UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-22585
VIALOG CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3305282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 NEW ENGLAND BUSINESS CENTER, SUITE 160
ANDOVER, MASSACHUSETTS 01810
(Address of principal executive offices, including Zip Code)
(978) 975-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes X No
--- ---
At November 11, 1998 the registrant had outstanding an aggregate of 3,688,572
shares of its Common Stock, $.01 par value.
VIALOG CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1997 and
September 30, 1998 (Unaudited) 3
Consolidated Statements of Operations (Unaudited) for the
Three and Nine Months Ended September 30, 1997 and 1998 4
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended September 30, 1997 and 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10-15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
2
VIALOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,567 $ 1,093
Accounts receivable, net of allowance for doubtful
accounts of $32 and $144, respectively 5,686 7,261
Prepaid expenses 156 269
Deferred offering costs -- 443
Other current assets 101 105
------------ -------------
Total current assets 15,510 9,171
Property and equipment, net 7,544 11,618
Deferred debt issuance costs 7,324 5,903
Goodwill and intangible assets, net 44,391 42,302
Other assets 314 903
------------ -------------
Total assets $ 75,083 $ 69,897
============ =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 397 $ 362
Accounts payable 2,129 3,270
Accrued interest expense 1,310 3,606
Accrued expenses and other liabilities 4,415 3,950
------------ -------------
Total current liabilities 8,251 11,188
Long-term debt, less current portion 71,539 72,093
Other long-term liabilities 175 465
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value; 10,000,000
shares authorized; none issued and outstanding -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized; 3,486,380 and 3,686,172 shares,
respectively, issued and outstanding 35 37
Additional paid-in capital 11,689 11,811
Retained deficit (16,606) (25,697)
------------ -------------
Total stockholders' deficit (4,882) (13,849)
------------ -------------
Total liabilities and stockholders' deficit $ 75,083 $ 69,897
============ =============
See accompanying notes to consolidated financial statements.
3
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1998 1997 1998
----------- ----------- -------------- -----------
Net revenues $ -- $ 11,602 $ -- $ 34,770
Cost of revenues, excluding depreciation -- 5,730 -- 17,864
Selling, general and administrative expense 358 3,683 3,888 11,627
Depreciation expense 7 755 10 1,990
Amortization of goodwill and intangibles -- 621 -- 1,870
Non-recurring charge -- 1,200 -- 1,200
----------- ----------- -------------- -----------
Operating income (loss) (365) (387) (3,898) 219
Interest expense, net (44) (3,156) (110) (9,310)
----------- ----------- -------------- -----------
Net loss $ (409) $ (3,543) $ (4,008) $ (9,091)
=========== =========== ============== ===========
Net loss per share - basic and diluted $ (0.15) $ (0.96) $ (1.44) $ (2.51)
=========== =========== ============== ===========
Weighted average shares outstanding 2,799,300 3,675,347 2,781,967 3,615,362
=========== =========== ============== ===========
See accompanying notes to consolidated financial statements.
4
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1998
-------------- -------------
Cash flows from operating activities:
Net loss $(4,008) $(9,091)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 10 1,990
Amortization of goodwill and intangibles -- 1,870
Amortization of debt issuance costs and debt discount 86 2,245
Provision for doubtful accounts -- 145
Write-off of deferred offering costs 377 --
Compensation expense for issuance of common stock and options -- 31
Non-cash portion of non-recurring charge -- 292
Changes in operating assets and liabilities:
Accounts receivable -- (1,720)
Prepaid expenses and other current assets (73) (117)
Other assets (48) (177)
Accounts payable 1,197 1,141
Accrued expenses 1,701 1,880
Other long-term liabilities -- 290
-------------- -------------
Cash flows used in operating activities (758) (1,221)
-------------- -------------
Cash flows from investing activities:
Additions to property and equipment (23) (6,141)
Deferred acquisition costs (203) (381)
-------------- -------------
Cash flows used in investing activities (226) (6,522)
-------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt and warrants 755 --
Payments of long-term debt -- (297)
Proceeds from issuance of common stock 2 44
Deferred offering costs -- (443)
Deferred debt issuance costs (34) (35)
-------------- -------------
Cash flows provided by (used in) financing activities 723 (731)
-------------- -------------
Net decrease in cash and cash equivalents (261) (8,474)
Cash and cash equivalents at beginning of period 337 9,567
-------------- -------------
Cash and cash equivalents at end of period $ 76 $ 1,093
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ -- $ 4,974
Taxes $ -- $ 8
See accompanying notes to consolidated financial statements.
