERING SENIOR NOTES AND DELIVERY OF CONSENTS--Guaranteed Delivery
Procedures."
A VALID TENDER OF SENIOR NOTES WILL CONSTITUTE CONSENT TO THE PROPOSED
AMENDMENTS TO THE INDENTURE (THE "PROPOSED AMENDMENTS"), AS SUCH PROPOSED
AMENDMENTS ARE DESCRIBED IN THE OFFERING MEMORANDUM AND SOLICITATION DOCUMENT.
The Company is relying on Sections 3(a)(9) and 18(b)(4)(C) of the Securities
Act of 1933, as amended (the "Securities Act"), to exempt the offer and sale
of the Preferred Stock from registration under the Securities Act and state
securities laws. Capitalized terms used but not defined herein have the
meanings assigned to them in the Offering Memorandum and Solicitation
Document.
The undersigned acknowledges receipt of the Offering Memorandum and
Solicitation Document and this Letter of Transmittal, which together
constitute the offer by the Company to exchange:
for each $ 1,000 principal amount of Senior Notes, $780.00 in cash plus 2.2
shares of Preferred Stock, par value $.01 per share, of the Company.
The Exchange Offer is not being made to, and letters will not be accepted
from or on behalf of, holders of Senior Notes in any jurisdiction in which the
making or acceptance of the Exchange Offer would not be in compliance with the
laws of such jurisdiction.
The undersigned has completed, signed and delivered this Letter of
Transmittal and checked the appropriate box(es) below to indicate the action
the undersigned desires to take with respect to the Exchange Offer.
Holders of Senior Notes who wish to tender their Senior Notes must, at a
minimum, complete columns (1), (2) and (3) in the "Description of Senior
Notes" table and complete the "Holder Sign Here" box. If only those columns
are completed, such holder will have tendered all Senior Notes listed in
column (2). If the holder of Senior Notes wishes to tender less than all of
such Senior Notes, column (4) must be completed in full. A partial tender of
Senior Notes will constitute consent to the Proposed Amendments to the extent
of the principal amount of Senior Notes being tendered.
BOOK-ENTRY TRANSFER FACILITY
Holders of Senior Notes who wish to tender their Senior Notes which are held
through the Depository Trust Company (the "Book-Entry Transfer Facility") must
instruct the financial institution that is a participant in the Book-Entry
Transfer Facility's system through which such Holder owns its Senior Notes to
tender book-entry delivery of such Senior Notes to the Exchange Agent's
account at the Book-entry Transfer Facility in accordance with the Book-Entry
Transfer Facility's procedure for such transfer. DTC's Automated Tender Offer
Program ("ATOP") is the only method of processing exchange offers through DTC.
To accept the Exchange Offer through ATOP, participants in DTC holding book
entry interests representing the Senior Notes ("Book Entry Interests") must
send electronic instructions to DTC through DTC's communication system in
place of sending a signed, hard copy of this Letter of Transmittal. DTC is
obligated to communicate those electronic instructions to the Exchange Agent.
To tender Book Entry Interests through ATOP, the electronic instructions sent
to DTC and transmitted by DTC to the Exchange Agent must contain a computer
generated message by which the participant acknowledges its receipt of and
agrees to be bound by this Letter of Transmittal.
B-3
<PAGE>
DESCRIPTION OF SENIOR NOTES
- -------------------------------------------------------------------------------
(1) (2) (3) (4)
CERTIFICATE
NUMBER(S) OF AGGREGATE
SENIOR NOTES PRINCIPAL
(A) (ATTACH AMOUNT PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED SIGNED LIST REPRESENTED BY AMOUNT
HOLDER(S) IF NECESSARY) CERTIFICATE(S) TENDERED (B)
- -------------------------------------------------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
- -------------------------------------------------------------------------------
(a) Need not be completed by holders tendering by book-entry transfer.
(b) Need not be completed by holders who wish to tender the principal amount
of Senior Notes listed in column (3). Completion of column (4) will
indicate that the holder wishes to tender only the principal amount of
Senior Notes indicated in column (4). The valid tender of any of your
Senior Notes will constitute a consent to the Proposed Amendments to the
extent of the principal amount of such Senior Notes validly tendered.
Holders of Senior Notes may elect to tender their Senior Notes in whole or
in part. See Instruction 5. A holder of Senior Notes who tenders only a
portion of such holder's Senior Notes will have consented to the Proposed
Amendments to the extent of the principal amount of Senior Notes being
tendered.
Holders of the Senior Notes who desire to tender their Senior Notes and who
cannot deliver their Senior Notes and any other documents required hereby to
the Exchange Agent prior to the expiration of the Exchange Offer, may tender
their Senior Notes according to the guaranteed delivery procedures set forth
in the Offering Memorandum and Solicitation Document under "PROCEDURES FOR
TENDERING SENIOR NOTES AND DELIVERING CONSENTS -- Guaranteed Delivery
Procedures." See Instruction 2.
(THE BOX BELOW IS FOR USE BY ELIGIBLE INSTITUTIONS ONLY)
[_]CHECK HERE IF TENDERED SENIOR NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name of Registered Holder(s): _________________________________________________
Window Ticket Number (if any): ________________________________________________
Date of Execution of Notice of Guaranteed Delivery: ___________________________
Name of Eligible Institution which Guaranteed Delivery: _______________________
If Delivered by Book-entry Transfer: __________________________________________
Account Number with DTC: ______________________________________________________
Transaction Code Number: ______________________________________________________
B-4
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
LADIES AND GENTLEMEN:
The undersigned hereby tenders to the Company the principal amount of Senior
Notes indicated above, in accordance with and upon the terms and subject to
the conditions set forth in the Exchange Offer, to exchange each $1,000
principal amount of Senior Notes due 2001 for $780.00 in cash plus 2.2 shares
of Preferred Stock. The proper execution and delivery of this Letter of
Transmittal, together with the delivery of Senior Notes pursuant to the
Instructions set forth herein, will constitute a valid tender of Senior Notes
to the Company of the principal amount of Senior Notes indicated above. A
VALID TENDER OF SENIOR NOTES CONSTITUTES CONSENT TO THE PROPOSED AMENDMENTS TO
THE EXTENT OF THE PRINCIPAL AMOUNT OF SENIOR NOTES TENDERED.
The undersigned hereby consents to the Proposed Amendments with respect to
the Senior Notes tendered hereby and subject to, and effective upon, the
acceptance for exchange and exchange of the Senior Notes tendered herewith in
accordance with the terms of the Exchange Offer, the undersigned hereby sells,
assigns and transfers to the Company all right, title and interest in and to
all such Senior Notes as are being tendered hereby. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent as the true and lawful
agent and attorney-in-fact of the undersigned (with full knowledge that the
Exchange Agent also acts as the agent of the Company), with respect to the
Senior Notes tendered hereby and accepted for exchange pursuant to the
Exchange Offer, with full power of substitution (such power of attorney being
deemed to be an irrevocable power coupled with an interest) to deliver the
Senior Notes tendered hereby to the Company or cause ownership of such Senior
Notes to be transferred to the Company on the Company's books and deliver all
accompanying evidences of transfer and authenticity to or upon the order of
the Company upon receipt by the Exchange Agent, as the undersigned's agent, of
the cash and Preferred Stock to which the undersigned is entitled upon the
acceptance for exchange by the Company of such Senior Notes pursuant to the
Exchange Offer.
The name and address of the holder(s) should be printed above under
"Description of Senior Notes" exactly as they appear on the Senior Notes
tendered hereby. The certificate number(s) and the principal amount of Senior
Notes to which this Letter of Transmittal relates, together with the principal
amount of Senior Notes that the undersigned wishes to tender, should be
indicated in the appropriate boxes above under "Description of Senior Notes."
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer any Senior Notes
tendered hereby, that the undersigned has full power and authority to consent
to the Proposed Amendments and that when the Senior Notes are accepted for
exchange by the Company, that the Company will acquire good, indefeasible and
unencumbered title thereto, free and clear of all liens, restrictions, claims
and encumbrances and not subject to any adverse claim. The undersigned, upon
request, will execute and deliver any additional documents deemed by the
Exchange Agent or the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Senior Notes tendered hereby and the
valid giving of consents to the Proposed Amendments with respect thereto.
All authority conferred or agreed to be conferred in this Letter of
Transmittal shall not be affected by, and shall survive, the death or
incapacity of the undersigned and any obligation of the undersigned hereunder
shall be binding upon the heirs, executors, administrators, legal
representatives, successors and assigns of the undersigned. Any tender of
Senior Notes hereunder may be withdrawn only in accordance with the procedures
set forth in the Instructions contained in this Letter of Transmittal. See
Instruction 4.
For the Proposed Amendments to become effective with respect to the Senior
Notes, the Company must complete the Exchange outside of bankruptcy. The
Proposed Amendments would, among other things, eliminate substantially all
restrictive covenants and events of default currently contained in the
Indenture. If the registered holders of not less than a majority in aggregate
principal amount of the Senior Notes consent to the Proposed Amendments, the
Company will, together with the Trustee, execute the Amendment to Indenture.
The
B-5
<PAGE>
Amendment to Indenture will be executed promptly after the later of (i) June
1, 2000 and (ii) receipt of the requisite consents, but will not become
effective unless and until the Exchange Offer is completed outside of
bankruptcy. Following completion of the Exchange Offer, any non-tendering
holders of Senior Notes will be bound by the Amendment to Indenture regardless
of whether they consent to the Proposed Amendments.
Pursuant to the Indenture, any registered holder of Senior Notes who has
consented to the Proposed Amendments by validly tendering such holder's Senior
Notes may effectively revoke such consent by filing written notice with the
Exchange Agent as described in the Offering Memorandum and Solicitation
Document under "PROCEDURE FOR TENDERING SENIOR NOTES AND DELIVERY OF CONSENTS
- -- Revocation of Consents" at any time prior to (but not after) the date and
time of the execution of the Amendment to Indenture. THE VALID REVOCATION OF
CONSENT TO THE PROPOSED AMENDMENTS WILL CONSTITUTE THE VALID WITHDRAWAL OF THE
TENDER OF THE SENIOR NOTES.
Prior to the execution of the Amendment to Indenture, the Company intends to
consult with the Exchange Agent and the Trustee to determine whether either
the Exchange Agent or the Trustee shall have received any revocations of
consents to the Proposed Amendments previously obtained through a valid tender
of Senior Notes, whether such revocations are valid and whether the Company
shall have received the requisite consents to effect the Proposed Amendments.
The Company reserves the right to contest the validity of any such
revocations. A purported notice of revocation which is not received by the
Exchange Agent or Trustee in a timely fashion will not be effective to revoke
a consent previously given.
The undersigned understands that the tender of Senior Notes pursuant to one
of the procedures described in the Offering Memorandum and Solicitation
Document under "PROCEDURE FOR TENDERING SENIOR NOTES AND DELIVERY OF CONSENTS"
and the Instructions hereto will constitute the tendering holder's acceptance
of the terms and the conditions of the Exchange Offer. The Company's
acceptance for exchange of Senior Notes tendered pursuant to the Exchange
Offer will constitute a binding agreement between the tendering holder and the
Company upon the terms and subject to the conditions of the Exchange Offer.
