- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ---------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO Commission File Number 333-22585 VIALOG CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-3305282 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 35 NEW ENGLAND BUSINESS CENTER, SUITE 160 ANDOVER, MA 01810 (Address of principal executive offices) (978) 975-3700 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Name of each exchange on Title of each class which registered Common Nasdaq National Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of March 22, 1999, the aggregate market value of the voting and non- voting common equity held by non-affiliates of the Company was $34,399,281.50. Shares of voting and non-voting common equity held by each executive officer and director and by each person who beneficially owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The aggregate market value has been computed based on a price per share of $4.75. On such date, the Company had 8,298,670 shares of common stock outstanding. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I This Annual Report on Form 10-K contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward- looking statements should be read with the cautionary statements and important factors included in this Form 10-K. (See Item 7.--Management's Discussion and Analysis of Financial Condition and Results of Operations, Safe Harbor for Forward-Looking Statements.) Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Such forward-looking statements may be identified, without limitation, by the use of the words "anticipates," "estimates," "expects," "intends," "plans," "predicts," "projects," and similar expressions. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. Item 1. Business. Introduction VIALOG Corporation, a Massachusetts corporation, was founded on January 1, 1996 with the intention of becoming a leading provider of value-added conferencing services. These services include audio, video and Internet conferencing. On November 12, 1997, VIALOG Corporation acquired, in separate transactions (the "Original Acquisitions"), six private conference service bureaus (each, an "Acquired Company;" collectively, the "Acquired Companies") in exchange for cash and shares of its Common Stock. On February 10, 1999, VIALOG Corporation completed an initial public offering of its Common Stock and acquired, in separate transactions, three private conference service bureaus (each, a "New Acquisition;" collectively, the "New Acquisitions" and together with the Acquired Companies, each, an "Operating Center;" collectively, the "Operating Centers") in exchange for cash. On February 1, 1999, the operations of two of the original six Acquired Companies were consolidated into one Operating Center. Including the New Acquisitions, VIALOG Corporation currently maintains eight Operating Centers. Unless otherwise indicated, (i) all references to "VIALOG Corporation" mean VIALOG Corporation as a stand alone entity and (ii) all references to "VIALOG" or the "Company" refer to VIALOG Corporation and include its consolidated subsidiaries. A brief description of each of the Operating Centers is set forth below. Telephone Business Meetings, Inc. d/b/a Access Conference Call Service ("Access"): Access is headquartered and maintains its operations center in Reston, Virginia. Founded in 1987, Access had net revenues of approximately $12.6 million in 1997 and of approximately $18.4 million in 1998. Access specializes in providing conferencing services to numerous organizations, including financial institutions, government agencies, trade associations and professional service firms. Access is also a leader among the Operating Centers in the development of video teleconferencing services. As of March 1, 1999, Access had approximately 157 employees and approximately 2,696 ports of teleconferencing capability. Conference Source International, Inc. ("CSI"): Prior to February 1, 1999, CSI was headquartered and maintained its operations center in Atlanta, Georgia. On February 1, 1999, the operations were moved to Montgomery, Alabama and consolidated with the operations of Call Points, Inc. into one Operating Center. Founded in 1992, CSI had net revenues of approximately $6.4 million in 1997 and of approximately $7.6 million in 1998. CSI specializes in providing conferencing services to certain facilities-based carriers and non-facilities- based telecommunications providers. As of March 1, 1999, the combined operations center in Montgomery, Alabama had approximately 121 employees and approximately 5,712 ports of teleconferencing capability. Call Points, Inc. ("Call Points"): Call Points is headquartered and maintains its operations center in Montgomery, Alabama. Founded in 1988, Call Points had net revenues of approximately $8.5 million in 1997 2 and of approximately $10.1 million in 1998. Call Points specializes in providing conferencing services to the retail industry. On February 1, 1999, the operations of CSI were moved to Montgomery, Alabama and consolidated with the operations of Call Points. Kendall Square Teleconferencing, Inc. d/b/a The Conference Center ("TCC"): TCC is headquartered and maintains its operations center in Cambridge, Massachusetts. Founded in 1987, TCC had net revenues of approximately $4.1 million in 1997 and of approximately $5.9 million in 1998. TCC services a general business clientele. As of March 1, 1999, TCC had approximately 46 employees and approximately 720 ports of teleconferencing capability. American Conferencing Company, Inc. d/b/a Americo ("Americo"): Americo is headquartered and maintains its operations center in Oradell, New Jersey. Founded in 1987, Americo had net revenues of approximately $2.2 million in 1997 and of approximately $2.8 million in 1998. Americo services a general business clientele. As of March 1, 1999, Americo