5
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission, and reflect all adjustments (all of which are of a normal
recurring nature) which, in the opinion of management, are necessary for a fair
statement of the results of the interim periods presented. The unaudited results
of operations for the three and nine month periods ended September 30, 1998 are
not necessarily an indication of the results of operations for the full year.
These financial statements do not include all disclosures associated with annual
financial statements and, accordingly, should be read in conjunction with the
financial statements and footnotes for the year ended December 31, 1997 included
in the Company's Form 10-K where certain terms have been defined. The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(2) DESCRIPTION OF BUSINESS
VIALOG Corporation (the "Company") was incorporated in Massachusetts on
January 1, 1996. The Company was formed to create a national independent
provider of group communications services, consisting primarily of operator-
attended and operator-on-demand audio teleconferencing, as well as video and
data conferencing services. On November 12, 1997, the Company sold $75.0 million
in senior notes due 2001, Series A in a private placement (the "Private
Placement"). Contemporaneously with the closing of the Private Placement, the
Company acquired, in separate transactions (the "Acquisitions"), six private
conference service bureaus (each an "Operating Center", and collectively, the
"Operating Centers") in exchange for cash and shares of its common stock. Each
of the Operating Centers is a wholly-owned subsidiary of the Company.
Prior to November 12, 1997, the Company did not conduct any operations, and all
activities conducted by it related to the Acquisitions and the completion of
financing transactions to fund the Acquisitions.
(3) LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ ------------
(in thousands)
12 3/4% Senior Notes Payable, due 2001, net
of unamortized discount of $4,203 and $3,387 $70,797 $71,613
Capitalized lease obligations 1,044 764
Other long-term debt 95 78
------------ ------------
Total long-term debt 71,936 72,455
Less current portion 397 362
------------ ------------
Total long-term debt, less current portion $71,539 $72,093
============ ============
Senior Notes Payable
The senior notes issued in the Private Placement bear interest at 12 3/4% per
annum, payable semi-annually on May 15 and November 15 of each year. The senior
notes, which are guaranteed by each of the Operating Centers, mature on November
15, 2001 and are redeemable in whole or in part at the option of the Company on
or after November 15, 1999 at 110% of the principal amount thereof, and on or
after November 15, 2000 at 105% of the principal amount thereof, in each case
together with accrued interest to the date of redemption. In addition, there
are certain other early redemption options available to the Company 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.
6
On February 12, 1998, the Company offered to exchange (the "Exchange Offer")
$75.0 million of 12 3/4% senior notes, Series B (the "Exchange Notes") for the
existing $75.0 million of 12 3/4% senior notes, Series A (the "Old Notes"). In
connection with the Exchange Offer, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 for the registration of
the Exchange Notes under the Securities Act of 1933. The form and terms of the
Exchange Notes are identical in all material respects to the form and terms of
the Old Notes except for certain transfer restrictions and registration rights
relating to the Old Notes. The Old Notes and the Exchange Notes (collectively,
the "Senior Notes") were issued pursuant to an indenture dated November 12,
1997. The Company did not receive any proceeds from the Exchange Offer, which
was terminated on March 26, 1998 with all of the Old Notes being surrendered for
Exchange Notes.
(4) NET LOSS PER SHARE
As the Company was in a net loss position for the three and nine months ended
September 30, 1997 and 1998, common stock equivalents of 701,763 and 2,172,724
for the three months ended September 30, 1997 and 1998, respectively, and
800,471 and 1,993,818 for the nine months ended September 30, 1997 and 1998,
respectively, were excluded from the diluted net loss per share calculation as
they would be antidilutive. As a result, diluted net loss per share for the
three and nine months ended September 30, 1997 and 1998 is the same as basic net
loss per share and, therefore, has not been presented separately.
(5) 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 nine
months ended September 30, 1998. Separate financial statements and other
disclosures concerning the guarantor subsidiaries are not presented because
management has determined that they are not material to investors.