Unless otherwise indicated below under "Special Issuance Instructions,"
please issue the Preferred Stock and cash payment with respect to Senior Notes
accepted for exchange, and/or any principal amount of Senior Notes not
tendered or not accepted for exchange, in the name of the registered holder(s)
appearing above under "Description of Senior Notes." In addition, unless
otherwise indicated below under "Special Delivery Instructions," please mail
the Preferred Stock and payment with respect to Senior Notes accepted for
exchange, and/or any Senior Notes for any principal amount not tendered or not
accepted for exchange (and accompanying documents, as appropriate), to the
registered holder(s) at the address(es) appearing above under "Description of
Senior Notes." If both the "Special Issuance Instructions" and "Special
Delivery Instructions" are completed, please mail the Preferred Stock and
payment with respect to Senior Notes accepted for exchange, and/or any Senior
Notes for any principal amount not tendered or accepted for exchange, in the
name of, and send Preferred Stock and payment and/or Senior Notes to, the
person(s) so indicated. The undersigned recognizes that the Company has no
obligation pursuant to the "Special Issuance Instructions" to transfer any
Senior Notes from the name(s) of the registered holder(s) thereof if the
Company does not accept for exchange any of the Senior Notes so tendered.
B-6
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instruction 6 and 7)
(See Instruction 7)
To be completed ONLY if the To be completed ONLY if the
Preferred Stock and cash payment Preferred Stock and cash payment
with respect to Senior Notes with respect to Senior Notes
accepted for exchange is to be accepted for exchange, or any
issued, or certificates for Senior certificates for Senior Notes for
Notes for principal amounts not principal amounts not tendered or
tendered or not accepted for not accepted for exchange, are to
exchange are to be reissued, in the be sent to someone other than the
name of someone other than the undersigned or to the undersigned
undersigned. at an address other than that
appearing above under "Description
of Senior Notes."
Issue:
[_]Cash payment and Preferred Stock
and/or Mail:
[_]Senior Notes [_]Cash payment and Preferred Stock
and/or
To:
[_]Senior Notes
Name _______________________________
(Please Type or Print) To:
Address ____________________________ Name _______________________________
------------------------------------ (Please Type or Print)
------------------------------------ Address ____________________________
(Zip Code) ------------------------------------
------------------------------------ ------------------------------------
(Taxpayer Identification or Social (Zip Code)
Security Number) ------------------------------------
(Taxpayer Identification or Social
Security Number)
B-7
<PAGE>
HOLDER SIGN HERE
(PLEASE COMPLETE SUBSTITUTE FORM W-9 ON THE BOTTOM HEREOF)
...........................................................................
...........................................................................
SIGNATURE(S) OF HOLDER(S)
Dated: ..................
(Must be signed by registered holder(s) exactly as name(s) appear(s) on
Senior Notes or on a security position listing or by the person(s)
authorized to become registered holder(s) by certificates and documents
transmitted herewith. If signature is by an officer of a corporation,
attorney-in-fact, executor, administrator, trustee, guardian or other
person(s) acting in a fiduciary or representative capacity, please set
forth full title and see Instruction 6.)
Name(s) ...................................................................
...........................................................................
(PLEASE TYPE OR PRINT)
Capacity (full title) .....................................................
Address ...................................................................
...........................................................................
(ZIP CODE)
Area Code and Telephone No. ...............................................
Tax Identification or Social Security No. .................................
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED -- SEE INSTRUCTIONS 1 AND 6)
Authorized Signature ......................................................
Name ......................................................................
...........................................................................
(PLEASE TYPE OR PRINT)
Name of Firm ..............................................................
Address ...................................................................
...........................................................................
(ZIP CODE)
Area Code and Telephone No. ...............................................
Dated ...................
B-8
<PAGE>
CONSENT OF REGISTERED HOLDER
If certificates for Senior Notes are being delivered and the holder
signing above is not the registered holder of such Senior Notes, the
registered holder(s) must complete the applicable information above and
sign below. Pursuant to the Exchange Offer the undersigned registered
holder(s) of the Senior Notes indicated above hereby consent(s) to the
Proposed Amendments in respect of such Senior Notes.
...........................................................................
...........................................................................
SIGNATURE(S) OF HOLDER(S)
Dated: ..................
(Must be signed by registered holder(s) exactly as name(s) appear(s) on
Senior Notes or on a security position listing. If signature is by an
officer of a corporation, attorney-in-fact, executor, administrator,
trustee, guardian or other person(s) acting in a fiduciary or
representative capacity, please set forth full title and see Instruction
6.)
Name(s) ...................................................................
...........................................................................
(PLEASE TYPE OR PRINT)
Capacity (full title) .....................................................
Address ...................................................................
...........................................................................
(ZIP CODE)
Area Code and Telephone No. ...............................................
Tax Identification or Social Security No. .................................
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED -- SEE INSTRUCTIONS 1 AND 6)
Authorized Signature ......................................................
Name ......................................................................
...........................................................................
(PLEASE TYPE OR PRINT)
Name of Firm ..............................................................
Address ...................................................................
...........................................................................
(ZIP CODE)
Area Code and Telephone No. ...............................................
Dated ...................
B-9
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. Guarantee of Signatures. Signatures on this Letter of Transmittal must be
guaranteed by an Eligible Institution unless (i) the Senior Notes tendered
hereby are tendered by a registered holder(s) of the Senior Notes who has
(have) not completed either the box entitled "Special Issuance Instructions"
or "Special Delivery Instructions" on this Letter of Transmittal or (ii) the
Senior Notes are tendered for the account of an Eligible Institution.
2. Delivery of this Letter of Transmittal and Senior Notes. This Letter of
Transmittal is to be used if Senior Notes tendered hereby are enclosed
herewith. A valid tender of Senior Notes shall constitute a consent to the
Proposed Amendments. DTC'S AUTOMATED TENDER OFFER PROGRAM ("ATOP") IS THE ONLY
METHOD OF PROCESSING EXCHANGE OFFERS THROUGH DTC. TO ACCEPT THE EXCHANGE OFFER
THROUGH ATOP, PARTICIPANTS IN DTC HOLDING BOOK ENTRY INTERESTS REPRESENTING
THE SENIOR NOTES ("BOOK ENTRY INTERESTS") MUST SEND ELECTRONIC INSTRUCTIONS TO
DTC THROUGH DTC'S COMMUNICATION SYSTEM IN PLACE OF SENDING A SIGNED, HARD COPY
OF THIS LETTER OF TRANSMITTAL. DTC IS OBLIGATED TO COMMUNICATE THOSE
ELECTRONIC INSTRUCTIONS TO THE EXCHANGE AGENT. TO TENDER BOOK ENTRY INTERESTS
THROUGH ATOP, THE ELECTRONIC INSTRUCTIONS SENT TO DTC AND TRANSMITTED BY DTC
TO THE EXCHANGE AGENT MUST CONTAIN A COMPUTER GENERATED MESSAGE BY WHICH THE
PARTICIPANT ACKNOWLEDGES ITS RECEIPT OF AND AGREES TO BE BOUND BY THIS LETTER
OF TRANSMITTAL. "Expiration Date" means 5:00 p.m., New York City time, on June
1, 2000 unless extended by the Company, in its sole discretion, in which event
the term "Expiration Date" shall mean the latest time and date as so extended.
The Company expressly reserves the right, at any time or from time to time, to
extend the Expiration Date by giving oral or written notice of such extension
to the Exchange Agent and by making a public announcement of such extension.
Holders whose Senior Notes are not immediately available or who cannot
deliver Senior Notes and all other required documents to the Exchange Agent
prior to the Expiration Date may tender their Senior Notes by properly
completing, and duly executing, the Notice of Guaranteed Delivery pursuant to
the guaranteed delivery procedures set forth in the Offering Memorandum and
Solicitation Document under "PROCEDURE FOR TENDERING SENIOR NOTES AND DELIVERY
OF CONSENTS--Guaranteed Delivery Procedures." Pursuant to such procedures, (i)
such tender must be made by or through an Eligible Institution, (ii) a
properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form included as Annex C to the Offering Memorandum and
Solicitation Document, must be received by the Exchange Agent prior to the
Expiration Date and (iii) all tendered Senior Notes, or a confirmation of a
book-entry transfer into the Exchange Agent's account at the Book-entry
Transfer Facility of all Senior Notes delivered electronically, as well as a
properly completed and duly executed Letter of Transmittal (or manually-signed
facsimile thereof or, in the case of a book-entry transfer, an Agent's
Message), with any required signature guarantees and all other required
documents, must be received by the Exchange Agent within three New York Stock
Exchange trading days after the date of execution of the Notice of Guaranteed
Delivery, all as provided in the Offering Memorandum and Solicitation Document
under "PROCEDURE FOR TENDERING SENIOR NOTES AND DELIVERY OF CONSENTS."
Unless the Senior Notes tendered are deposited with the Exchange Agent prior
to the Expiration Date (accompanied by a properly completed Letter of
Transmittal and any other documents required by this Letter of Transmittal) or
tendered pursuant to the guaranteed delivery procedures set forth above, the
Company may, at its option, reject such tender. Issuance of Preferred Stock
and payment in exchange for Senior Notes will be made only against deposit of
the tendered Senior Notes. If less than the entire principal amount of any
Senior Notes evidenced by a submitted certificate is tendered, the tendering
holder of Senior Notes should fill in the principal amount tendered in the
appropriate box above with respect to the deposit being made, but only to the
extent of the principal amount of Senior Notes being tendered. The Exchange
Agent will then return to the tendering holder (unless otherwise requested by
the holder under "Special Delivery Instructions" above), as promptly as
practicable following the Expiration Date, Senior Notes in principal amount
equal to the portion of such delivered Senior Notes not tendered. The entire
principal amount of all Senior Notes deposited with the Exchange Agent will be
deemed to have been tendered unless otherwise indicated.
B-10
<PAGE>
The method of delivery of Senior Notes, this Letter of Transmittal (or
manually-signed facsimile hereof) and any other required documents is at the
option and risk of the tendering holder, but, except as otherwise provided
below, the delivery will be deemed made only when actually received or
confirmed by the Exchange Agent. Instead of delivery by mail, we recommend
that you use an overnight or hand delivery service. If sent by mail,
registered mail with return receipt requested, properly insured, is
recommended. In all cases, sufficient time should be allowed to assure timely
delivery.
No alternative, conditional or contingent tenders will be accepted. All
tendering holders, by execution of this Letter of Transmittal (or manually-
signed facsimile hereof), waive any right to receive notice of acceptance of
their Senior Notes for exchange.
Only a registered holder of Senior Notes may consent to the Proposed
Amendments. Any beneficial owner of Senior Notes who is not the registered
holder must arrange with the registered holder to execute and deliver the
consent on his or her behalf. The registered holder may provide such consent
either by executing the "Consent of Registered Holder" box provided herein or
by executing a separate consent substantially in the form of such "Consent of
Registered Holder." In either case, the signature of the registered holder
must be guaranteed by an Eligible Institution.
3. Inadequate Space. If the space provided herein is inadequate, the
certificate numbers and the principal amount of the Senior Notes to which this
Letter of Transmittal relates should be listed on a separate signed schedule
attached hereto.