had approximately 24 employees and approximately 456 ports of teleconferencing capability. Communication Development Corporation ("CDC"): CDC is headquartered and maintains its operations center in Danbury, Connecticut. Founded in 1990, CDC had net revenues of approximately $2.1 million in 1997 and of approximately $2.7 million in 1998. CDC specializes in providing a range of conferencing services and customized communications solutions to its clients, the majority of whom are in the pharmaceutical industry. As of March 1, 1999, CDC had approximately 37 employees and approximately 293 ports of teleconferencing capability. A Business Conference-Call, Inc. ("ABCC"): ABCC is headquartered and maintains its operations center in Chaska, Minnesota. Founded in 1988, ABCC had net revenues of approximately $5.7 million in 1997 and of approximately $7.5 million in 1998. ABCC services a general corporate clientele with a specialty in the communications industry. As of March 1, 1999, ABCC had approximately 52 employees and approximately 864 ports of teleconferencing capability. Conference Pros International, Inc. ("CPI"): CPI is headquartered and maintains its operations center in Houston, Texas. Founded in 1989, CPI had net revenues of approximately $2.0 million in 1997 and of approximately $2.5 million in 1998. CPI services a general corporate clientele. As of March 1, 1999, CPI had approximately 30 employees and approximately 796 ports of teleconferencing capability. A Better Conference, Inc. ("ABCI"): ABCI is headquartered and maintains its operations center in Palm Springs, California. Founded in 1991, ABCI had net revenues of approximately $2.0 million in 1997 and of approximately $3.0 million in 1998. ABCI services a general corporate clientele with a speciality in the software, financial services and legal services industries. As of March 1, 1999, ABCI had approximately 24 employees and approximately 432 ports of teleconferencing capability. Description of Business Company Overview VIALOG is a leading independent provider of audio, video and Internet conferencing services. The Company believes it is the largest company focused solely on conferencing services, with eight operating centers, approximately 11,969 ports of conferencing capability (one "port" is required for each participating telephone line), state-of-the-art digital conferencing technology and an experienced national sales force. The Company believes it differentiates itself from its competitors by providing superior customer service and an extensive range of enhanced and customized conferencing solutions. The Company has capitalized on the growth in the conferencing services market to build a large, stable client base ranging from Fortune 500 companies to small institutions. Customers also include certain major long distance telecommunications providers which have outsourced their conferencing services to the Company. The Company provided services to more than 5,000 customers representing over 30,000 accounts during the twelve months ended December 31, 1998. 3 Operator-attended audioconferencing is the cornerstone of VIALOG's business, and the Company believes it to be the principal service which builds customer loyalty. The Company also offers operator-on-demand audioconferencing as well as enhanced audioconferencing services such as digital replay, broadcast fax and audio streaming. The Company's other services include multipoint videoconferencing, as well as a family of Internet conferencing services. VIALOG offers customized communications solutions, which include conference event planning and coaching, as well as customized formats specifically designed for such applications as auctions, investor relations calls and interactive educational programs. The Company has designed its service delivery infrastructure to be flexible so that comprehensive, custom solutions for each customer may be easily designed and implemented. The industry in which the Company operates has been experiencing significant growth. See "Industry Overview." The Company intends to capitalize on this strong industry growth, as it expands its national marketing, branding and sales program. In addition to internal growth generated by strong industry fundamentals and the Company's enhanced marketing capabilities, the Company intends to continue to increase its wholesale, or outsourcing, business. Management believes that the broad trend among the service providers in the North American conferencing industry to outsource labor-intensive activities such as teleconferencing will lead to new outsourcing contracts, particularly as Regional Bell Operating Companies ("RBOCs") become approved to provide long distance service. Further, the Company intends to augment its internal growth through selective acquisitions in the conferencing industry to leverage the inherent economies of scale and build upon the Company's position as the largest company in the industry focused solely on conferencing services. Industry Overview Services The conferencing industry, which includes audio, video and Internet conferencing, provides a range of services to facilitate multiparty communications with participants in different locations. Through conferencing services, customers conduct routine meetings, run training sessions, and share information when face-to-face meetings would be too costly, impractical or inconvenient. Industry studies published by Frost & Sullivan estimate that total conferencing services revenues in North America increased from $437 million in 1994 to an estimated $780 million in 1997, representing a compound annual growth rate of 21%. Frost & Sullivan estimates that the conferencing services sector will grow at a compound annual rate of approximately 24% between 1998 and 2003. Audioconferencing Audioconferencing connects multiple parties on a single telephone call through specialized telephone