VIALOG CALL
CORP. ACCESS CSI POINTS TCC AMERICO CDC ELIMINATIONS CONSOLIDATED
-------- -------- -------- -------- -------- -------- ------- ------------ ------------
(in thousands)
BALANCE SHEET INFORMATION
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
Current assets $ (1,606) $ 3,440 $ 2,994 $ 3,098 $ 1,366 $ (802) $ 681 $ -- $ 9,171
Property and equipment, net 424 5,444 2,038 1,847 1,041 610 214 -- 11,618
Investment in subsidiaries 57,121 -- -- -- -- -- -- (57,121) --
Goodwill and intangible assets -- 15,239 14,337 3,680 3,790 2,852 2,404 -- 42,302
Other assets 6,472 157 79 -- 14 76 8 -- 6,806
-------- -------- -------- -------- -------- -------- ------- ------------ ------------
Total assets $ 62,411 $ 24,280 $ 19,448 $ 8,625 $ 6,211 $ 2,736 $ 3,307 $(57,121) $ 69,897
======== ======== ======== ======== ======== ======== ======= ============ ============
Current liabilities $ 4,953 $ 1,690 $ 2,402 $ 920 $ 622 $ 478 $ 123 $ -- $ 11,188
Long-term debt, excluding
current portion 71,613 12 281 -- 109 78 -- -- 72,093
Other liabilities -- 179 264 -- -- -- 22 -- 465
Stockholders' equity (deficit) (14,155) 22,399 16,501 7,705 5,480 2,180 3,162 (57,121) (13,849)
-------- -------- -------- -------- -------- -------- ------- ------------ ------------
Total liabilities and stock-
holders' equity (deficit) $ 62,411 $ 24,280 $ 19,448 $ 8,625 $ 6,211 $ 2,736 $ 3,307 $(57,121) $ 69,897
======== ======== ======== ======== ======== ======== ======= ============ ============
7
VIALOG CALL
CORP. ACCESS CSI POINTS TCC AMERICO CDC ELIMINATIONS CONSOLIDATED
-------- -------- -------- -------- -------- -------- ------- ------------ ------------
STATEMENT OF OPERATIONS
INFORMATION FOR THE NINE
MONTHS ENDED SEPTEMBER
30, 1998 (UNAUDITED)
Net revenues $ -- $ 13,341 $ 6,029 $ 7,412 $ 4,367 $ 2,083 $ 1,976 $ (438) $ 34,770
Cost of revenues, excluding
depreciation -- 6,027 2,522 4,879 2,339 1,319 1,216 (438) 17,864
Selling, general and
administrative expenses 7,488 1,041 586 478 709 906 419 -- 11,627
Depreciation expense 49 1,024 282 330 179 87 39 -- 1,990
Amortization of goodwill and
intangibles -- 662 649 190 153 117 99 -- 1,870
Non-recurring charge -- -- 1,200 -- -- -- -- -- 1,200
-------- -------- -------- -------- -------- -------- ------- ------------ ------------
Operating income (loss) (7,537) 4,587 790 1,535 987 (346) 203 -- 219
Interest income (expense), net (9,221) 3 (48) -- (28) (22) 6 -- (9,310)
-------- -------- -------- -------- -------- -------- ------- ------------ ------------
Net income (loss) $(16,758) $ 4,590 $ 742 $ 1,535 $ 959 $ (368) $ 209 $ -- $ (9,091)
======== ======== ======== ======== ======== ======== ======= ============ ============
CASH FLOW INFORMATION FOR
THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 (UNAUDITED)
Cash flows provided by
(used in) operating activities $ (6,099) $ 2,570 $ 1,783 $ 109 $ 355 $ 42 $ 19 $ -- $ (1,221)
Cash flows used in investing
activities (784) (3,162) (1,436) (560) (337) (86) (157) -- (6,522)
Cash flows used in financing
activities (434) (22) (180) -- (78) (17) -- -- (731)
-------- -------- -------- -------- -------- -------- ------- ------------ ------------
Net increase (decrease) in
cash and cash equivalents (7,317) (614) 167 (451) (60) (61) (138) -- (8,474)
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 $ 1,079 $ (174) $ 118 $ 38 $ (14) $ 6 $ 40 $ -- $ 1,093
======== ======== ======== ======== ======== ======== ======= ============ ============
(6) ACQUISITION
In May, 1998, the Company signed a definitive merger agreement to acquire all of
the outstanding capital stock of A Business Conference-Call, Inc. ("ABCC"),
simultaneous with and contingent upon the closing of a proposed initial public
offering of common stock by the Company. The acquisition will be accounted for
using the purchase method of accounting. The total purchase price is $14.2
million in cash plus (i) an additional amount, based on ABCC's closing date
balance sheet, equal to the balances of cash plus accounts receivable (net of a
bad debt reserve of 5%) less all liabilities as of the closing date, and (ii)
approximately $100,000 related to tax reimbursements. Based on ABCC's September
30, 1998 balance sheet, the amount of such additional consideration would be
approximately $389,000. In addition, the Company expects to incur approximately
$200,000 of acquisition costs. The two stockholders of ABCC will each enter
into one-year employment contracts and receive incentive stock options for the
purchase of 37,500 shares of common stock at the effective date of the merger.
The options will vest as to 3,125 shares on the effective date of the merger and
an additional 3,125 shares on each January 1, April 1, July 1, and October 1
thereafter until fully vested.