4. Withdrawal of Tender. Holders who tender Senior Notes pursuant to the
Exchange Offer may not withdraw such Senior Notes after June 1, 2000 unless
(i) we reduce the Exchange consideration deliverable to such holders, (ii) we
reduce or otherwise modify the terms of the principal amount of the Senior
Notes subject to the Exchange Offer, (iii) we are otherwise required by law to
permit withdrawal, or (iv) we do not complete the Exchange by July 15, 2000.
In the case of a reduction in the Exchange consideration or the principal
amount of Senior Notes subject to the Exchange Offer, previously tendered
Senior Notes may be validly withdrawn until the expiration of five business
days after the date that notice of any such reduction is first published,
given or sent to holders by us. PRIOR TO THE EXECUTION OF THE AMENDMENT TO
INDENTURE, A WITHDRAWAL OF THE TENDER OF A SENIOR NOTE WILL ALSO EFFECT A
REVOCATION OF A CONSENT TO THE PROPOSED AMENDMENTS. Consents to the Proposed
Amendments cannot be revoked after execution of the Amendment to Indenture.
Holders who wish to exercise their right of withdrawal must give notice of
withdrawal in writing or by telegram, telex or facsimile transmission, which
notice must be received by the Exchange Agent at the address set forth at the
beginning of this Letter of Transmittal. Except as provided in the preceding
paragraph, such notice must be received on or prior to June 1, 2000. Any such
notice of withdrawal must specify the name of the person who tendered the
Senior Notes to be withdrawn; the name in which the Senior Notes are
registered (or, if tendered by book-entry transfer, the name of the
participant at the Book-entry Transfer Facility whose name appears on the
security position listing as the owner of such notes), if different from that
of the depositor; and the principal amount of Senior Notes to be withdrawn. If
Senior Notes have been delivered or otherwise identified (through book-entry
confirmation) to the Exchange Agent, the name of the registered holder and the
serial numbers of the particular Senior Notes to be so withdrawn (or, in the
case of notes transferred by book-entry transfer, the name and number of the
account at the Book-entry Transfer Facility to be credited with withdrawn
notes) must also be furnished to the Exchange Agent prior to the physical
release of the withdrawn Senior Notes. Such notice of withdrawal must be
signed by the holder in the same manner as the original signature on the
Letter of Transmittal or be accompanied by evidence satisfactory to us that
the person withdrawing the tender has succeeded to the beneficial ownership of
the Senior Notes.
Any permitted withdrawals of tenders of Senior Notes may not be rescinded,
and any Senior Notes withdrawn will thereafter be deemed not validly tendered
for purposes of the Exchange Offer; however, withdrawn Senior Notes may be re-
tendered by following one of the procedures for tendering described herein at
any time on or prior to the Expiration Date.
B-11
<PAGE>
All questions as to validity, form and eligibility (including time of
receipt) of the notice of withdrawal will be determined by the Company in its
sole discretion, which determination will be final and binding. None of the
Company, the Exchange Agent or any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal or
will incur any liability for failure to give any such notification.
5. Partial Tenders. Holders may elect to tender their Senior Notes in whole
or in part. A partial tender shall constitute consent to the Proposed
Amendments to the extent of the principal amount of Senior Notes being
tendered. If less than the entire principal amount of Senior Notes evidenced
by a certificate is to be tendered, fill in the principal amount that is to be
tendered in part in the box entitled "Principal Amount Tendered" above. In
such case, a new certificate for the principal amount of Senior Notes not so
tendered will be sent to such holder, unless otherwise provided in the
appropriate box of this Letter of Transmittal, as soon as practicable after
the Expiration Date. The entire principal amount of Senior Notes represented
by a certificate delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
6. Signatures on this Letter of Transmittal; Bond Powers and
Endorsements. If this Letter of Transmittal is signed by the registered
holder(s) of the Senior Notes tendered hereby, the signature must correspond
with the name as written on the face of the Senior Notes without alteration,
enlargement or any change whatsoever.
If any of the Senior Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If any Senior Notes tendered hereby are registered in different names, it
will be necessary to complete, sign and submit as many separate copies of this
Letter of Transmittal and any necessary accompanying documents as there are
different registrations.
If the certificates for Senior Notes are registered in the name of a person
other than the signer of a Letter of Transmittal, then, in order to tender
such notes pursuant to the Exchange Offer, the certificates representing such
Senior Notes must be endorsed or accompanied by appropriate bond powers,
signed exactly as the name or names of such holder or holders appear on the
certificates, with the signatures on the certificates or bond powers
guaranteed as provided below.
If this Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, such persons should
so indicate when signing, and proper evidence satisfactory to the Company of
their authority so to act must be submitted.
7. Special Issuance and Delivery Instructions. Tendering holders should
indicate in the applicable box the name and address to which the Preferred
Stock and cash payment, with respect to Senior Notes accepted for exchange, or
Senior Notes for principal amounts not exchanged or not tendered, are to be
issued or sent, if different from the name and address of the person signing
this Letter of Transmittal. In the case of issuance in a different name, the
tax identification or Social Security number of the person named must also be
indicated.
8. Waiver of Conditions. The Company reserves the right upon certain limited
conditions specified in the Offering Memorandum and Solicitation Document
under the heading "THE EXCHANGE OFFER-- Conditions of the Exchange Offer," to
waive certain of the specified conditions of the Exchange Offer, in whole at
any time or in part from time to time, in the case of any Senior Notes
tendered hereby. See "THE EXCHANGE OFFER--Conditions of the Exchange Offer" in
the Offering Memorandum and Solicitation Document.
9. Transfer Taxes. The Company shall pay all transfer taxes, if any,
applicable to the transfer and exchange of Senior Notes to it or its order
pursuant to the Exchange Offer. If, however, delivery of the Preferred Stock
and payment with respect to Senior Notes accepted for such exchange and/or
Senior Notes for principal amounts not tendered are to be made to, or are to
be registered or issued in the name of, any person other than the registered
holder of the Senior Notes tendered hereby, or if tendered Senior Notes are
registered in the name
B-12
<PAGE>
of any person other than the person signing this Letter of Transmittal, or if
a transfer tax is imposed for any reason other than the transfer and exchange
of Senior Notes to the Company or its order pursuant to the Exchange Offer,
the amount of any such transfer taxes (whether imposed on the registered
holder or any other person) will be payable by the tendering holder.
10. Replacement Notes. If a holder desires to tender Senior Notes pursuant
to the Exchange Offer but is unable to locate the Senior Notes to be tendered,
such holder should write to or telephone the Trustee under the Indenture,
State Street Bank and Trust Company, Corporate Trust Division, Two
International Place, Boston, MA 02110, Attn: Mr. Roland Gustafsen, Tel: (617)
664-5371, about procedures for replacing Senior Notes or arranging for
indemnification. Letters of Transmittal should not be sent to the Trustee
under the Indenture but to the Exchange Agent as described above.
11. Substitute Form W-9. Each tendering holder is required to provide the
Exchange Agent with a correct taxpayer identification number ("TIN") on
Substitute Form W-9 which is provided under "Important Tax Information" below,
and, if applicable, to indicate that the holder is not subject to backup
withholding. Failure to provide the information on the form for an adequate
basis for exemption may subject the tendering holder to a $50 (or greater)
penalty imposed by the Internal Revenue Service, and 31% backup withholding on
the payments made to the holder or other payee with respect to Senior Notes
exchanged pursuant to the Exchange Offer. The box in Part 3 of the Form W-9
may be checked if the tendering holder has not been issued a TIN and has
applied for a TIN or intends to apply for a TIN in the near future. If the box
in Part 3 is checked, 31% of all reportable payments will be withheld, but
such withheld amount shall be refunded if a TIN is provided to the Exchange
Agent within 60 days.
12. Requests for Assistance and Additional Copies. Requests for assistance
or for additional copies of the Offering Memorandum and Solicitation Document,
this Letter of Transmittal, the Notice of Guaranteed Delivery and/or
Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9, may be directed to the Company at the address and telephone numbers
set forth below:
Vialog Corporation
35 New England Business Center
Andover, Massachusetts 01810
Phone: (978) 975-3700
Fax: (978) 975-7028
Attn: Michael Savage, Chief Financial Officer
Important: For a tender of Senior Notes to be valid, this Letter of
Transmittal (or manually-signed facsimile hereof), together with the Senior
Notes and all other required documents, or a Notice of Guaranteed Delivery,
must be received by the Exchange Agent prior to the Expiration Date.
IMPORTANT TAX INFORMATION
Under United States federal income tax law, a holder whose tendered Senior
Notes are accepted for exchange is required by law to provide the Exchange
Agent with such holder's correct TIN on Substitute Form W-9 below. If the
Exchange Agent is not provided with the correct TIN, the holder or other payee
may be subject to a $50 (or greater) penalty imposed by the Internal Revenue
Service. In addition, payments that are made to such holder or other payee
with respect to Senior Notes exchanged pursuant to the Exchange Offer may be
subject to backup withholding at a rate of 31%.
Certain holders of Senior Notes (including, among others, all corporations
and certain foreign individuals) are generally not subject to these backup
withholding and reporting requirements. In order for a foreign individual to
qualify for exemption from U.S. withholding taxes, that holder must submit to
the Exchange Agent the appropriate Internal Revenue Service Form W-8, properly
completed and signed under penalties of perjury, attesting to that person's
exemption from withholding taxes. Exempt holders, other than foreign
individuals,
B-13
<PAGE>
should furnish their TIN, write "Exempt" on the face of the Substitute Form W-
9 below, and sign, date and return the Substitute Form W-9 to the Exchange
Agent. Forms W-8 can be obtained from the Exchange Agent. See the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional instructions.
By tendering Senior Notes pursuant to the Exchange Offer, a holder that does
not comply with the conditions described above authorizes the Exchange Agent
to withhold payment otherwise due so as to enable it to satisfy its backup
withholding obligation. Pursuant to the backup withholding provisions of
United States federal income tax law, unless the conditions described above
are satisfied, the Exchange Agent will withhold an amount of any cash or
Preferred Stock payable to a tendering holder of Senior Notes pursuant to the
Exchange Offer that will enable the Exchange Agent to remit the appropriate
amount of backup withholding due to the Internal Revenue Service with respect
to the Exchange. In addition, if any such Preferred Stock is sold by the
Exchange Agent to remit such backup withholding taxes, the Exchange Agent will
be entitled to seek reimbursement from such noncomplying holder for the costs,
fees or expenses of such sale incurred by it. Alternatively, the Exchange
Agent may require such a holder to remit a payment (in cash or certified
check) sufficient to cover the holder's backup withholding tax liability prior
to the release of any Preferred Stock withheld from such holder. Backup
withholding is not an additional tax. Rather, the United States federal income
tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be sought from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments made to a holder or other payee
with respect to Senior Notes exchanged pursuant to the Exchange offer, the
holder is required to notify the Exchange Agent of the holder's correct TIN by
completing the form below, certifying (a) that the TIN provided on Substitute
Form W-9 is correct (or that such holder is awaiting a TIN) and (b) that such
holder is not subject to backup withholding because (i) such holder is exempt
from backup withholding, (ii) such holder has not been notified by the
Internal Revenue Service that such holder is subject to backup withholding as
a result of failure to report all interest or dividends or (iii) the Internal
Revenue Service has notified such holder that the holder is no longer subject
to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The holder is required to give the Exchange Agent the TIN (e.g., Social
Security number or employer identification number) of the registered holder of
the Senior Notes. If the Senior Notes are in more than one name or are not in
the name of the actual owner, consult the Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9, included as Annex F to
the Offering Memorandum and Solicitation Document, for additional guidance on
which number to report.