equipment known as a "bridge." Multipoint Control Units ("MCUs") offer the most advanced bridge technology, although calls involving a small number of parties can be established through a PBX or on the network switch of an inter-exchange carrier ("IXC"). Using MCU technology, the maximum number of participants is only limited by the number of conference "ports" available to the conferencing service provider. Calls may be established manually by an operator who places calls to or receives calls from conference participants, with each access line occupying a single port. Advances in MCU technology have not only eliminated many of the problems associated with early audioconferencing, such as "clipping" (the loss of initial or ending syllables of words) and loss of quality as lines were added, but also have increased the number of available enhanced features. The Company believes that these technological advances, combined with the greater overall awareness and acceptance of audioconferencing as a business tool, have contributed to the increased usage of conferencing over the last five years. The Company believes that the demand for audioconferencing services has also increased as a result of a wide range of trends, including globalization of operations, increased workforce training requirements, the advent of geographically dispersed work teams, shared decision-making, and the growing role of strategic partnerships. Users of audioconferencing are able to replace travel to existing meetings, with attendant savings of actual and 4 opportunity cost, and increase communication with parties with whom they would otherwise not meet, thereby yielding greater organizational productivity. The Company believes that the facilities, network and labor costs associated with audioconferencing services, combined with a lack of expertise and a desire to focus on their core businesses, have caused most organizations to outsource audioconferencing. Industry sources project compound annual growth in audioconferencing services revenues of 23% between 1998 and 2003, from $723 million to $2 billion. Videoconferencing Videoconferencing is similar to audioconferencing except that one or more callers may be viewed on a video monitor by the other participants. The Company believes that the broad adoption of videoconferencing as a meeting tool has historically been constrained by several factors, including limited access to video sites, expensive and proprietary equipment, limited and costly network facilities, incompatibility of systems and poor video quality. Videoconferencing was also generally limited to small or broadcast meetings at fixed locations, except when implemented using expensive two-way satellite technology. The adoption of industry standards, technological advances (which have brought down the cost of equipment and required bandwidth) and increased processing speed (which has improved quality) have all contributed to the development of desktop videoconferencing applications. Interactive multipoint video conferencing also became feasible in 1995 with the introduction of more cost-effective video MCU technology and low-cost, PC-based video cameras and sound cards. The rapid deployment of compatible hardware, reductions in cost, increases in available bandwidth, and improvements in quality are all expected to accelerate the growth of the market for multipoint videoconferencing. Industry sources estimate that videoconferencing services revenue will grow at a compound rate of 27% between 1998 and 2003, from $240 million to $779 million. Internet Conferencing The Company's Internet conferencing services include web presentation sharing and audio streaming services. Web presentation sharing, which enables multiple users to conference and collaborate using both data (e.g., presentations) and voice is the most recent advancement in conferencing. Audio streaming enables participants to listen to an audioconference being "streamed" live over the Internet. Listen-only participants can access the audioconference by logging on to a web site and listening via a multimedia PC. The adoption of industry standards for multimedia conferencing and new Internet application services and software are expected to facilitate greater adoption of web conferencing. The Company believes that Internet conferencing programs will likely be used in conjunction with audioconferencing to allow simultaneous group discussions during display of documents. Service Providers There are three categories of service providers in the North American conferencing industry: (i) IXCs, such as AT&T Corporation ("AT-T"), MCI WorldCom, Inc. ("MCI"), Sprint Corporation ("Sprint"), Frontier Corporation ("Frontier") and Cable & Wireless, Inc. ("Cable & Wireless"), (ii) private conference service bureaus ("PCSBs"), a group of approximately 20 companies (excluding the Company), and (iii) independent local exchange carriers ("LECs"), such as GTE and Cincinnati Bell. In addition, under the terms of the Telecommunications Act of 1996, the RBOCs may be allowed to provide long distance services, which the Company believes may lead to their entry into the conferencing market. See "Business--Regulation." According to industry sources, the IXCs are currently the largest providers of conferencing services, constituting approximately 80% of audioconferencing services revenue. The Company believes that the IXCs generate most of their business through their position as the customer's long distance carrier. The IXCs generally do not market conferencing services separately, but rather offer such services as part of a "bundled" 5 telecommunications offering. The Company believes that the IXCs have generally not emphasized enhanced services and customized communications solutions to meet individual customer needs, preferring instead to implement automated systems and technology as a substitute for