(7) OFFICER TERMINATION
The Company terminated the employment of David L. Lipsky, former President of
Americo, in June 1998. On July 22, 1998, the Company and Mr. Lipsky signed an
agreement resolving a dispute regarding his employment and position at
8
Americo. The Company paid Mr. Lipsky a sum of $309,000, less required
withholdings and deductions, in satisfaction of amounts due under his employment
agreement and agreed to include Mr. Lipsky as a selling shareholder in a
proposed initial public offering of the Company's common stock with respect to
the 267,826 shares of common stock owned by Mr. Lipsky. In exchange, Mr. Lipsky
agreed, among other things, to cancel all of his vested and unvested stock
options, release the Company from all claims, refrain from acquiring any voting
securities of the Company for ten years, and acknowledge the termination of his
employment as President of Americo and his term as a director of the Company.
Approximately $413,000 has been expensed in the three months ended June 30, 1998
related to the payment of $309,000 and associated legal fees.
(8) NON-RECURRING CHARGE
The results for the three months ended September 30, 1998 include a non-
recurring charge of $1.2 million related to the consolidation of the Atlanta and
Montgomery Operating Centers. The combined Operating Center will operate in a
new facility in Montgomery, Alabama. The charge includes $908,000 associated
with personnel reductions of approximately 45 positions in the Atlanta Center
and closing of the Atlanta facility, and includes $292,000 associated with the
disposal and impairment of assets in both the Atlanta and Montgomery Centers.
No amounts have been paid as of September 30, 1998.
(9) SUBSEQUENT EVENT
On October 6, 1998, the Company closed 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 will bear interest at the higher of 7% or the Prime Rate plus 1 1/2%,
and interest will be 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 Operating Centers and the assets of VIALOG
Corporation, excluding the ownership interest in each of the Operating Centers.
The Company is required to maintain compliance with certain financial ratios and
tests, including a debt service coverage ratio and minimum net worth level.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the financial statements and
footnotes contained in the Company's Form 10-Q for the three and nine months
ended September 30, 1998 and the Form 10-K for the year ended December 31, 1997
filed with the Securities and Exchange Commission.
VIALOG CORPORATION
RESULTS OF OPERATIONS
The Company was incorporated on January 1, 1996. Prior to the Acquisitions of
the Operating Centers, 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.
Net revenues and cost of revenues, excluding depreciation. As the Company did
not conduct any operations prior to November 12, 1997, there were no revenues
and cost of revenues, excluding depreciation for the three and nine months ended
September 30, 1997. Net revenues and cost of revenues, excluding depreciation
for the three and nine months ended September 30, 1998 represent the
consolidated results of the Company, including the Operating Centers.
Two of the Company's largest outsourcing customers have acquired or merged with
competitors of the Company. Collectively, these customers accounted for
approximately 13% of the Company's 1997 combined net revenues. One of these
customers, representing approximately 9% of the Company's 1997 combined net
revenues, has verbally informed the Company that it will honor its current
outsourcing contract with the Company, which expires in August 1999. The
second customer, representing approximately 4% of the Company's 1997 combined
net revenues, has begun to transition its teleconferencing business to a
teleconferencing company it has recently acquired. Although a significant
reduction in or loss of net revenues from these customers could reduce the
Company's expected net revenues and operating results in the near term, the
Company believes that the long-term impact to net revenues and results of
operations will not be significant.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $3.3 million, or 929%, from $358,000 to $3.7
million for the three months ended September 30, 1997 and 1998, respectively,
and increased $7.7 million, or 199%, from $3.9 million to $11.6 million for the
nine months ended September 30, 1997 and 1998, respectively. The increase was
primarily due to the fact that selling, general and administrative expenses for
the three and nine months ended September 30, 1997 represented only general and
administrative expenses related to the organization of the Company and the
consummation of business combination agreements with the Operating Centers,
while the expenses for the three and nine months ended September 30, 1998
represent consolidated selling, general and administrative expenses of the
Company, including the Operating Centers. Selling, general and administrative
expenses for the nine months ended September 30, 1997 and 1998 consisted
primarily of the following: (i) compensation, benefits and travel expenses of
$1.0 million and $7.7 million, respectively, (ii) certain marketing expenses,
including advertising, promotions, trade shows and consulting of $240,000 and
$1.3 million, respectively, (iii) professional services expenses of $2.5 million
and $691,000, respectively, (iv) occupancy costs of $116,000 and $610,000,
respectively, (v) materials, supplies and equipment related costs of $31,000 and
$573,000, respectively, (vi) taxes and insurance costs of $1,000 and $318,000,
respectively, and (vii) all other costs of $13,000 and $454,000, respectively.
