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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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.)
32 CROSBY DRIVE
BEDFORD, MASSACHUSETTS 01730
(Address of principal executive offices)
(781) 761-6200
(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.
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PART I
This Annual Report on Form 10-K contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Forward-
looking statements should be read with the cautionary statements and important
factors included in this Form 10-K. (See Item 7.--Management's Discussion and
Analysis of Financial Condition and Results of Operations, Safe Harbor for
Forward-Looking Statements.) Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than
statements of historical facts. Such forward-looking statements may be
identified, without limitation, by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts," "projects," and
similar expressions. The Company's expectations, beliefs and projections are
expressed in good faith and are believed by the Company to have a reasonable
basis, including 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.
2
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.
3
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.
4
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.
5
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.
6
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.
7
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.
8
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
9
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
10
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
11
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
12
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
13
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.
14
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:
High Low
----- -----
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
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.
15
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.
Year Ended December 31,
------------------------------------------
1996 1997 1998 1999
--------- --------- --------- ---------
(in thousands, except share
and per share data)
Consolidated Statement of
Operations Data:
Net revenues...................... $ -- $ 4,816 $ 46,820 $ 68,629
Cost of revenues, excluding
depreciation..................... -- 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
intangibles...................... 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
diluted.......................... $ (0.38) $ (5.48) $ (3.27) $ (1.53)
========= ========= ========= =========
Weighted average shares
outstanding...................... 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
activities....................... (7) (53,762) (7,848) (37,455)
Cash flows provided by financing
activities....................... 522 67,140 3,931 37,621
December 31,
------------------------------------------
1996 1997 1998 1999
--------- --------- --------- ---------
(in thousands)
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
- --------
(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
16
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.
January 1,
Year Ended December 31, 1997 to
------------------------------ November 12,
1995 1996 1997
-------------- --------------- ---------------
(In thousands, except share and per share data)
Access Statement of Op-
erations Data:
Net revenues............ $ 6,508 $ 9,073 $ 10,945
Cost of revenues, ex-
cluding depreciation... 3,021 3,564 4,791
Selling, general and ad-
ministrative expenses.. 2,484 3,332 4,124
Depreciation and amorti-
zation 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
(benefit).............. (48) -- --
------------- --------------- ------------
Net income.............. $ 403 $ 1,373 $ 1,075
============= =============== ============
Net income per share--
basic 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
operating activities... 821 2,048 2,932
Cash flows used in
investing activities... (1,432) (795) (1,704)
Cash flows provided by
(used in) financing
activities............. 771 (839) (1,549)
December 31,
------------------------------
1995 1996
-------------- ---------------
(In thousands)
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
17
January 1,
Year Ended December 31, 1997 to
---------------------------------- November 12,
1995 1996 1997
--------------- ----------------- ----------------
(In thousands, except share and per share data)
CSI Statement of
Operations Data:
Net revenues............. $ 3,808 $ 5,868 $ 5,579
Cost of revenues,
excluding depreciation.. 1,617 2,438 2,052
Selling, general and
administrative
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--
basic 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
operating activities.... 721 2,128 2,897
Cash flows used in
investing activities.... (225) (41) (311)
Cash flows provided by
(used in) financing
activities.............. (144) (2,144) (2,801)
December 31,
----------------------------------
1995 1996
--------------- -----------------
(In thousands)
CSI Balance Sheet Data:
Cash and cash
equivalents............. $ 375 $ 318
Working capital
(deficit)............... (322) 445
Total assets............. 2,037 2,293
Total long-term debt,
including current
portion................. 1,446 1,405
Stockholders' equity
(deficit)............... 360 676
- --------
(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.
18
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.
19
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.
20
Components of the non-recurring charge recorded in 1999 and amounts incurred
through December 31, 1999 are as follows:
Amount
1999 Incurred Balance
Charge 1999 12/31/99
------ -------- --------
($000's)
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
====== ====== ======
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:
Amount Amount
1998 Incurred Balance Incurred Adjustments Balance
Charge 1998 12/31/98 1999 to Charge 12/31/99
------ -------- -------- -------- ----------- --------
($000's)
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
====== ==== ==== ==== ==== ====
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
21
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:
Amount Amount
1998 Incurred Balance Incurred Adjustments Balance
Charge 1998 12/31/98 1999 to Charge 12/31/99
------ -------- -------- -------- ----------- --------
($000's)
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
====== ==== ==== ==== ==== ====
22
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
23
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.