traditional operator-intensive services in order to reduce labor costs. The second category of providers of conferencing services are the PCSBs. There are approximately 20 PCSBs, excluding the Company. PCSBs emerged in the conferencing market in the mid-1980s when businesses were beginning to find applications for conferencing due to significant technological improvements in conferencing equipment. The number of PCSBs increased in the late 1980s, taking advantage of a niche opportunity to provide customized, high quality service and specialized applications. As a result of their scale and limited access to capital, PCSBs tended to develop as regional or industry-specific businesses. Due to technological changes facing the conferencing industry, such as the introduction of video and data service, the Company believes that the ability to secure necessary capital has become more critical for PCSBs. Additionally, the company believes that many PCSBs do not currently have the marketing expertise or conferencing capacity to reach the critical mass which will allow them to develop a national brand name and compete for and service large, national accounts. The third category of providers of conferencing services are the independent LECs. Similar to the IXCs, the Company believes the LECs have generally not included conferencing, enhanced services or customized communications solutions in their core service offerings. A potential new category of providers is the RBOCs. As a result of the Consent Decree entered into by AT&T and the United States Department of Justice in 1982, the RBOCs could not offer long distance services, which drastically limited their conferencing potential. Under the Telecommunications Act of 1996, the RBOCs may be allowed to provide in-region long distance services upon the satisfaction of certain conditions. The Company believes that the ability of an RBOC to gain immediate and significant conferencing market share upon entrance into the long distance market could be enhanced by such RBOC's status as the incumbent provider of local services to its customers. While each RBOC will determine whether to create a separate conferencing business unit or to outsource this service, the Company believes that some of the potential new entrants will elect to outsource conferencing services and focus on entering the long distance market. Competitive Strengths The Company believes that several characteristics differentiate it from many of its competitors, including: Diverse and stable customer base. The Company has a diverse base of customers that numbered more than 5,000 in 1998, with no customer representing greater than 10% of consolidated net revenues and the Company's top ten customers representing less than 23% of consolidated net revenues. The Company believes that it has created strong customer loyalty for its services through its emphasis on superior customer service and the importance of such service to its clients. Unique industry position. The Company believes that it is positioned as one of the largest and most geographically diverse companies in the industry that focuses solely on conferencing services. The Company's largest competitors are long distance service providers for whom conferencing represents only a small fraction of their total revenues. The Company can focus its capabilities and resources solely on conferencing, including its information systems, capital equipment, hiring practices, training and marketing. The Company believes that this focus offers significant flexibility and competitive advantages in responding to the needs of customers. The Company is also well situated to obtain future outsourcing contracts from long distance service providers which the Company believes are reluctant to outsource to a long distance service competitor, and would prefer to outsource to a larger, independent conferencing company with experience in managing the outsourcing process. Superior customer service capabilities. The Company believes that it has a core competency in its customer service capabilities, which stress operator training, personalized service and anticipation of customer 6 needs. The Company has developed and refined the technological capabilities, procedures and management information systems necessary to provide superior customer service, a factor that is critical to both customer retention and new business. An example of these capabilities is the Company's proprietary billing system for outsourced services. The Company has spent several years developing and revising this software and believes that no competitor can currently match the flexibility of this system in meeting customer needs. Broad range of services. The Company believes that it offers the most comprehensive selection of audio, video and Internet conferencing services in its industry, providing it with significant marketing advantages. The Company offers the features and pricing options to meet a wide variety of customer needs. The Company intends to remain at the forefront of the conferencing industry by continuing to augment its existing service offerings through the development and introduction of additional enhanced services and customized conferencing solutions. Experienced management team. The Company has one of the most experienced management teams in the conferencing industry. The top 10 managers of the Company have on average 11 years of experience within the conferencing/telecommunications industry. This experience is critical to the Company's ability to implement its business strategy, respond to industry trends and to identify and consummate acquisition opportunities successfully. Operating Strategy The Company provides a full array of conferencing services through its eight Operating Centers, five of which were acquired by the Company in November, 1997 and three of which were acquired by the Company in February 