Included in professional services expenses for the nine months ended September
30, 1997 is approximately $2.0 million related to an initial public offering
which was terminated in early 1997. Included in selling, general and
administrative expenses for the nine months ended September 30, 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 $1.4 million from $7,000 to $1.4 million for the three months ended
September 30, 1997 and 1998, respectively, and increased $3.9 million from
$10,000 to $3.9 million for the nine months ended September 30, 1997 and 1998,
respectively. The increase was primarily due to the fact that VIALOG
Corporation did not conduct operations during the three and nine months ended
September 30, 1997, while depreciation and amortization expense for the three
and nine months ended September 30, 1998 represents consolidated depreciation
and amortization expense of the Company, including the Operating Centers.
Non-recurring charge. The results for the three months ended September 30, 1998
include a non-recurring charge of $1.2 million related to the consolidation of
the Atlanta and Montgomery Operating Centers. The combined Operating Center will
10
operate in a new facility in Montgomery, Alabama. The charge includes $908,000
associated with personnel reductions of approximately 45 positions in the
Atlanta Center and closing of the Atlanta facility, and includes $292,000
associated with the disposal and impairment of assets in both the Atlanta and
Montgomery Centers. No amounts have been paid as of September 30, 1998.
Interest expense, net. Interest expense, net increased $3.1 million from
$44,000 to $3.2 million for the three months ended September 30, 1997 and 1998,
respectively, and increased $9.2 million from $110,000 to $9.3 million for the
nine months ended September 30, 1997 and 1998, respectively. The nine month
increase was primarily due to (i) approximately $7.2 million of interest expense
on the $75.0 million of Senior Notes and (ii) approximately $2.2 million of non-
cash interest expense related to the amortization of deferred debt issuance
costs and original issue discount on the Senior Notes, partially offset by (iii)
increased interest income of approximately $186,000 due to increased cash
balances.
LIQUIDITY AND CAPITAL RESOURCES
As the Company did not conduct any operations prior to November 12, 1997, the
Company generated negative cash flows for the nine months ended September 30,
1997. For the nine months ended September 30, 1998, the Company generated
negative cash flows from operations of $1.2 million. Cash used in investing
activities of $6.5 million for the nine months ended September 30, 1998 included
$6.1 million related to the acquisition of property and equipment and $381,000
of deferred acquisition costs. Cash used in financing activities of $731,000
for the nine months ended September 30, 1998 represents payments of indebtedness
of the Operating Centers and deferred offering costs, offset by proceeds from
the exercise of stock options.
On November 12, 1997, the Company 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. The Senior Notes
are guaranteed by the Operating Centers and mature on November 15, 2001. The
Senior Notes are redeemable in whole or in part at the option of the Company on
or after November 15, 1999 at 110% of the principal amount thereof, and on or
after November 15, 2000 at 105% of the principal amount thereof until maturity,
in each case together with accrued interest to the date of redemption. In
addition, there are certain other early redemption options available to the
Company at any time on or prior to November 15, 1999 at certain premiums, as
specified in the Indenture. In the event of a change in control, as defined in
the Indenture, the Company may be required to repurchase all of the outstanding
Senior Notes at 101% of the principal amount plus accrued interest and
additional interest, if any. The Indenture contains restrictive covenants with
respect to the Company that among other things, create limitations (subject to
certain exceptions) on (i) the incurrence of additional indebtedness, (ii) the
ability of the Company to purchase, redeem or otherwise acquire or retire any
Common Stock or warrants, rights or options to acquire Common Stock, to retire
any subordinated indebtedness prior to final maturity or to make investments in
any person, (iii) certain transactions with affiliates, (iv) the ability to
materially change the present method of conducting business, (v) the granting of
liens on property or assets, (vi) mergers, consolidations and the disposition of
assets, (vii) declaring and paying any dividends or making any distribution on
shares of Common Stock, and (viii) the issuance or sale of any capital stock of
the Company's subsidiaries. The Indenture does not require the Company to
maintain compliance with any financial ratios or tests, except with respect to
certain restrictive covenants noted above. At September 30, 1998, 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
(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 will bear interest at the higher of 7% or the Prime Rate plus 1 1/2%,
and interest will be 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 Operating Centers and the assets of VIALOG
Corporation, excluding the ownership interest in each of the Operating Centers.
The Company is required to maintain compliance with certain financial ratios and
tests, including a debt service coverage ratio and minimum net worth level.