24
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:
Year Ended December 31,
-------------------------------------------
1997 1998 1999
------------- ------------- -------------
(Dollars in thousands)
Net revenues..................... $45,583 100.0% $59,819 100.0% $70,539 100.0%
Cost of revenues, excluding
depreciation.................... 22,296 48.9% 29,096 48.6% 33,032 46.8%
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
25
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
26
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:
January 1, November 13,
Year Ended December 31, 1997 to 1997 to
-------------------------- November 12, December 31,
1995 1996 1997 1997
------------ ------------ ------------- ---------------
(In thousands, except percentages)
Net revenues............ $6,508 100.0% $9,073 100.0% $10,945 100.0% $ 1,620 100.0 %
Cost of revenues,
excluding
depreciation........... 3,021 46.4% 3,564 39.3% 4,791 43.8% 709 43.8 %
Selling, general and
administrative
expenses............... 2,484 38.2% 3,332 36.7% 4,124 37.7% 2,603 160.6 %
Depreciation and
amortization 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)%
====== ===== ====== ===== ======= ===== ======= ======
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
27
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:
Year Ended December 31,
------------------------- January 1, 1997 to
1995 1996 November 12, 1997
------------ ----------- ------------------
(In thousands)
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)
============ =========== =======
28
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:
January 1, November 13,
Year Ended December 31, 1997 to 1997 to
-------------------------- November 12, December 31,
1995 1996 1997 1997
------------ ------------ ------------ ---------------
(In thousands, except percentages)
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)%
====== ===== ====== ===== ====== ===== ======= ======
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.
29
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:
Year Ended
December 31, January 1, 1997
-------------- to
1995 1996 November 12, 1997
------ ------- -----------------
(In thousands)
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)
===== ======= ======
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
30
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.
31
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."
32
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
33
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.
34
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.
Page
Numbers
-------
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
35
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
36
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
37
VIALOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, December 31,
1998 1999
------------ ------------
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
======== ========
See accompanying notes to consolidated financial statements.
38
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Year Ended December 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
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
========= ========= =========
See accompanying notes to consolidated financial statements.
39
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Total
Common Stock Additional Stockholders'
------------------- Paid-in Accumulated Treasury Equity
Shares Par Value Capital Deficit Stock (Deficit)
--------- --------- ---------- ----------- -------- -------------
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
========= ==== ======= ======== ==== ========
See accompanying notes to consolidated financial statements.
40
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
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
======== ======== ========
See accompanying notes to consolidated financial statements.
41
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.
42
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").
43
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.
Cash(1) Shares of
($000's) Common Stock
-------- ------------
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
======= =======
- --------
(1) Excludes tax reimbursements of approximately $925,000 to certain
stockholders of certain of the Acquired Companies.
44
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):
($000's)
--------
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
=======
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):
($000's)
--------
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
=======
45
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, 1998 and 1999 below assume that the acquisitions of ABCC, CPI and
ABCI occurred at the beginning of fiscal 1998.
1998 1999
------- --------
(Dollars in
thousands
except per share
data)
Net revenues............................................. $59,819 $ 70,539
Net loss................................................. $(9,300) $(11,511)
Net loss per share....................................... $ (1.13) $ (1.33)
The pro forma results include amortization of the goodwill and intangible
assets described above and reductions to selling, general and administrative
expenses related to compensation and benefits that were reduced for certain
officers and employees of ABCC, CPI and ABCI as a condition to closing the
acquisitions. The pro forma results are not necessarily indicative of the
results that would have been obtained had these events actually occurred at
the beginning of the period presented, nor are they necessarily indicative of
future consolidated results.
(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.
46
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.
Included in the category "net increase/deductions from allowance" for the
years ended December 31, 1999 and 1998 were write-offs totaling approximately
$189,000 and $86,000, respectively, net of recoveries on previously written-
off accounts and reserves included as part of the acqusitions occuring on
February 10, 1999.
Balance Net Increase/
at Provision Deductions Balance
Beginning Charged to from at End
of Period Operations Allowance of Period
--------- ---------- ------------- ---------
($000's)
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
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
----------------
1998 1999
------- -------
($000's)
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
======= =======
(6) GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
December 31,
----------------
1998 1999
------- -------
($000's)
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
======= =======
47
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:
December 31, December 31,
1998 1999
------------ ------------
($000's)
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
======= =======
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.