B-14
<PAGE>
PAYOR'S NAME: STATE STREET BANK AND TRUST COMPANY
- --------------------------------------------------------------------------------
PART 1 -- PLEASE PART 3 -- Awaiting
SUBSTITUTE PROVIDE YOUR TIN IN THE TIN [_]
FORM W-9 BOX AT RIGHT AND Social Security Number
CERTIFY BY SIGNING AND
DATING BELOW
-------------------------
DEPARTMENT OF THE Employer Identification
TREASURY INTERNAL Number
REVENUE SERVICE -------------------------
-----------------------------------------------------
PAYER'S REQUEST FOR
TAXPAYER IDENTIFICATION PART 2 -- Please refer to the enclosed Guidelines
NUMBER ("TIN") AND for Certification of Taxpayer Identification
CERTIFICATION Number on Substitute Form W-9. If you are exempt
from backup withholding, please provide (and print
"EXEMPT" underneath) your TIN in the box at right.
- --------------------------------------------------------------------------------
Certification -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification
Number (or I am waiting for a number to be issued to me) and
(2) I am not subject to backup withholding because (a) I am exempt from
backup withholding, or (b) I have not been notified by the IRS that I am
subject to backup withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
Certification Instructions: You must cross out Item (2) above if you have
been notified by the IRS that you are subject to backup withholding because
of underreporting of interest or dividends on your tax returns.
Signature: _____________________________ Date: ______________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF THE AMOUNT OF ANY PAYMENT DUE TO YOU PURSUANT TO THE
EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 3 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number to the
Exchange Agent, 31% of all reportable payments made to me will be withheld,
but that such withheld amount shall be refunded to me if I provide the
Exchange Agent with my taxpayer identification number within 60 days.
Signature: _____________________________ Date: ______________________________
B-15
<PAGE>
ANNEX C:
NOTICE OF GUARANTEED DELIVERY
C-1
<PAGE>
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO 12 3/4% SENIOR NOTES DUE 2001 OF
VIALOG CORPORATION
This form or one substantially equivalent hereto must be used to accept the
Exchange Offer if any 12 3/4% Senior Notes due 2001 ("Senior Notes") of Vialog
Corporation (the "Company") are not lost but are not immediately available or
time will not permit all required documents to reach the Exchange Agent by the
Expiration Date. Such form may be delivered by telegram, telex, facsimile
transmission, mail or hand delivery to the Exchange Agent. See "PROCEDURE FOR
TENDERING SENIOR NOTES AND DELIVERY OF CONSENTS--Guaranteed Delivery
Procedures" in the Offering Memorandum and Solicitation Document dated as of
May 3, 2000 (the "Offering Memorandum and Solicitation Document"). All
correspondence should be addressed to the Exchange Agent as follows:
By Mail: By Hand and Overnight Courier:
State Street Bank and Trust Company State Street Bank and Trust Company
Corporate Trust Department Corporate Trust Department, 5th Floor
Attn: Susan Lavey Attn: Susan Lavey
P.O. Box 778 2 Avenue de Lafayette
Boston, MA 02102 Boston, MA 02111-1724
For Information Call:
(617) 662-1544
Terms capitalized but not defined herein have the meanings assigned to them
in the Offering Memorandum and Solicitation Document.
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION OF THIS
INSTRUMENT VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Offering Memorandum and Solicitation Document
and the accompanying Letter of Transmittal/Consent Form (the "Letter of
Transmittal"), receipt of which is hereby acknowledged, the principal amount
of Senior Notes specified below, pursuant to the guaranteed delivery
procedures set forth in the Offering Memorandum and Solicitation Document
under "PROCEDURE FOR TENDERING SENIOR NOTES AND DELIVERY OF CONSENTS--
Guaranteed Delivery Procedures."
The undersigned hereby tenders the Senior Notes listed below and
acknowledges that such tender also constitutes a consent to the proposed
amendments to the Indenture, as such proposed amendments are described in the
Offering Memorandum and Solicitation Document.
SENIOR NOTES CERTIFICATE NUMBERS PRINCIPAL AMOUNT
(IF AVAILABLE) TENDERED
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
C-2
<PAGE>
SIGN HERE
- -------------------------------------------------------------------------------
Signature(s)
- -------------------------------------------------------------------------------
Name(s) (Please Print)
- -------------------------------------------------------------------------------
Address
- -------------------------------------------------------------------------------
Zip Code
- -------------------------------------------------------------------------------
Area Code & Tel. No.
Dated: ________________________________________________________________________
GUARANTEE
(Not To Be Used For Signature Guarantee)
The undersigned, an Eligible Institution, guarantees that the certificates
representing the principal amount of Senior Notes tendered hereby in proper
form for transfer, or timely confirmation of the book-entry transfer of such
Senior Notes into the Exchange Agent's account at The Depository Trust Company
pursuant to the procedures set forth in the "PROCEDURE FOR TENDERING SENIOR
NOTES AND DELIVERY OF CONSENTS--Guaranteed Delivery Procedures" section of the
Offering Memorandum and Solicitation Document, together with a properly
completed and duly executed Letter of Transmittal (or manually-signed
facsimile thereof or Agent's Message in lieu thereof) and any required
signature guarantee and any other documents required by the Letter of
Transmittal, will be received by the Exchange Agent at the address set forth
above, no later than three New York Stock Exchange trading days after the date
of execution of the Notice of Guaranteed Delivery.
Name of Firm: ________________________ Title: _______________________________
Authorized Signature: ________________ Address: _____________________________
- -------------------------------------- --------------------------------------
Zip Code
Area Code and Telephone Number:
Name: ________________________________ --------------------------------------
Dated: _______________________________
NOTE: DO NOT SEND CERTIFICATES WITH THIS FORM. CERTIFICATES SHOULD BE SENT
WITH THE LETTER OF TRANSMITTAL
C-3
<PAGE>
ANNEX D:
OFFER TO EXCHANGE
TO OUR CLIENTS
D-1
<PAGE>
VIALOG CORPORATION
OFFER TO EXCHANGE: $780.00 IN CASH PLUS 2.2 SHARES OF PREFERRED STOCK, PAR
VALUE $0.01 PER SHARE, STATED VALUE $100.00 PER SHARE, OF VIALOG CORPORATION.
FOR EACH: $1,000 PRINCIPAL AMOUNT OF 12 3/4% SENIOR NOTES DUE 2001 OF VIALOG
CORPORATION.
To Our Clients:
Enclosed for your consideration is an Offering Memorandum and Solicitation
Document dated as of May 3, 2000 (the "Offering Memorandum and Solicitation
Document") and a form of Letter of Transmittal/Consent Form (the "Letter of
Transmittal") relating to the offer of Vialog Corporation, a Massachusetts
corporation, to exchange for its 12 3/4% Senior Notes due 2001 (the "Senior
Notes"), upon the terms and subject to the conditions set forth in the
Offering Memorandum and Solicitation Document and in the accompanying Letter
of Transmittal, the consideration set forth below:
<TABLE>
<CAPTION>
FOR EACH: TENDERING HOLDERS WILL RECEIVE
--------- ------------------------------
<C> <S>
$1,000 principal amount of Senior Notes $780.00 in cash plus 2.2 shares of
Preferred Stock, par value $0.01 per
share, stated value $100.00 per
share, of the Company.
</TABLE>
Capitalized terms used but not defined herein have the meanings assigned to
them in the Offering Memorandum and Solicitation Document.
This material is being forwarded to you as the beneficial owner of Senior
Notes carried by us in your account but not registered in your name. A tender
of such Senior Notes may only be made by us as the registered holder and
pursuant to your instructions. Accordingly, we request instructions as to
whether you wish us to tender any or all Senior Notes held by us for your
account. A valid tender of Senior Notes also constitutes consent to the
proposed amendments to the Indenture (the "Proposed Amendments"), pursuant to
the terms and conditions set forth in the enclosed Offering Memorandum and
Solicitation Document and the Letter of Transmittal.
Your instructions to us should be forwarded as promptly as possible in order
to permit us to tender Senior Notes in accordance with the provisions of the
Exchange Offer. The Exchange Offer will expire at 5:00 p.m., New York City
time, on Wednesday, June 1, 2000, unless extended by the Company.
Please instruct us regarding your wishes as to the Senior Notes held by us
for your account, by completing, executing and returning to us the instruction
form that appears on the reverse side of this letter. The accompanying Letter
of Transmittal is furnished for your information only and may not be used by
you to tender Senior Notes held by us for your account.
D-2
<PAGE>
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of the Company
relating to the Senior Notes.
This will instruct you regarding the Senior Notes held by you for my
account:
[_]Please tender Senior Notes held by you for my account. I have identified
on a signed schedule attached hereto the principal amount of the Senior
Notes to be tendered if I wish to tender with respect to less than all
of my Senior Notes. I understand that a valid tender of my Senior Notes
will constitute consent to the Proposed Amendments.
[_]Please do not tender Senior Notes held by you for my account.
- -------------------------------------------------------------------------------
Signature(s)
- -------------------------------------------------------------------------------
Please print name(s) here
UNLESS A SPECIFIC CONTRARY INSTRUCTION IS GIVEN IN THE SPACE
PROVIDED, YOUR SIGNATURE (S) HEREON SHALL CONSTITUTE AN
INSTRUCTION TO US TO TENDER ALL OF YOUR SENIOR NOTES.
D-3
<PAGE>
ANNEX E:
OFFER TO EXCHANGE
TO SECURITIES DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES AND OTHER NOMINEES
E-1
<PAGE>
VIALOG CORPORATION
OFFER TO EXCHANGE: $780.00 IN CASH PLUS 2.2 SHARES OF PREFERRED STOCK, PAR
VALUE $0.01 PER SHARE, STATED VALUE $100.00 PER SHARE, OF VIALOG CORPORATION.
12 3/4% SENIOR NOTES DUE 2001 OF VIALOG CORPORATION.
To Securities Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Vialog Corporation, a Massachusetts corporation (the "Company"), is offering
to exchange for its 12 3/4% Senior Notes due 2001 ("Senior Notes"), upon the
terms and subject to the conditions set forth in the Offering Memorandum and
Solicitation Document dated as of May 3, 2000 (the "Offering Memorandum and
Solicitation Document") and in the accompanying Letter of Transmittal/Consent
Form (the "Letter of Transmittal") (which together constitute the "Exchange
Offer"), the consideration set forth below:
<TABLE>
<CAPTION>
FOR EACH: TENDERING HOLDERS WILL RECEIVE
--------- ------------------------------
<C> <S>
$1,000 principal amount of Senior Notes $780.00 in cash plus 2.2 shares of
Preferred Stock, par value $0.01 per
share, stated value $100.00 per
share, of the Company.
</TABLE>
We are asking you to contact your clients for whom you hold Senior Notes
registered in your name or in the name of your nominee or who hold Senior
Notes registered in their own names. Capitalized terms used but not defined
herein have the meanings assigned to them in the Offering Memorandum and
Solicitation Document.