The Company anticipates that its expected cash flows from operations,
supplemented by borrowings under the 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,
11
and future issuances of debt and/or equity securities. However, no assurances
can be given that such funds will be available when required or on terms
favorable to the Company.
In May, 1998, the Company signed a definitive merger agreement to acquire all of
the outstanding capital stock of A Business Conference-Call, Inc. ("ABCC"),
simultaneous with and contingent upon the closing of a proposed initial public
offering of common stock by the Company. The acquisition will be accounted for
using the purchase method of accounting. The total purchase price is $14.2
million in cash plus (i) an additional amount, based on ABCC's closing date
balance sheet, equal to the balances of cash plus accounts receivable (net of a
bad debt reserve of 5%) less all liabilities as of the closing date, and (ii)
approximately $100,000 related to tax reimbursements. Based on ABCC's September
30, 1998 balance sheet, the amount of such additional consideration would be
approximately $389,000. In addition, the Company expects to incur approximately
$200,000 of acquisition costs. No assurances can be given that either the
proposed initial public offering or the acquisition of ABCC will occur as
anticipated.
The Company intends to continue pursuing attractive acquisition opportunities.
The timing, size or success of any acquisition and the associated potential
capital commitments are unpredictable. The Company plans to fund future
acquisitions primarily through a combination of working capital, cash flow from
operations and borrowings, as well as issuances of debt and/or equity
securities. However, no assurances can be given that such funds will be
available when required or on terms favorable to the Company.
The Acquisition agreements, pursuant to which the Operating Centers were
acquired, except for the Oradell Center, limit through 1999 the Company's
ability to change the location of an Operating Center's facilities (except for
the Montgomery Center), physically merge the Operating Center's operations with
another operation, change the position of those employees who received
employment agreements pursuant to the applicable Acquisition agreement, reduce
the workforce or terminate employees (except as related to employee performance,
the contemplated reorganization of the combined sales and marketing staff and
the consolidation of certain accounting functions) without the approval of a
majority in interest of the former stockholders of the affected Operating
Center. Based on the term of these limitations and the fact that the Company
has been growing and adding additional employees, the Company does not believe
that these limitations will have a significant impact on the future results of
operations and liquidity. In connection with the consolidation of the Atlanta
and Montgomery Centers, the Company is in the process of obtaining the
appropriate approvals of a majority in interest of the former stockholders of
the Atlanta and Montgomery Centers.
The Company is highly leveraged and has a stockholders' deficit at September 30,
1998. This indebtedness requires the Company to dedicate a significant portion
of its cash flow from operations to service its indebtedness and makes the
Company more vulnerable to unfavorable changes in general economic conditions.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software programs were designed to
use only a two digit date field. These date fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. Until
the date fields are revised, the systems and programs could fail or give
erroneous results when referencing dates following December 31, 1999. Such
failure or errors could occur prior to the actual change in century.
The Company relies on computer applications to manage and monitor its
operations, accounting, sales and administrative functions. In addition, the
Company's suppliers and service providers (particularly telecommunications
companies) are reliant upon computer applications, some of which may contain
software that may fail as a result of the upcoming change in century. Failure
of the Company's systems or those of its suppliers or service providers could
have a material adverse impact on the Company's business, financial condition
and results of operations.
State of readiness. The Company is in the process of assessing its Year 2000
readiness. The Company's current Year 2000 readiness project will cover the
following phases: (i) identification of internal systems and components that
will be in service in the 21st century, (ii) assessment of internal system
repair or replacement requirements, (iii) assessment of supplier and service
provider Year 2000 readiness, (iv) repair or replacement of both internal and
external systems or components, (v) testing, (vi) implementation, and (vii)
development of contingency plan in the event of Year 2000 failures.
The Company has completed a comprehensive inventory of all systems and system
components in use, and is currently identifying which systems and system
components will be in use beyond the year 1999. This identification is expected
to be
12
completed by the end of 1998. Additionally, in connection with its plans to
integrate the Operating Centers, the Company is in the process of implementing
certain common systems in both the operations and financial management areas.
Such common systems are Year 2000 compliant, a criteria of the systems
integration plan. Based on the initial analysis of its internal systems, the
Company does not believe its computer systems or applications expected to be in
use beyond the year 1999 will be adversely affected by the upcoming change in
century. The Company expects all of its internal systems and system components
to be Year 2000 compliant by June 1999. However, the Company has not yet
completed an assessment as to whether any of its suppliers or service providers
will be adversely affected. This assessment is expected to be completed by March
1999. There is no assurance that the Company's suppliers or service providers
will not suffer a Year 2000 business disruption which could have a material
adverse impact on the Company's business, financial condition and results of
operations.