48
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
49
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:
Year Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
($000's)
Interest income................................ $ 56 $ 233 $ 69
Interest expense............................... (1,922) (12,862) (13,593)
------- -------- --------
Interest income (expense), net............... $(1,866) $(12,629) $(13,524)
======= ======== ========
(9) ACCRUED EXPENSES
Accrued expenses consist primarily of the following:
December 31, December 31,
1998 1999
------------ ------------
($000's)
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
====== ======
(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:
Year Ending December 31, Capital Leases Operating Leases
------------------------ -------------- ----------------
($000's)
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
capital leases............................ (44)
----
Present value of minimum lease payments at
December 31, 1999......................... $525
====
50
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:
Year
Ending
December
31, ($000's)
-------- --------
2000 $ 501
2001 669
2002 669
2003 690
2004 697
Thereafter 174
------
$3,400
======
(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:
Amount Amount
1998 Incurred Balance Incurred Adjustments Balance
Charge 1998 12/31/98 1999 to Charge 12/31/99
------ -------- -------- -------- ----------- --------
($000's)
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
====== ==== ==== ==== ==== ====
51
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 certain intangible assets consisting of assembled
workforce and developed technology, (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:
Amount
1999 Incurred Balance
Charge 1999 12/31/99
------ -------- --------
(000's)
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
====== ====== ======
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:
Current Deferred Total
------- -------- -----
(000's)
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)
===== ===== =====
52
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:
1997 1998 1999
------- ------- -------
($000's)
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)
======= ======= =======
The tax effects of temporary differences that give rise to significant
portion of deferred tax assets and liabilities are presented below:
1998 1999
-------- --------
($000's)
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
======== ========
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
53
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.
54
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:
Weighted Average
Shares Exercise Price
--------- ----------------
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
========= =====
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:
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
-------- ----------- ---------------- ---------------- ----------- ----------------
$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
========= =======
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.
55
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:
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
($000's except per share
data)
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)
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.
56
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.
57
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(Continued)
VIALOG Call
Corp. Access CSI Points TCC Americo CDC Eliminations Consolidated
------- ------- ------- ------- ------ ------- ------ ------------ ------------
($000's)
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,
excluding Depreciation.. -- 709 322 806 279 212 174 (10) 2,492
Selling, general and
administrative
Expenses................ 6,117 403 93 159 190 134 82 -- 7,178
Depreciation expense.... 10 80 60 79 27 9 8 -- 273
Amortization of goodwill
and Intangibles......... -- 103 108 33 26 20 16 -- 306
Write-off of in-process
research and
Development............. -- 2,200 3,400 2,000 120 160 120 -- 8,000
------- ------- ------- ------- ------ ------ ------ -------- --------
Operating loss......... (6,127) (1,875) (3,129) (1,935) (75) (245) (47) -- (13,433)
Interest income
(expense), net.......... (1,828) (16) (12) 2 (4) (8) -- -- (1,866)
------- ------- ------- ------- ------ ------ ------ -------- --------
Loss before taxes...... (7,955) (1,891) (3,141) (1,933) (79) (253) (47) -- (15,299)
Income tax expense...... (522) -- -- -- -- -- -- -- (522)
------- ------- ------- ------- ------ ------ ------ -------- --------
Net loss............... $(8,477) $(1,891) $(3,141) $(1,933) $ (79) $ (253) $ (47) $ -- $(15,821)
======= ======= ======= ======= ====== ====== ====== ======== ========
Cash Flow Information
for the Year Ended
December 31, 1997(1)
Cash flows provided by
(used in) operating
activities.............. $(7,072) $ 1,663 $ 407 $ 320 $ 65 $ 264 $ 205 $ -- $ (4,148)
Cash flows provided by
(used in) investing
activities.............. (54,281) 192 90 169 56 (8) 20 -- (53,762)
Cash flows provided by
(used in) financing
activities.............. 69,412 (1,415) (546) 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
equivalents at the
beginning of year....... 337 -- -- -- -- -- -- -- 337
------- ------- ------- ------- ------ ------ ------ -------- --------
Cash and cash
equivalents at the end
of Year................. $ 8,396 $ 440 $ (49) $ 489 $ 46 $ 67 $ 178 $ -- $ 9,567
======= ======= ======= ======= ====== ====== ====== ======== ========
- -----
(1) Represents operating results of the Acquired Companies from the date of
Acquisition on November 12, 1997.