The Company will not pay any fees or commissions to any broker, dealer or
other person for soliciting tenders of Senior Notes pursuant to the Exchange
Offer, and no such solicitation shall be made. You will be reimbursed for
customary mailing and handling expenses incurred by you in forwarding any of
the enclosed materials to your clients. The Company will pay all transfer
taxes, if any, applicable to the transfer and exchange of Senior Notes to them
or their order, except as otherwise provided in the Letter of Transmittal.
A copy of each of the following documents is enclosed:
1. The Offering Memorandum and Solicitation Document.
2. A Letter of Transmittal for the Exchange Offer for your use and for the
information of your clients.
3. A form of letter which may be sent to your clients for whose account you
hold Senior Notes registered in your name or in the name of your
nominee.
4. The form of Notice of Guaranteed Delivery.
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
6. A return envelope addressed to State Street Bank and Trust Company, the
Exchange Agent.
Your prompt action is requested. The Exchange Offer will expire at 5:00
p.m., New York City time on Wednesday, June 1, 2000, unless extended by the
Company. Senior Notes tendered pursuant to the Exchange Offer may be
withdrawn, subject to the procedures described in the section of the Offering
Memorandum and Solicitation Document entitled "Procedure For Tendering Senior
Notes and Delivery Of Consents--Withdrawal Rights," at any time prior to 5:00
p.m., New York City time, on June 1, 2000.
A registered holder of Senior Notes electing to tender Senior Notes pursuant
to the Exchange Offer must (i) complete and sign a Letter of Transmittal in
accordance with the instructions set forth therein and forward or hand deliver
such Letter of Transmittal and the certificates representing the tendered
Senior Notes to the Exchange Agent at its address set forth on the back cover
page of the Offering Memorandum and Solicitation Document or (ii) comply with
the procedures set forth in the Offering Memorandum and Solicitation Document
E-2
<PAGE>
under the heading "Procedure For Tendering Senior Notes And Delivery Of
Consents--Guaranteed Delivery Procedures." The valid tender of Senior Notes
will constitute consent to the proposed amendments to the Indenture (the
"Proposed Amendments"), as such Proposed Amendments are described in the
Offering Memorandum and Solicitation Document. Letters of Transmittal and
Senior Notes should not be sent to the Company or to the Trustee under the
Indenture. A holder of Senior Notes registered in the name of a broker,
dealer, commercial bank, trust company or other nominee is urged to contact
such registered holder promptly if such holder wishes to accept the Exchange
Offer.
Additional copies of the enclosed material and additional information about
the Exchange Offer may be obtained from the Company at (978) 975-3700 (call
collect).
Very truly yours,
VIALOG CORPORATION
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR
ANY OTHER PERSON TO MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT
TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE OFFERING
MEMORANDUM AND SOLICITATION DOCUMENT OR THE LETTER OF TRANSMITTAL.
E-3
<PAGE>
ANNEX F:
GUIDELINES FOR CERTIFICATION
OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9
F-1
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER. Social Security numbers have nine digits separated by two hyphens:
i.e., 000-00-0000. Employer identification numbers have nine digits separated
by only one hyphen: i.e., 00-0000000.
The table below will help determine the number to give the payer.
- --------------------------------------
FOR THIS TYPE GIVE THE SOCIAL
OF ACCOUNT: SECURITY NUMBER OF
- --------------------------------------
<TABLE>
<S> <C>
1. Individual The individual
2. Two or more The actual owner of the
individuals account or, if combined
(joint account) funds, the first
individual on the
account(1)
3. Custodian The minor(2)
account of a
minor (Uniform
Gift to Minors
Act)
4. a. The usual The grantor-trustee(1)
revocable
savings
trust
(grantor is
also
trustee)
b. So-called The actual owner(1)
trust
account
that is not
a legal or
valid trust
under
State law
5. Sole The owner(3)
proprietorship
</TABLE>
- --------------------------------------
FOR THIS TYPE GIVE THE EMPLOYER
OF ACCOUNT: IDENTIFICATION
NUMBER OF:
- --------------------------------------
<TABLE>
<S> <C>
6. A valid trust, The legal entity (Do not
estate, or furnish the identifying
pension trust number of the personal
representative or
trustee unless the legal
entity itself is not
designated in the
account title.)(4)
7. Corporate The corporation
8. Association, The organization
club,
religious,
charitable,
educational or
other tax-
exempt
organization
9. Partnership The partnership
10. A broker or The broker or nominee
registered
nominee
11. Account with The public entity
the Department
of Agriculture
in the name of
a public
entity (such
as a State or
local
government,
school
district, or
prison) that
receives
agricultural
program
payments
</TABLE>
- --------
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has a social security number, that
person's number must be furnished.
(2) Circle the minor's name and furnish the minor's social security number.
(3) You must show your individual name, but you may also enter your business
or "doing business as" name. You may use either your SSN or (if you have
one) EIN.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
F-2
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
OBTAINING A NUMBER
If you do not have a taxpayer identification number, obtain Form SS-5,
Application for a Social Security Number Card (for individuals), Form W-7,
Application for IRS Individual Taxpayer Identification Number (for individuals
ineligible to obtain a U.S. Social Security number) or Form SS-4, Application
for Employer Identification Number (for businesses and all other entities), at
the local office of the Social Security Administration or the Internal Revenue
Service and apply for a number.
NOTE: See the chart on the previous page for further clarification of name
and TIN combinations.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments of
interest and dividends include the following:
. A corporation.
. A financial institution.
. An organization exempt from tax under Section 501 (a), any IRA, or a
custodial account under Section 402(b) (7) if the account satisfies the
requirements of Sections 401 (f) (2).
. The United States or any agency or instrumentality thereof.
. A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
. A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
. An international organization or any agency, or instrumentality thereof.
. A dealer in securities or commodities required to register in the U.S.
(including the District of Columbia) or a possession of the U.S.
. A real estate investment trust.
. A common trust fund operated by a bank under Section 584(a).
. An exempt charitable remainder trust, or a non-exempt trust described in
Section 4947(a)(1) of the Code.
. An entity registered at all times under the Investment Company Act of 1940.
. A foreign central bank of issue.
. A middleman known in the investment community as a nominee or custodian.
BROKER TRANSACTIONS
All payees listed above, other than an exempt charitable remainder trust, a
non-exempt trust described in Section 4947(a)(1) of the Code or a middleman as
described above, are exempt payees with regard to broker transactions.
Payments of dividends and patronage dividends not generally subject to
backup withholding include the following:
. Payments to nonresident aliens subject to withholding under Section 1441.
. Payments to partnerships that are not engaged in a trade or business in the
U.S. and that have at least one nonresident partner.
. Payments of patronage dividends not paid in money.
. Payments made by certain foreign organizations.
. Section 404(k) distributions made by an ESOP.
Payments of interest not generally subject to backup withholding include the
following:
. Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid
in the course of the payer's trade or business and you have not provided
your correct taxpayer identification number to the payer.
. Payments of tax-exempt interest (including exempt interest dividends under
Section 852).
. Payments described in Section 6049(b)(5) to nonresident aliens.
. Payments on tax-free covenant bonds under Section 1451.
. Payments made by certain foreign organizations.
. Payments of mortgage or student loan interest
Exempt payees described above should file Substitute Form W-9 to avoid
possible erroneous
F-3
<PAGE>
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT
TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS,
ALSO SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends,
that are not subject to information reporting are also not subject to backup
withholdings. For details, see the regulations under Sections 6041, 6041 A
(a), 6045 and 6050A of the Internal Revenue Code.
PRIVACY ACT NOTICE. Section 6109 of the Internal Revenue Code requires most
recipients of dividend, interest, or other payments to give correct taxpayer
identification numbers to payers who must report the payments to the IRS. The
IRS uses the numbers for identification purposes and to help verify the
accuracy of the returns. Payers must be given the numbers whether or not
recipients are required to file tax returns. Payers must generally withhold
31% of taxable interest, dividend, and certain other payments to a payee who
does not furnish a taxpayer identification number to a payer. Certain
penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you
fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due
to reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
F-4
<PAGE>
ANNEX G:
AMENDMENT TO INDENTURE
G-1
<PAGE>
SUPPLEMENTAL INDENTURE
This Supplemental Indenture, dated as of , 2000 (this "Supplemental
Indenture"), by and among Vialog Corporation, a Massachusetts corporation
(together with its successors and assigns, the "Company"), Telephone Business
Meetings, Inc. d/b/a/ Access Conference Call Service, a Delaware corporation,
Conference Source International, Inc., a Georgia corporation, Call Points,
Inc., a Delaware corporation, Kendall Square Teleconferencing, Inc. d/b/a/ The
Conference Center, a Massachusetts corporation, American Conferencing Company,
Inc. d/b/a Americo, a Delaware corporation and Communication Development
Corporation, a Connecticut corporation (collectively, the "Subsidiary
Guarantors") and State Street Bank and Trust Company, as Trustee under the
Indenture referred to below (the "Trustee").
W I T N E S S E T H:
WHEREAS, the Company, the Subsidiary Guarantors and the Trustee have
heretofore executed and delivered an Indenture, dated as of November 12, 1997
(as amended, supplemented, waived or otherwise modified, the "Indenture"),
providing for the issuance of an aggregate principal amount of $75.0 million
of 12 3/4% Senior Notes due November 15, 2001 of the Company (the
"Securities"); and
WHEREAS, pursuant to Section 9.02 of the Indenture, the Trustee, the Company
and the Subsidiary Guarantors are authorized to execute and deliver this
Supplemental Indenture to amend the Indenture, with the consent of the Holders
of at least a majority in aggregate principal amount of the outstanding
Securities.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, each
Subsidiary Guarantor, the Company and Trustee mutually covenant and agree for
the equal and ratable benefit of the Holders of the Securities as follows.
ARTICLE I
DEFINITIONS
SECTION 1.1. Defined Terms. As used in this Supplemental Indenture, terms
defined in the Indenture or in the preamble or recital hereto are used herein
as therein defined except that the term "Holders" in this Supplemental
Indenture shall refer to the term "Holders" as defined in the Indenture and
the Trustee acting on behalf or for the benefit of such holders. The words
"herein," "hereof" and "hereby" and other words of similar import used in this
Supplemental Indenture refer to this Supplemental Indenture as a whole and not
to any particular section hereof.
ARTICLE II
AMENDMENT
SECTION 2.1. Amendment. The Indenture is hereby amended by deleting the
following sections of the Indenture in their entirety: Sections 4.03, 4.04,
4.05, 4.06, 4.12, 4.13, 4.14, 4.15, 4.18, 4.20, 4.21, 4.22, 5.01(a)(ii),
6.01(4), 6.01(5) and 6.01(8). To the extent provisions of the Indenture make
reference to the foregoing Sections, or are otherwise affected by such
deletions, the Indenture as amended by this Supplemental Indenture shall be
read in a manner consistent with the intent hereof.
ARTICLE III
MISCELLANEOUS
SECTION 3.1. Effectiveness. The provisions of this Supplemental Indenture
shall become effective only upon the Effective Date (as such term is defined
in the Offering Memorandum and Solicitation Document of the Company dated May
3, 2000).
G-2
<PAGE>
SECTION 3.2. Parties. Nothing expressed or mentioned in this Supplemental
Indenture is intended or shall be construed to give any Person, firm or
corporation, other than the Holders and the Trustee any legal or equitable
right, remedy claim under or in respect of this Supplemental Indenture or any
provision herein contained.