Costs. To date, the Company has not incurred any material expenditures in
connection with its Year 2000 assessment and remediation efforts. Most of its
expenses have related to the opportunity cost of time spent by employees of the
Company evaluating Year 2000 compliance matters. The Company intends to retain
outside consultants to assist with the assessment and testing phases of the Year
2000 readiness project. Management estimates that the cost of such outside
consultants will approximate $220,000. As the Company continues with the
deployment of new systems related to its planned efforts to integrate the
Operating Centers, such new systems will be Year 2000 compliant. The cost of
purchasing, or developing, and deploying these new systems are not considered
Year 2000 costs as they were included in the Company's integration plan and were
not accelerated due to Year 2000 issues.
Risks. The Company relies heavily on the use of telecommunications systems and
services--both internally deployed and from multiple third party service
providers. Thus, the Company believes that telecommunications is the area most
sensitive to problems with Year 2000 readiness. Failure of one or more of the
Company's telecommunications service providers to become Year 2000 compliant on
a timely basis could, in a worst case scenario, render the Company unable to
schedule or conduct conference calls and other group communications services,
and could have a material adverse impact on the Company's business, financial
condition and results of operations. However, the Company believes that its
ability to redistribute certain of its telecommunications services among its
multiple third party service providers could lessen any potential adverse
impact.
Contingency plan. The Company has not yet developed a Year 2000-specific
contingency plan as the Company expects its systems and system components to be
Year 2000 compliant by June 1999. The Company intends to prepare a contingency
plan as it becomes aware of Year 2000 problems or risks.
CONSOLIDATED AND COMBINED OPERATING CENTERS AND VIALOG CORPORATION RESULTS OF
OPERATIONS
The combined Operating Centers' Statement of Operations data for the nine months
ended September 30, 1997 does not purport to present the financial results or
the financial condition of the combined Operating Centers 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 on an historical basis, and excludes the
effects of pro forma adjustments. This data 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.
The following table compares certain unaudited combined data of the Operating
Centers on an historical basis for the nine months ended September 30, 1997 and
certain unaudited consolidated data of VIALOG Corporation for the nine months
ended September 30, 1998, excluding the effects of pro forma adjustments:
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1997 1998
------------------- ----------------
Net revenues $26,350 100.0% $34,770 100.0%
Cost of revenues, excluding depreciation 13,262 50.3% 17,864 51.4%
Net revenues. All Operating Centers reflected an increase in net revenues for
the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997. Net revenues increased $8.4 million, or 32.0%, from
combined net revenues of $26.4 million in 1997 to consolidated net revenues of
$34.8 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
13
increase in the Reston Center's net revenues of $4.1 million, or 44.1%, from
$9.2 million to $13.3 million for the nine months ended September 30, 1997 and
1998, respectively, which consisted of increased sales of teleconferencing
services of approximately $2.1 million and $2.0 million to existing and new
customers, respectively, including the introduction of video equipment sales in
the first quarter of 1998, (ii) an increase in the Cambridge Center's net
revenues of $1.4 million, or 45.5%, which was primarily attributable to
increased audio teleconferencing services to existing customers and new
customers, (iii) an increase in the Atlanta Center's net revenues of $1.2
million, or 25.9%, which was primarily due to increased revenues from two
significant customers, which represented 71.8% and 73.0% of the Atlanta Center's
net revenues for the nine months ended September 30, 1997 and 1998,
respectively, and (iv) an increase in the Montgomery Center's net revenues of
$1.2 million, or 18.9%, which was primarily due to increased revenues for audio
teleconferencing services to existing retail and financial services customers.