58
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(Continued)
VIALOG Call
Corp. Access CSI Points TCC Americo CDC Eliminations Consolidated
-------- ------- ------- ------- ------ ------- ------ ------------ ------------
($000's)
Balance Sheet
Information as of
December 31, 1998
Total current assets.... $ (3,873) $ 4,845 $ 2,492 $ 3,843 $1,620 $ (746) $ 628 $ -- $ 8,809
Property and equipment,
net..................... 561 5,914 1,642 2,054 994 605 217 -- 11,987
Investment in
subsidiaries............ 57,121 -- -- -- -- -- -- (57,121) --
Goodwill and intangible
assets, net............. -- 15,021 14,120 3,617 3,738 2,812 2,371 -- 41,679
Other assets............ 6,351 260 79 -- 27 66 8 -- 6,791
-------- ------- ------- ------- ------ ------ ------ -------- --------
Total assets........... $ 60,160 $26,040 $18,333 $ 9,514 $6,379 $2,737 $3,224 $(57,121) $ 69,266
======== ======= ======= ======= ====== ====== ====== ======== ========
Current liabilities..... $ 5,695 $ 2,052 $ 1,055 $ 1,416 $ 550 $ 337 $ 82 $ -- $ 11,187
Long-term debt,
excluding current
portion................. 73,814 8 209 -- 88 70 -- -- 74,189
Other liabilities....... -- 187 264 -- -- -- 31 -- 482
Stockholders' equity
(deficit)............... (19,349) 23,793 16,805 8,098 5,741 2,330 3,111 (57,121) (16,592)
-------- ------- ------- ------- ------ ------ ------ -------- --------
Total liabilities and
stockholders' equity
(deficit).............. $ 60,160 $26,040 $18,333 $ 9,514 $6,379 $2,737 $3,224 $(57,121) $ 69,266
======== ======= ======= ======= ====== ====== ====== ======== ========
Statement of Operations
Information for the Year
Ended December 31, 1998
Net revenues............ $ -- $18,361 $ 7,594 $10,144 $5,936 $2,824 $2,682 $ (721) $ 46,820
Cost of revenues,
excluding
depreciation............ 3 8,506 3,225 6,749 3,189 1,712 1,658 (721) 24,321
Selling, general and
administrative
expenses................ 9,972 1,318 679 626 967 1,001 633 -- 15,196
Depreciation expense.... 81 1,458 413 450 252 115 66 -- 2,835
Amortization of goodwill
and intangibles......... -- 881 865 253 204 156 131 -- 2,490
Non-recurring charge.... -- -- 1,200 -- -- -- -- -- 1,200
-------- ------- ------- ------- ------ ------ ------ -------- --------
Operating income
(loss)................. (10,056) 6,198 1,212 2,066 1,324 (160) 194 -- 778
Interest income
(expense), net.......... (12,521) 8 (63) -- (35) (25) 7 -- (12,629)
-------- ------- ------- ------- ------ ------ ------ -------- --------
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
activities.............. $(11,980) $ 3,992 $ 1,525 $ 459 $ 459 $ 98 $ 29 $ -- $ (5,418)
Cash flows used in
investing activities.... (1,065) (4,066) (1,171) (887) (363) (109) (187) -- (7,848)
Cash flows provided by
(used in) financing
activities.............. 4,739 (366) (244) -- (142) (56) -- -- 3,931
-------- ------- ------- ------- ------ ------ ------ -------- --------
Net increase (decrease)
in cash and cash
equivalents............. (8,306) (440) 110 (428) (46) (67) (158) -- (9,335)
Cash and cash
equivalents at the
beginning of period..... 8,396 440 (49) 489 46 67 178 -- 9,567
-------- ------- ------- ------- ------ ------ ------ -------- --------
Cash and cash
equivalents at the end
of period............... $ 90 $ -- $ 61 $ 61 $ -- $ -- $ 20 $ -- $ 232
======== ======= ======= ======= ====== ====== ====== ======== ========
59
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--(Continued)
VIALOG Call Elimin- Consol-
Corp. Access CSI(1) Points TCC Americo CDC ABCC CPI ABCI ations idated
-------- ------- ------- ------- ------ ------- ------ ------- ------ ------ -------- --------
($000's)
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
======== ======= ======= ======= ====== ======= ====== ======= ====== ====== ======== ========
- ----
(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.
60
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
61
TELEPHONE BUSINESS MEETINGS, INC.