SECTION 3.3. Modification, etc. Subject to the provisions of, and except as
otherwise provided in, Article IX of the Indenture (including without
limitation Sections 9.01 and 9.02 thereof), no modification, amendment or
waiver of any provision of this Supplemental Indenture shall in any event be
effective unless the same shall be in writing and consented to by the Trustee
(with the consent of the Holders of at least a majority of the then
outstanding Securities if required by Section 9.02 of the Indenture) and then
such waiver or consent shall be effective only in the specific instance and
for the purpose for which it was given.
SECTION 3.4. Entire Agreement. This Supplemental Indenture is intended by
the parties to be a final expression of their agreement in respect of the
subject matter contained herein, and, together with the Indenture, supersedes
all prior agreements and understandings between the parties with respect to
such subject matter.
SECTION 3.5. Notices. Any notices or other communications required or
permitted hereunder shall be in writing, and shall be sufficiently given if
made by hand delivery, by telecopier or registered or certified mail, postage
prepaid, return receipt requested, addressed as follows:
if to the Company or any Subsidiary Guarantor:
Vialog Corporation
35 New England Business Center
Andover, Massachusetts 01810
Attention: Michael Savage, Chief Financial Officer
Facsimile: (978) 975-7208
Telephone: (978) 975-3700
with copies to:
Mirick, O'Connell, DeMallie & Lougee, LLP
1700 Bank of Boston Tower
100 Front Street
Worcester, Massachusetts 06108
Attention: David L. Lougee
Facsimile: (508) 752-7305
Telephone: (508) 799-0541
if to the Trustee:
if by mail:
State Street Bank and Trust Company
Corporate Trust Division
P.O. Box 778
Boston, Massachusetts 02102
Attention: Mr. Roland Gustafsen
Facsimile: (617) 662-1458
Telephone: (617) 662-1699
G-3
<PAGE>
if by courier or delivery:
State Street Bank and Trust Company
Corporate Trust Division
2 Avenue de Lafayette
Boston, Massachusetts 02111-1724
Attention: Mr. Roland Gustafsen
Facsimile: (617) 662-1458
Telephone: (617) 662-1699
with copies to :
Peabody & Arnold
50 Rowes Wharf
Boston, Massachusetts 02110
Attention: Rober J. Coughlin
Facsimile: (617) 951-2125
Telephone: (617) 951-2100
Each of the Company, the Subsidiary Guarantors and the Trustee by written
notice to each other such person may designate additional or different
addresses for notices to such person. Any notice or communication to the
Company and the Trustee shall be deemed to have been given or made as of the
date so delivered if personally delivered; when answered back, if telexed;
when receipt is acknowledged, if telecopied; and five (5) calendar days after
mailing if sent by registered or certified mail, postage prepaid (except that
a notice of change of address shall not be deemed to have been given until
actually received by the addressee).
SECTION 3.6. Governing Law. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED
TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT
TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.
SECTION 3.7. Successors. This Supplemental Indenture shall inure to the
benefit of and be binding upon the successors and assignees of the Company,
the Subsidiary Guarantor and the Trustee.
SECTION 3.8. Counterparts. This Supplemental Indenture may be executed in
any number of counterparts and by the parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute but one and the same instrument.
SECTION 3.9. Severability. If any term, provision, covenant or restriction
of this Supplemental Indenture is held by a court of competent jurisdiction to
be invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated and
the parties hereto shall use their best efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would
have executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid, illegal,
void or unenforceable.
SECTION 3.10 Ratification of Indenture; Supplemental Indenture Part of
Indenture. Except as expressly amended hereby, the Indenture is in all
respects ratified and confirmed and all the terms, conditions and provisions
thereof shall remain in full force and effect. This Supplemental Indenture
shall form a part of the Indenture for all purposes, and every holder of
Securities heretofore or hereafter authenticated and delivered shall
G-4
<PAGE>
be bound hereby. The Trustee makes no representation or warranty as to the
validity or sufficiency of this Supplemental Indenture.
SECTION 3.11. Headings. The headings of the Articles and the sections in
this Supplemental Indenture are for convenience of reference only and shall
not be deemed to alter or affect the meaning or interpretation of any
provisions hereof.
SECTION 3.12. The Trustee. The Trustee shall not be responsible in any
manner whatsoever for or in respect of the validity or sufficiency of this
Supplemental Indenture or for or in respect of the recitals contained herein,
all of which recitals are made solely by the Company and each Subsidiary
Guarantor.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed as of the date first above written.
THE COMPANY:
VIALOG CORPORATION
By: __________________________________________
Name:
Title:
THE SUBSIDIARY GUARANTORS:
TELEPHONE BUSINESS MEETINGS, INC.
D/B/A/ ACCESS CONFERENCE CALL SERVICE
By: __________________________________________
Name:
Title:
CONFERENCE SOURCE INTERNATIONAL, INC.
By: __________________________________________
Name:
Title:
CALL POINTS, INC.
By: __________________________________________
Name:
Title:
KENDALL SQUARE TELECONFERENCING, INC.
D/B/A/ THE CONFERENCE CENTER
By: __________________________________________
Name:
Title:
AMERICAN CONFERENCING COMPANY, INC. D/B/A
AMERICO
By: __________________________________________
Name:
Title:
COMMUNICATION DEVELOPMENT CORPORATION
By: __________________________________________
Name:
Title:
THE TRUSTEE:
STATE STREET BANK AND TRUST COMPANY
By: __________________________________________
Name:
Title:
G-6
<PAGE>
ANNEX H:
CERTIFICATE OF VOTE OF DIRECTORS
ESTABLISHING A CLASS OR SERIES OF STOCK
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<PAGE>
FEDERAL IDENTIFICATION NO.
THE COMMONWEALTH OF MASSACHUSETTS
WILLIAM FRANCIS GALVIN
SECRETARY OF THE COMMONWEALTH
ONE ASHBURTON PLACE, BOSTON, MASSACHUSETTS 02108-1512
CERTIFICATE OF VOTE OF DIRECTORS
ESTABLISHING A CLASS OR SERIES OF STOCK
(GENERAL LAWS, CHAPTER 156B, SECTION 26)
We, Kim Mayassi_____________________________________________________, President
[X]
and Michael Savage______________________________________________________, Clerk
[X]
of Vialog Corporation_________________________________________________________,
(Exact name of corporation)
located at: 35 New England Business Center, Andover, MA 01810
(Street Address of corporation in Massachusetts)
do hereby certify that at a meeting of the directors of the corporation held
on , , the following vote establishing and designating a class or
series of stock and determining the relative rights and preferences thereof
was duly adopted:
*Delete the inapplicable words.
Noted Votes for which the space provided above is not sufficient should be
provided on one side of separate sheets of white paper, numbered 2A, 2B,
etc. with a left margin of at least 1 inch.
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<PAGE>
TERMS OF SERIES A 8% CUMULATIVE CONVERTIBLE PREFERRED STOCK:
1. Designation and Amount. The shares of such series shall be designated as
"Series A 8% Cumulative Convertible Preferred Stock" (the "Preferred Stock")
and the number of shares constituting the Preferred Stock shall be
[ ].
2. Dividends. (a) From and after the date of issuance (the "Issuance Date"),
the holders of Preferred Stock shall be entitled to receive dividends, when,
as and if declared by the Board of Directors of the Corporation, either (i)
out of funds legally available therefor, at the rate of $8.00 per annum for
each share of Preferred Stock, or (ii) payable in additional shares of
Preferred Stock, such that holders shall receive a dividend of 2/25th of a
share of Preferred Stock per annum for each share of Preferred Stock held, as
shall be determined by the Board of Directors. Such dividends, if so declared,
shall be payable semi-annually on January 1 and July 1 of each year and shall
be cumulative.
3. Rank. The Preferred Stock shall, with respect to dividend rights and
rights upon liquidation, winding up and dissolution, rank prior to all classes
or series of equity securities heretofore and hereafter issued by the
Corporation, including the Common Stock (as defined in paragraph 8).
4. Liquidation. In the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation or the sale, lease, conveyance or
other disposition of all or substantially all of its property and business,
the holders of Preferred Stock shall be entitled to receive $100 per share
(subject to equitable adjustments in the event of stock splits or other
similar events) (the "Liquidation Preference"), plus accrued and unpaid
dividends, before any distribution or payment is made to the holders of any
shares of any class of equity securities heretofore or hereinafter issued by
the Corporation. If, upon any such sale, liquidation, dissolution or winding
up of the Corporation, the assets distributable among the holders of all the
Preferred Stock shall be insufficient to permit the payment in full to such
holders of the amount hereinabove provided, then the entire assets of the
Corporation shall be applied ratably to the payment of such amount to the
holders of Preferred Stock then outstanding. Neither the merger nor the
consolidation of the Corporation, nor the sale, lease or conveyance of all or
a part of its property and business as an entirety, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning
of this paragraph 4, unless such sale, lease or conveyance shall be in
connection with a plan of liquidation, dissolution or winding up of the
Corporation.
5. Redemption. (a) The shares of Preferred Stock at the time outstanding may
be redeemed by the Corporation at its option expressed by a resolution adopted
by its Board of Directors, at any time and from time to time in whole or in
part from and after the Issuance Date, at a price, plus accrued and unpaid
dividends thereon to the date fixed for redemption (the "Redemption Price")
equal to (i) 101% of the Liquidation Preference for each share plus accrued
and unpaid dividends at any time during the period commencing on the Issuance
Date and ending on the date 365 days thereafter, (ii) 102% of the Liquidation
Preference for each share plus accrued and unpaid dividends at any time during
the period commencing on the first anniversary of the Issuance Date and ending
on the date 365 days thereafter, (iii) 103% of the Liquidation Preference for
each share plus accrued and unpaid dividends at any time during the period
commencing on the second anniversary of the Issuance Date and ending on the
date 365 days thereafter, and (iv) the Liquidation Preference for each share
plus accrued and unpaid dividends at any time thereafter through the six-year
anniversary of the Issuance Date (the "Maturity Date"), in each case subject
to the prior right of the holder to convert such shares to Common Stock.
(b) If, pursuant to paragraph 5(a) above, the Corporation shall redeem
shares of the Preferred Stock, the Corporation shall give written notice of
such redemption to each holder of record of shares of the Preferred Stock to
be redeemed not less than 30 nor more than 60 days prior to the date fixed for
redemption, by certified mail enclosed in a postage paid envelope addressed to
such holder at such holder's address as the same shall appear on the books of
the Corporation. Such notice shall (i) state that the Corporation has elected
to redeem such Shares, (ii) state the date fixed for redemption, (iii) state
the Redemption Price, (iv) state that the shares called for redemption are
convertible until the close of business on the second day preceding the date
fixed for redemption and (v) call upon such holder to surrender to the
Corporation on or after said date at its principal place of business
designated in such notice, a certificate or certificates representing the
number of shares of
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<PAGE>
Preferred Stock to be redeemed in accordance with such notice. On or after the
date fixed in such notice for redemption, each holder of shares of Preferred
Stock to be so redeemed shall present and surrender the certificate or
certificates for such shares to the Corporation at the place designated in
said notice and thereupon the Redemption Price of such shares shall be paid
to, or to the order of, the person whose name appears on such certificate or
certificates as the owner thereof. From and after the date fixed in any such
notice as the date for redemption, unless default shall be made by the
Corporation in providing for the payment of the Redemption Price pursuant to
such notice, all rights of the holders of the Preferred Stock so redeemed,
except the right to receive the Redemption Price (but without interest
thereon) shall cease and terminate.