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation for the nine months ended September 30, 1998 increased $4.6
million, or 34.7%, from cost of revenues, excluding depreciation for the nine
months ended September 30, 1997, and increased as a percentage of revenue from
50.3% to 51.4% for the nine months ended September 30, 1997 and 1998,
respectively. The dollar increase was primarily attributable to (i) an increase
in the Reston Center's cost of revenues, excluding depreciation of $2.0 million,
or 48.8%, resulting from increased telecommunications costs and personnel and
related costs associated with increased call volumes, and equipment costs
related to the introduction of video equipment sales in the first quarter of
1998 (which generate a lower gross margin than teleconferencing services), (ii)
an increase in the Atlanta Center's cost of revenues, excluding depreciation of
$815,000, or 47.7%, resulting from increased telecommunications costs associated
with increased call volumes as well as increased operating costs due to
increased staffing to support current and projected revenue growth, (iii) an
increase in the Montgomery Center's cost of revenues, excluding depreciation of
$601,000, or 14.0%, resulting primarily from increased telecommunications costs
associated with increased call volumes, and (iv) an increase in the Cambridge
Center's cost of revenues, excluding depreciation of $801,000, or 53.4%,
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. The increase as a percentage of
revenues was primarily attributable to (a) a change at the Reston Center in the
utilization of certain personnel from providing sales support activities during
the start-up phase of video conferencing, the related cost of which was included
in selling, general and administrative expenses during the nine months ended
September 30, 1997, to being involved directly in the providing of video
conferencing services during the nine months ended September 30, 1998, the
related cost of which was included in cost of revenues, excluding depreciation,
(b) additional labor and related expenses associated with the integration of the
Operating Centers and temporary accelerated hiring and training due to
anticipated increases in call volumes, (c) a modest net decrease in the average
price per conferencing minute for similar types of conferencing services, which
resulted in a net decrease to net revenues of approximately $1.3 million based
on taking the respective call volumes for the nine months ended September 30,
1998 at the average prices during the nine months ended September 30, 1997 for
similar services, and (d) additional long distance charges associated with new
Federal Communications Commission fees.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Under this concept, all revenues,
expenses, gains and losses recognized during the period are included in income,
regardless of whether they are considered to be the results of operations of the
period. The adoption of SFAS 130 did not have a material impact on the
Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
established standards for reporting information about operating segments in
annual and interim financial statements issued to shareholders. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131, which becomes effective for the
Company in its year ending December 31, 1998 is not expected to have a material
impact on the Company's consolidated financial statements and disclosures, as
the Company does not have multiple reportable operating segments.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for internal
use, and is effective for fiscal years beginning after December 31, 1998, with
earlier application encouraged. The adoption of SOP 98-1 is not expected to
have a material effect on the Company's financial statements.
14
CAUTIONARY STATEMENTS FOR FORWARD LOOKING INFORMATION
Management's discussion and analysis set forth above contains certain forward
looking statements, including statements regarding its financial position,
results of operations and Year 2000 compliance. These forward looking
statements are based on current expectations. Certain factors have been
identified by the Company which could cause the Company's actual results to
differ materially from expected and historical results. These factors are
discussed in the Safe Harbor for Forward Looking Statements section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Form 10-K for the year ended December 31,
1997, and should be read in conjunction with this Form 10-Q.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as described below, there are no material pending legal proceedings
to which the Company is a party or to which any of its properties are subject.
In connection with the acquisition of the assets of Call Points, Inc. ("Call
Points"), the Company agreed to assume all disclosed liabilities with the
exception of any liabilities arising out of Equal Employment Opportunity
Commission ("EEOC") claims and litigation filed against Call Points and Ropir
Industries, Inc. ("Ropir"), the sole stockholder and parent corporation of Call
Points, by certain former and current employees. On or about October 24, 1997,
11 employees or former employees of Call Points filed claims in federal district
court (Middle District of Alabama, Northern Division) against Call Points and
Ropir. On or about August 4, 1998, the complainants were granted leave to add
the Company as a defendant. All 11 complainants sought to hold the Company
liable for damages as a successor in interest to Call Points. Two of the
complainants added additional claims against the Company alleging discriminatory
and retaliatory conduct alleged to have occurred subsequent to the acquisition.
The parties have recently settled all claims brought by the complainants, and
all of the complainants' claims were dismissed with prejudice by the federal
district court on October 19, 1998. Neither the Company nor any of its
subsidiaries are liable to the complainants for any monetary or other damages
under the settlement agreement.
A former employee of Conference Source International, Inc. ("CSI") has claimed
in writing that he may be entitled to up to five percent of the stock of CSI,
based on an unsigned paper outlining possible employment terms. Based on the
$18.7 million consideration paid to CSI's stockholders upon the consummation of
the acquisition of CSI by the Company, the value of a five percent equity
interest in CSI would be approximately $934,000. CSI's position is that the
only agreements with such employee were set forth in two successive executed
employment agreements, each of which had a specific provision that such
agreement was inclusive as to the terms of employment. The Company and the
former stockholders of CSI believe that such claim is without merit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 11(a) Calculation of Shares Used in Determining Net Loss Per Share
(b) Reports on Form 8-K.
None.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
VIALOG Corporation
(Registrant)
Date: November 12, 1998
/s/ Glenn D. Bolduc
--------------------------
Glenn D. Bolduc,
President and Chief
Executive Officer
/s/ John J. Dion
--------------------------
John J. Dion,
Vice President--Finance
(Principal Financial Officer
and Principal Accounting
Officer)
17
EXHIBIT INDEX
PAGE
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11(a)--Calculation of Shares Used in Determining Net Loss Per Share 19