BALANCE SHEETS
(In thousands, except share data)
December 31,
-------------
1995 1996
------ ------
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
====== ======
See accompanying notes to financial statements.
62
TELEPHONE BUSINESS MEETINGS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
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
------------ ----------- ------------ ------------ ------------
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
======= ======= ======= ========= =========
See accompanying notes to financial statements.
63
TELEPHONE BUSINESS MEETINGS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common stock
------------------- Additional Total
Number of Paid in Retained Stockholders'
Shares Par Value Capital Earnings Equity
--------- --------- ---------- -------- -------------
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
===== ==== ==== ====== ======
See accompanying notes to financial statements.
64
TELEPHONE BUSINESS MEETINGS, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
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
------------ ----------- --------------- ------------ ------------
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 $ -- $ --
==== ====== ====== ====== ======
See accompanying notes to financial statements.
65
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.
66
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):
December 31,
-------------
1995 1996
------ ------
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
====== ======
67
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(3) LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
---------------
1995 1996
------- -------
(in thousands)
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
======= ======
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):
1997................................................................ $ 770
1998................................................................ 777
1999................................................................ 357
2000................................................................ 69
------
$1,973
======
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.
68
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.
69
TELEPHONE BUSINESS MEETINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 31,
-------------
1995 1996
------ ------
Accrued salaries, wages and benefits........................ $ 86 $ 215
Accrued fees and other expenses............................. 190 151
------ ------
$ 276 $ 366
====== ======
(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):
1997................................................................ $ 362
1998................................................................ 373
1999................................................................ 384
2000................................................................ 396
2001................................................................ 407
Thereafter.......................................................... 1,485
------
$3,407
======
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):
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
70
===
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
71
CONFERENCE SOURCE INTERNATIONAL, INC.
BALANCE SHEETS
(In thousands, except share data)
December 31,
-------------
1995 1996
------ ------
ASSETS (note 3)
Current assets:
Cash and cash equivalents...................................... $ 375 $ 318
Trade account receivables, less allowance for doubtful accounts
of $5 and $10 at December 31, 1995 and December 31, 1996,
respectively (note 6)......................................... 692 801
Due from stockholder (note 4).................................. 72 --
Prepaid expenses and other current assets...................... -- 24
------ ------
Total current assets......................................... 1,139 1,143
------ ------
Property and equipment, net (notes 2 and 5)...................... 866 1,059
Other assets..................................................... 32 91
------ ------
Total assets................................................. $2,037 $2,293
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 3)................ $1,089 $ 111
Current installments of obligations under capital leases (note
5)............................................................ 141 375
Accounts payable............................................... 201 121
Accrued expenses............................................... 30 91
------ ------
Total current liabilities.................................... 1,461 698
------ ------
Long-term debt, excluding current installments (note 3).......... 43 219
Obligations under capital leases, excluding current installments
(note 5)........................................................ 173 700
------ ------
Total liabilities............................................ 1,677 1,617
------ ------
Stockholders' equity:
Common stock, $1.00 par value. Authorized 100,000 shares;
issued and outstanding 1,000 shares........................... 1 1
Additional paid-in capital..................................... 349 349
Retained earnings.............................................. 10 326
------ ------
Total stockholders' equity................................... 360 676
------ ------
Commitments and contingencies (notes 5 and 7)
Total liabilities and stockholders' equity................... $2,037 $2,293
====== ======
See accompanying notes to financial statements.
72
CONFERENCE SOURCE INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Period from
January 1,
Year Ended December 31, 1997 to
------------------------ November 12,
1994 1995 1996 1997
------ ------- --------- ------------
Net revenues (note 6)................... $2,331 $ 3,808 $ 5,868 $ 5,579
Cost of revenues, excluding
depreciation........................... 1,256 1,617 2,438 2,052
Selling, general and administrative
expenses............................... 707 905 998 831
Depreciation expense.................... 235 292 393 356
------ ------- --------- ---------
Income from operations................ 133 994 2,039 2,340
Interest expense, net................... 124 160 165 120
------ ------- --------- ---------
Net income............................ $ 9 $ 834 $ 1,874 $ 2,220
====== ======= ========= =========
Net income per share - basic and
diluted.............................. $ 9.00 $834.00 $1,874.00 $2,220.00
====== ======= ========= =========
Weighted average shares outstanding... 1,000 1,000 1,000 1,000
====== ======= ========= =========
See accompanying notes to financial statements.