(c) Any shares of Preferred Stock redeemed by the Corporation shall be
retired and shall not be reissued and the Corporation may, from time to time,
take such appropriate corporate action as may be necessary to reduce the
number of authorized shares of Preferred Stock.
6. Conversion. (a) The holder of any share or shares of Preferred Stock
shall have the right, at its option, to convert all or any portion of such
shares into fully paid and nonassessable shares of Common Stock of the
Corporation, at any time and from time to time after the date of issuance
until the Maturity Date, at the rate of one (1) share of Preferred Stock into
the number of shares of Common Stock equal to (X) the product of the number of
shares of Preferred Stock (including paid-in-kind dividends thereon as of the
date of such conversion) to be converted and $100.00, (Y) divided by the
Conversion Price. The "Conversion Price" shall be established as of [June ,
2000] (the "Effective Date") and shall be the lesser of (i) $8.00 per share or
(ii) 150% of the average closing price of the Corporation's Common Stock for
the 20 trading days immediately preceding the Effective Date (the "Market
Price"), subject to downward adjustment on the first anniversary of the
Effective Date as described in the following sentence. If the average closing
price of the Corporation's Common Stock for the 20 trading days immediately
preceding the first anniversary of the Effective Date (the "Adjusted Market
Price") is less than the Market Price, then the Conversion Price shall be
reduced by a percentage equal to the percentage difference between the Market
Price and the Adjusted Market Price. The Conversion Price shall be subject to
adjustment as specified in subparagraph (e) hereof (the number of shares of
Common Stock issuable at any time, giving effect to the latest prior
adjustment pursuant to subparagraph (e) hereof, if any, in exchange for one
share of Preferred Stock being hereinafter called the "Conversion Rate").
(b) The Preferred Stock shall be convertible at the principal office of the
Corporation into fully paid and nonassessable shares of Common Stock at the
Conversion Rate. In case of the redemption, pursuant to paragraph 5(a) above,
of any shares of Preferred Stock, such right of conversion shall cease and
terminate, as to the shares to be redeemed, at the close of business on the
second day preceding the date fixed for such redemption, unless default shall
be made in the payment of the Redemption Price for the shares to be so
redeemed.
(c) In order to convert shares of Preferred Stock into shares of Common
Stock pursuant to the right of conversion set forth in subparagraph (a) above,
the holder thereof shall surrender the certificate or certificates
representing such shares of Preferred Stock, duly endorsed to the Corporation
or in blank, at the principal office of the Corporation and shall give written
notice to the Corporation that such holder elects to convert the same, stating
in such notice the name or names in which such holder wishes the certificate
or certificates representing shares of Common Stock to be issued. The
Corporation shall, within five (5) business days, deliver at said office or
other place to such holder of Preferred Stock, or to such holder's nominee or
nominees, a certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid, together with any
cash to which such holder shall be entitled in lieu of any fractional share in
an amount equal to the product of such fractional share multiplied by the
closing price of the Common Stock on the business day preceding the day of
conversion. Shares of Preferred Stock shall be deemed to have been converted
as of the date of the surrender of such shares for conversion as provided
above, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date. Upon
conversion of only a portion of the number of shares covered by a certificate
representing shares of Preferred Stock surrendered for conversion, the
Corporation shall issue and deliver to, or upon the written order of, the
holder of the certificate so surrendered for conversion, at the expense of the
Corporation, a new certificate covering the number of shares of Preferred
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<PAGE>
Stock representing the unconverted portion of the certificate so surrendered,
which new certificate shall entitle the holder thereof to the rights of the
shares of Preferred Stock represented thereby to the same extent as if the
certificate theretofore covering such unconverted shares had not been
surrendered for conversion.
(d) The issuance of certificates for shares of Common Stock upon the
conversion of shares of Preferred Stock shall be made without charge to the
converting stockholder for any original issue or transfer tax in respect of
the issuance of such certificates and any such tax shall be paid by the
Corporation.
(e) The Conversion Rate shall be subject to the following adjustments:
(i) If the Corporation shall declare and pay to the holders of Common
Stock a dividend or other distribution payable in shares of Common Stock,
the Conversion Rate in effect immediately prior thereto shall be adjusted
so that the holders of Preferred Stock thereafter surrendered for
conversion shall be entitled to receive the number of shares of Common
Stock which such holder would have owned or been entitled to receive after
the declaration and payment of such dividend or other distribution if such
shares of Preferred Stock had been converted immediately prior to the
record date for the determination of shareholders entitled to receive such
dividend or other distribution.
(ii) If the Corporation shall subdivide the outstanding shares of Common
Stock into a greater number of shares of Common Stock, or combine the
outstanding shares of Common Stock into a lesser number of shares, or issue
by reclassification of its shares of Common Stock any shares of the
Corporation, the Conversion Rate in effect immediately prior thereto shall
be adjusted so that the holders of Preferred Stock thereafter surrendered
for conversion shall be entitled to receive the number of shares of Common
Stock which such holder would have owned or been entitled to receive after
the happening of any of the events described above if such shares of
Preferred Stock had been converted immediately prior to the happening of
such event on the day upon which such subdivision, combination or
reclassification, as the case may be, becomes effective.
(iii) If, after the date of issuance of the Preferred Stock, the
Corporation shall issue or sell any Additional Shares (as defined in
paragraph 8 below) of Common Stock for a consideration per share less than
the Conversion Price in effect, then the Conversion Rate shall be adjusted
to the number determined by dividing $100.00 by the dollar value of lowest
amount received per share by the Corporation for the issuance of any
Additional Shares of Common Stock.
(iv) If the Corporation shall issue or sell any warrants or options or
other rights entitling the holders thereof to subscribe for or purchase
either any Additional Shares of Common Stock or evidences of indebtedness,
shares of stock or other securities which are convertible into or
exchangeable, with or without payment of additional consideration in cash
or property, for Additional Shares of Common Stock (such convertible or
exchangeable evidences of indebtedness, shares of stock or other securities
hereinafter being called "Convertible Securities"), and the consideration
per share for which Additional Shares of Common Stock may at any time
thereafter be issuable pursuant to such warrants, options or other rights
or pursuant to the terms of such Convertible Securities (when added to the
consideration per share of Common Stock, if any, received for such
warrants, options or other rights), shall be less than the Conversion
Price, then the Conversion Rate shall be adjusted as provided in
subparagraph (xviii) on the basis that (x) the maximum number of Additional
Shares of Common Stock issuable pursuant to all such warrants, options or
other rights or necessary to effect the conversion or exchange of all such
Convertible Securities shall be deemed to have been issued and (y) the
aggregate consideration (plus the consideration, if any, received for such
warrants, options or other rights) for such maximum number of Additional
Shares of Common Stock shall be deemed to be the consideration received and
receivable by the Corporation for the issuance of such Additional Shares of
Common Stock pursuant to such warrants, options or other rights or pursuant
to the terms of such Convertible Securities.
(v) If the Corporation shall issue or sell Convertible Securities and the
consideration per share for which Additional Shares of Common Stock may at
any time thereafter be issuable pursuant to the terms of such Convertible
Securities shall be less than the Conversion Price, then the Conversion
Rate shall be
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<PAGE>
adjusted as provided in subparagraph (xviii) on the basis that (x) the
maximum number of Additional Shares of Common Stock necessary to effect the
conversion or exchange of all such Convertible Securities shall be deemed
to have been issued and (y) the aggregate consideration for such maximum
number of Additional Shares of Common Stock shall be deemed to be the
consideration received and receivable by the Corporation for the issuance
of such Additional Shares of Common Stock pursuant to the terms of such
Convertible Securities. No adjustment of the Conversion Rate shall be made
under this subparagraph (v) upon the issuance of any Convertible Securities
which are issued pursuant to the exercise of any warrants, options or other
rights, if such adjustment shall previously have been made upon the
issuance of such warrants, options or other rights pursuant to subparagraph
(iv).
(vi) For the purposes of subparagraphs (iv) and (v), the date as of which
the Conversion Price shall be computed shall be the earliest of (x) the
date on which the Corporation shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive any warrants,
options or other rights referred to in subsection (iv) or to receive any
Convertible Securities, (y) the date on which the Corporation shall enter
into a firm contract for the issuance of such warrants, options or other
rights or Convertible Securities or (z) the date of the actual issuance of
such warrants, options or other rights or Convertible Securities.
(vii) No adjustment of the Conversion Rate shall be made under
subparagraph (xviii) upon the issuance of any Additional Shares of Common
Stock which are issued pursuant to the exercise of any warrants, options or
other rights or pursuant to the exercise of any conversion or exchange
rights in any Convertible Securities, if such adjustment shall previously
have been made upon the issuance of such warrants, options or other rights
or upon the issuance of such Convertible Securities (or upon the issuance
of any warrants, options or other rights therefor), pursuant to
subparagraphs (iv) or (v).
(viii) If any warrants, options or other rights (or any portions thereof)
which shall have given rise to an adjustment pursuant to subparagraph (iv)
or conversion rights pursuant to Convertible Securities which shall have
given rise to an adjustment pursuant to subparagraph (v) shall have expired
or terminated without the exercise thereof and/or if by reason of the terms
of such warrants, options or other rights or Convertible Securities there
shall have been an increase or increases, with the passage of time or
otherwise, in the price payable upon the exercise or conversion thereof,
then the Conversion Rate hereunder shall be readjusted (but to no greater
extent than originally adjusted) on the basis of (x) eliminating from the
computation any Additional Shares of Common Stock corresponding to such
warrants, options or other rights or conversion rights as shall have
expired or terminated, (y) treating the Additional Shares of Common Stock,
if any, actually issued or issuable pursuant to the previous exercise of
such warrants, options or other rights or of conversion rights pursuant to
any Convertible Securities as having been issued for the consideration
actually received and receivable thereof or, and (z) treating any of such
warrants, options or other rights or of conversion rights pursuant to any
Convertible Securities which remain outstanding as being subject to
exercise or conversion on the basis of such exercise or conversion price as
shall be in effect at the time; provided, however, that any consideration
which was actually received by the Corporation in connection with the
issuance or sale of such warrants, options or other rights shall form part
of the readjustment computation even though such warrants, options or other
rights shall have expired without the exercise thereof. The Conversion Rate
shall be adjusted as provided in subparagraph (xviii) as a result of any
increase in the number of Additional Shares of Common Stock issuable, or
any decrease in the consideration payable upon any issuance of Additional
Shares of Common Stock, pursuant to any antidilution provisions contained
in any warrants, options or other rights or in any Convertible Securities.
(ix) (A) In case any Additional Shares of Common Stock, Convertible
Securities or warrants, options or other rights to purchase any such
Additional Shares of Common Stock or Convertible Securities shall be issued
or sold for cash, the consideration received thereof or shall be deemed to
be the amount received by the Corporation therefor.
(B) In case any Additional Shares of Common Stock, Convertible
Securities or warrants, options or other rights to purchase any such
Additional Shares of Common Stock or Convertible Securities shall be
offered by the Corporation for subscription, the consideration received
therefor shall be deemed to be the subscription price.