73
CONFERENCE SOURCE INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock
------------
Number Additional Total
of Par Paid-in Retained Stockholders'
Shares Value Capital Earnings Equity
------ ----- ---------- -------- -------------
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
===== === ==== ======= =======
See accompanying notes to financial statements.
74
CONFERENCE SOURCE INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended Period from
December 31, January 1, 1997
--------------------- to November 12,
1994 1995 1996 1997
----- ----- ------- ---------------
Cash flows from operating activities:
Net income............................. $ 9 $ 834 $ 1,874 $ 2,220
Adjustments to reconcile net income to
net cash provided by operating
activities:
Loss on sale of property and
equipment........................... -- -- -- 5
Depreciation and amortization........ 235 292 393 356
Changes in operating assets and
liabilities:
Trade accounts receivable, net...... (205) (312) (109) 5
Due from stockholder................ (6) (66) 72 --
Prepaid expenses and other assets... (35) 4 (83) 36
Accounts payable and accrued
expenses........................... 55 (31) (19) 275
----- ----- ------- -------
Net cash provided by operating
activities........................ 53 721 2,128 2,897
----- ----- ------- -------
Cash flows from investing activities:
Additions to property and equipment.... (476) (225) (41) (317)
Cash proceeds from disposal of property
and equipment......................... -- -- -- 6
----- ----- ------- -------
Net cash used in investing activities.. (476) (225) (41) (311)
----- ----- ------- -------
Cash flows from financing activities:
Proceeds from borrowings on long-term
debt.................................. 652 201 -- 573
Principal repayment of long-term debt.. (100) (197) (438) (400)
Proceeds from refinancing of
obligations under capital leases...... -- -- 142 --
Principal repayment of obligations
under capital leases.................. (126) (148) (290) (338)
Distributions to stockholder........... -- -- (1,558) (2,636)
----- ----- ------- -------
Net cash provided by (used in)
financing activities............... 426 (144) (2,144) (2,801)
----- ----- ------- -------
Net increase (decrease) in cash and cash
equivalents............................ 3 352 (57) (215)
Cash and cash equivalents at beginning
of period.............................. 20 23 375 318
----- ----- ------- -------
Cash and cash equivalents at end of
period................................. $ 23 $ 375 $ 318 $ 103
===== ===== ======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest............................. $ 119 $ 162 $ 169 $ 127
===== ===== ======= =======
Noncash transaction:
Equipment purchased under capital
lease obligations................... $ 296 $ -- $ 545 $ --
===== ===== ======= =======
See accompanying notes to financial statements.
75
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.
76
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):
December 31,
-------------
1995 1996
------ ------
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
====== ======
77
CONFERENCE SOURCE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(3) LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
----------------
1995 1996
-------- -------
(in thousands)
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
======== ======
The aggregate maturities of long-term debt are as follows (in thousands):
1997.................................................................. $111
1998.................................................................. 127
1999.................................................................. 92
----
$330
====
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.
78
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):
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
====
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):
December 31,
-------------
1995 1996
------ ------
Equipment..................................................... $1,243 $1,788
Less: accumulated amortization................................ 521 852
------ ------
$ 722 $ 936
====== ======
Future minimum payments under capital leases are as follows (in thousands):
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
======
(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.
79
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:
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
---- ---- ---- ------------ ------ ------
Customer A........................ 14% 30% 49% 47% 47% 58%
Customer B........................ 14% 24% 21% 25% 26% 26%
80
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
81
A BUSINESS CONFERENCE-CALL, INC.
BALANCE SHEETS
(In thousands, except share and per share data)
December 31, December 31,
1997 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 71 $ 153
Trade accounts receivable, less allowance for
doubtful accounts of $15 and $65, respectively.... 577 740
Prepaid expenses................................... 75 184
------ ------
Total current assets............................. 723 1,077
Property and equipment, net (notes 1 and 2).......... 538 864
Other assets......................................... 6 3
------ ------
Total assets..................................... $1,267 $1,944
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 55 $ 152
Accrued compensation and benefits.................. 231 290
Accrued expenses and other liabilities............. 3 12
Capital lease obligations-current.................. -- 6
------ ------
Total current liabilities........................ 289 460
Capital lease obligations, less current
installments........................................ -- 11
Stockholders' equity
Common stock, $0.01 par value; 100,000 shares
authorized; 1,000 shares issued and outstanding... -- --
Additional paid-in capital......................... 10 10
Retained earnings.................................. 968 1,463
------ ------
Total stockholders' equity....................... 978 1,473
------ ------
Total liabilities and stockholders' equity....... $1,267 $1,944
====== ======
See accompanying notes to financial statements.
82
A BUSINESS CONFERENCE-CALL, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(In Thousands, Except Share and Per Share Data)
Year Ended December 31,
------------------------------
1996 1997 1998
--------- --------- ---------
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
========= ========= =========
See accompanying notes to financial statements.
83
A BUSINESS CONFERENCE-CALL, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December
31,
----------------------
1996 1997 1998
------ ------ ------
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
====== ====== ======
See accompanying notes to financial statements.
84
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
85
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):
December 31,
-----------------
1996 1997 1998
---- ----- -----
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
==== ===== =====
(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:
1999................................................................. $60,700
2000................................................................. 22,900
2001................................................................. 1,900
2002................................................................. 400
86
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:
Conference Equipment................................................ $18,603
Less accumulated amortization....................................... (886)
-------
$17,717
=======
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:
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
=======
(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:
1999................................................................. $34,900
2000................................................................. 34,900
2001................................................................. 16,600
(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.
87
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.
Name Age Position
---- --- --------
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
- --------
(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.
88
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.
89
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 $50,000 or 10% of the officer's
salary and bonus.
Summary Compensation Table
Long-Term
Annual Compensation Compensation Awards
----------------------- Securities Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options (#) Compensation($)
- --------------------------- ---- --------- -------- --------------------- ---------------
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
- --------
(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 $149,153 in
severance-related compensation in 1999.
Option grants in 1999. The following table summarizes all options granted to
the named executive officers in 1999. Amounts reported in the last two columns
represent hypothetical values that the holder could realize by exercising the
options immediately before their expiration, assuming the value of the
Company's common stock appreciates at the specified compounded annual rates
over the terms of the options. These numbers are calculated based on the SEC's
rules and do not represent the Company's estimate of future stock price
growth. Actual gains, if any, on stock option exercises and common stock
holdings will depend on the timing of exercise and the future performance of
the Company's common stock. Vialog may not be able to achieve the rates of
appreciation assumed in this table and the named executive officers may not
receive the calculated amounts. This table does not take into account any
appreciation in the price of the common stock from the date of grant to the
current date. The values shown are net of the option exercise price, but do
not include deductions for taxes or other expenses associated with the
exercise.
90
Option Grants in 1999
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
----------------------------------------------- ---------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price Expiration
Name Granted (#) in Fiscal Year ($/Share) Date 5%($) 10%($)
- ---- ----------- -------------- --------- ---------- --------- -----------
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
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 $3.125.
1999 Aggregated Option Exercises and
Fiscal Year-End Option Values
Value of Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options at Fiscal
Options at Fiscal-Year End (#) Year End ($)
Shares Acquired ---------------------------------- -------------------------
Name on Exercise (#) Value Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ------------------ -------------- ---------------- ----------- -------------
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
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.
91
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:
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
--------- ------------- --------------- -------------- -------------- --------------
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
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.
92
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.
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
- ------------------------ --------------------------- ------------------------- --------------------
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%
- --------
*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.
93
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.
94
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
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.
95
Exhibit
Number Description
------- -----------
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.
Exhibit 23.1 filed with this amended 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).
*+ Included as an exhibit to Form 10-K as filed on 3/30/2000.
96
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
By: /s/ Kim A. Mayyasi
-----------------------------------
Kim A. Mayyasi,
President and Chief Executive
Officer
Date: February 12, 2001
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.
Signature Title Date
--------- ----- ----
/s/ Kim A. Mayyasi President, Chief Executive February 12, 2001
By: __________________________________ Officer and Director
Kim A. Mayyasi
/s/ Michael E. Savage Senior Vice President, February 12, 2001
By: __________________________________ Chief Financial Officer
Michael E. Savage and Principal Accounting
Officer
/s/ Joanna M. Jacobson Director February 12, 2001
By: __________________________________
Joanna M. Jacobson
/s/ David L. Lougee Director February 12, 2001
By: __________________________________
David L. Lougee
/s/ Richard G. Hamermesh Director February 12, 2001
By: __________________________________
Richard G. Hamermesh
/s/ Edward M. Philip Director February 12, 2001
By: __________________________________
Edward M. Philip
97