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<PAGE>
(C) In case any Additional Shares of Common Stock, Convertible
Securities or warrants, options or other rights to purchase any such
Additional Shares of Common Stock or Convertible Securities are sold to
underwriters or dealers for public offering without a subscription
offering, the consideration received therefor shall be deemed to be the
initial public offering price.
(D) In any such case covered by subparagraphs (A), (B), or (C)
herein, in determining the amount of consideration received by the
Corporation, if the consideration is in whole or in part consideration
other than cash, the amount of the consideration shall be deemed to be
the fair value of such consideration as determined in good faith by the
Board of Directors of the Corporation. If Additional Shares of Common
Stock shall be issued as part of a unit with warrants, options, or
other rights, then the amount of consideration for the warrants, option
or other right shall be deemed to be the amount determined in good
faith at the time of issuance by the Board of Directors of the
Corporation. If the Board of Directors of the Corporation shall not
make any such determination, the consideration for the warrant, option
or other right shall be deemed to be zero.
(E) In any such case covered by subparagraphs (A), (B), (C), or (D)
herein, in determining the amount of consideration received by the
Corporation (I) any amounts paid or receivable for accrued interest or
accrued dividends shall be excluded, and (II) any compensation,
discounts, expenses paid or incurred or underwriting commissions or
concessions paid in connection therewith shall not be deducted.
(F) In any case covered by subparagraphs (A), (B) or (C) herein,
there shall be added to the consideration received by the Corporation
at the time of issuance or sale, the minimum aggregate amount of
additional consideration payable to the Corporation upon the exercise
of such warrants, options or other rights which relate to Convertible
Securities, the minimum aggregate amount of consideration, if any,
payable upon the conversion or exchange thereof.
(G) In case any Additional Shares of Common Stock, Convertible
Securities or any options, warrants or other rights to purchase such
Additional Shares of Common Stock or Convertible Securities shall be
issued in connection with any merger or consolidation in which the
Corporation is the surviving corporation, the amount of consideration
therefor shall be deemed to be the fair value, as determined in good
faith by the Board of Directors of the Corporation, of such portion of
the assets and business of the non-surviving corporation or
corporations as such Board shall determine to be attributable to such
Additional Shares of Common Stock, Convertible Securities or warrants,
options or other rights to purchase such Additional Shares of Common
Stock or Convertible Securities.
(x) In case the Corporation shall effect a reorganization, shall merge
with or consolidate into another corporation, or shall sell, transfer or
otherwise dispose of all or substantially all of its property, assets or
business and, pursuant to the terms of such reorganization, merger,
consolidation or disposition of assets, shares of stock or other
securities, property or assets of the Corporation, successor or transferee
or an affiliate thereof or cash are to be received by or distributed to the
holders of Common Stock, then each holder of Preferred Stock shall be given
a written notice from the Corporation informing each holder of the terms of
such reorganization, merger, consolidation, or disposition of assets and of
the record date thereof for any distribution pursuant thereto, at least ten
days in advance of such record date, and each holder of Preferred Stock
shall have the right thereafter to receive, upon conversion of such
Preferred Stock, the number of shares of stock or other securities,
property or assets of the Corporation, successor or transferee or affiliate
thereof or cash receivable upon or as a result of such reorganization,
merger, consolidation or disposition of assets by a holder of the number of
shares of Common Stock equal to the Conversion Rate immediately prior to
such event, multiplied by the number of shares of Preferred Stock as may be
converted. The provisions of this subparagraph (x) shall similarly apply to
successive reorganizations, mergers, consolidations or dispositions of
assets.
(xi) If a purchase, tender or exchange offer is made to and accepted by
the holders of more than 50% of the outstanding shares of Common Stock, the
Corporation shall not effect any consolidation, merger or sale with the
person having made such offer or with any affiliate of such person, unless
prior to the
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consummation thereof each holder of shares of Preferred Stock shall have
been given a reasonable opportunity to elect to receive, upon conversion of
the shares of Preferred Stock then held by such holder, either the stock,
securities, cash or assets then issuable with respect to the Common Stock
or the stock, securities, cash or assets issued to previous holders of the
Common Stock in accordance with such offer, or the equivalent thereof.
(xii) The number of shares of Common Stock outstanding at any given time
shall not include shares owned or held by or for the account of the
Corporation, and the disposition of such shares shall be considered an
issue or sale of Common Stock, for the purposes of this paragraph 6(e).
(xiii) The Corporation will not pay or declare a dividend (other than in
Common Stock) upon the Common Stock payable otherwise than out of earnings
or earned surplus (determined in accordance with generally accepted
accounting principles).
(xiv) If a state of facts shall occur which, without being specifically
controlled by the provisions of this paragraph (e), would not fairly
protect the conversion rights of the Preferred Stock in accordance with the
essential intent and principles of such provisions, then the Board of
Directors of the Corporation shall make an adjustment in the application of
such provisions, in accordance with such essential intent and principles,
so as to protect such conversion rights.
(xv) Anything herein to the contrary notwithstanding, no adjustment in
the Conversion Rate shall be required unless such adjustment, either by
itself or with other adjustments not previously made, would require a
change of at least 1% in such rate; provided, however, that any adjustment
which by reason of this subparagraph (xv) is not required to be made shall
be carried forward and taken into account in any subsequent adjustment.
(xvi) All calculations under this paragraph (e) shall be made to the
nearest one-thousandth of a share.
(xvii) Whenever the Conversion Rate shall be adjusted pursuant to this
paragraph (e), the Corporation shall forthwith obtain, and cause to be
delivered to each holder of Preferred Stock, a certificate signed by the
principal financial or accounting officer of the Corporation, setting forth
in reasonable detail the event requiring the adjustment and the method by
which such adjustment was calculated (including a description of the basis
on which the Board of Directors of the Corporation determined the fair
value of any consideration other than cash pursuant to subparagraph (ix))
and specifying the new Conversion Rate. In the case referred to in
subparagraph (x), such a certificate shall be issued describing the amount
and kind of stock, securities, property or assets or cash which shall be
receivable upon conversion of the Preferred Stock after giving effect to
the provisions of such subparagraph (x).
(xviii) The Conversion Rate adjustment for subparagraphs (iv), (v), and
(viii) is as follows: the Conversion Rate shall be adjusted to the number
determined by multiplying the Conversion Price in effect immediately prior
to such issuance or sale by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to the
issuance or sale of such Additional Shares of Common Stock plus (s) the
number of such Additional Shares of Common Stock so issued or sold and (t)
the number of shares of Common Stock then issuable upon conversion of all
outstanding shares of convertible securities and exercise of all then
outstanding options to the extent that the conversion or exercise prices
thereof are less than the price at which the Preferred Stock is convertible
and the denominator of which shall be the number of shares of Common Stock
plus (x) the number of shares of Common Stock which the aggregate
consideration for such Additional Shares of Common Stock so issued or sold
would purchase at a consideration per share equal to the Conversion Price
and (y) the number of shares of Common stock then issuable upon conversion
of all outstanding shares of convertible securities and exercise of all
then outstanding options to the extent that the conversion or exercise
prices thereof are less than the price at which the Preferred Stock is
convertible. For the purposes of this subparagraph (iii), the date as of
which the Conversion Price shall be computed shall be the earlier of (x)
the date on which the Corporation shall enter into a firm contract for the
issuance or sale of such Additional Shares of Common Stock or (y) the date
of the actual issuance or sale of such shares.
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(f) The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of Preferred Stock, the full number of shares of
Common Stock then deliverable upon the conversion or exchange of all shares of
Preferred Stock at the time outstanding. The Corporation shall at all times,
take such corporate action as shall be necessary in order that the Corporation
may validly and legally issue fully paid and nonassessable shares of Common
Stock upon the conversion of Preferred Stock in accordance with the provisions
hereof.
(g) No fractional shares of Common Stock or scrip representing fractional
shares of Common Stock shall be issued upon any conversion of Preferred Stock,
but, in lieu thereof, there shall be paid an amount in cash equal to the same
fraction of the Conversion Price multiplied by the closing price of the
Corporation's Common Stock on the business day preceding the day of
conversion.
7. Voting Rights. (a) Except as otherwise required by the Massachusetts
General Laws, the holders of shares of Preferred Stock shall have the right to
vote, together with the holders of all the outstanding shares of Common Stock
and not by classes, on all matters on which holders of Common Stock shall have
the right to vote. The holders of shares of Preferred Stock shall have the
right to cast one vote for each share of Common Stock issuable upon conversion
of Preferred Stock on the relevant record date, with any fractions rounded to
the next full vote.
(b) Without the prior approval of the holders of a majority of the shares of
Preferred Stock outstanding, voting separately as a class, the Corporation
will not (i) amend this Certificate of Vote of Directors Establishing a Class
or Series of Stock, the Articles of Organization or By-Laws of the Corporation
(A) so as to permit the issuance of any securities senior to, or in parity
with, the Preferred Stock or (B) in any other manner that adversely affects
the specified rights, preferences, privileges or voting rights of the holders
of the Preferred Stock, or (ii) authorize the payment of any "Restricted
Payment" (as such term is defined in the Indenture, dated November 12, 1997 by
and among by and among the Corporation, Telephone Business Meetings, Inc.
d/b/a/ Access Conference Call Service, a Delaware corporation, Conference
Source International, Inc., a Georgia corporation, Call Points, Inc., a
Delaware corporation, Kendall Square Teleconferencing, Inc. d/b/a/ The
Conference Center, a Massachusetts corporation, American Conferencing Company,
Inc. d/b/a Americo, a Delaware corporation and Communication Development
Corporation, a Connecticut corporation and State Street Bank and Trust
Company, as Trustee.)
(c) Without the prior approval of the holders of a majority of the
outstanding shares of Preferred Stock and Common Stock, voting together as a
class, the Corporation will not (i) increase the number of shares of capital
stock which the Corporation is authorized to issue, (ii) authorize any sale,
lease, exchange or other disposition by the Corporation of all or
substantially all of its assets, (iii) authorize any merger or consolidation
of the Corporation with any other corporation, or (iv) authorize the
liquidation, dissolution or winding up of the Corporation.
8. Definitions.
(a) "Additional Shares of Common Stock" shall mean all shares of Common
Stock of the Corporation issued by the Corporation after June , 2000, except
Common Stock which may be issued pursuant to (i) conversion of the Preferred
Stock and (ii) shares issued pursuant to the exercise by employees,
consultants and directors of the Corporation of options issued pursuant to
stock option plans or agreements adopted by the Board of Directors of the
Corporation.
(b) "Common Stock" shall mean the common stock, par value $.01 per share, of
the Corporation.
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<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
CERTIFICATE OF VOTE OF DIRECTORS
ESTABLISHING A SERIES OF A CLASS OF STOCK
(GENERAL LAWS, CHAPTER 156B, SECTION 26)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
I hereby approve the within Certificate of Vote of Directors and the filing fee
in the amount $ having been paid, said certificate is deemed to have been
filed with me this day of .
Effective date: ________________________________________________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF DOCUMENT TO BE SENT TO:
Vialog Corporation
35 New England Business Center
Andover, MA 01810
c/o Michael Savage
Telephone: (978) 975-3700
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