1999. The basic goals of the Company's operating strategy consist of the following: Focus exclusively on conferencing services. VIALOG believes that it is the largest and most geographically diverse company focused solely on conferencing services. The Company believes that its dedicated focus on conferencing enables it to respond to the needs of its customers better than competitors which do not focus on conferencing as a core business activity. Deliver a broad range of services. VIALOG believes that it offers the most comprehensive selection of audio, video and Internet conferencing services among the independent conferencing service providers, providing the Company with significant marketing advantages. The Company believes that it can leverage the diverse service capabilities and industry expertise of individual operating centers to provide the features and pricing options to meet a wide variety of customer needs. The Company intends to remain at the forefront of the conferencing industry by continuing to augment its existing service offerings through the development and introduction of additional enhanced services and customized communications solutions. Maximize operational synergies. VIALOG is capitalizing on the benefits of increased size, product range and diverse customer base afforded to it by the acquisition of its Operating Centers. Since November 1997, VIALOG has centralized several of its operations, including sales, marketing, and most human resource, benefits administration and cash management functions. Additionally, the Company recently consolidated the Atlanta and Montgomery Operating Centers, which the Company believes will provide operational efficiencies and reduce operating costs. The combination of the Operating Centers has enabled the Company to improve operations by: (i) allowing it to handle calls involving a larger number of participants than any of its Operating Centers had been able to handle individually and (ii) increasing network efficiency by allocating port capacity among the Operating Centers according to need, time of day, personnel, type of service and other factors. The Company plans to centralize additional support activities, including reservations, billing, purchasing, management information systems and accounting, within the next 3 to 9 months in order to standardize its services, improve customer service and reduce operating expenses. Furthermore, the Company believes that its increased size has resulted in stronger bargaining power in areas such as long distance telecommunications, equipment, employee benefits and marketing. 7 Retain customers and stimulate usage. Through the implementation of new focused selling strategies and cross-selling programs designed to stimulate use by its existing customer base, the Company intends to expand sales to its diverse base of customers, which numbered more than 5,000 during the twelve months ended December 31, 1998. The Company believes that customer loyalty for its services is fostered by its emphasis on customer service and ability to design custom solutions. In addition, VIALOG is developing a comprehensive marketing database to monitor account behavior and, based on changes in behavior, trigger appropriate marketing and sales responses to increase customer satisfaction, increase customer usage and maintain customer relationships. Growth Strategy The Company's objective is to build upon its position as a leading independent provider of conferencing services. The Company intends to achieve this goal through a strategy focused on the following: Maintain strong internal growth. The Company intends to capitalize on the strong growth in the conferencing services industry. Industry sources project that conferencing services revenues will grow at a compound annual growth rate of 24% through 2003. The Company believes that the acquisition of the Operating Centers created significant opportunities to enhance internal growth by enabling it to develop a national brand identity, pursue cross-selling opportunities, expand the Company's service offerings and leverage the Company's increased capacity to handle larger contracts. In addition, the Company has undertaken several marketing and sales initiatives, including deployment of a national sales force to access new geographic areas and national accounts, establishment of a coordinated calling effort and implementation of database marketing programs. Pursue outsourced services opportunities. The Company has deployed a wholesale sales organization which intends to capitalize on what the Company believes to be significant opportunities to provide outsourced services to IXCs, LECs and RBOCs as these providers continue to reduce their dependence upon labor-intensive activities. VIALOG currently has contracts to provide outsourced services to a number of facilities-based and non-facilities-based telecommunications service providers. As RBOCs obtain regulatory approval to provide long distance service, the Company believes that some will desire to enter the market quickly with complete packages of high quality telecommunications services, including conferencing. As a result, some RBOCs and LECs may seek to outsource their conferencing requirements in order to speed up their time to market. The Company believes that it is well-positioned to compete for outsourced conferencing business from the IXCs, LECs and RBOCs because it (i) does not compete with IXCs, LECs or RBOCs in their core businesses, (ii) has the capacity and resources to handle significant conferencing volume and (iii) has experience in providing services on an outsourced basis. Expand through acquisitions. The Company intends to augment its internal growth through selective acquisitions of complementary businesses in order to capitalize on the significant potential economies of scale and synergies available in its business. The Company's strategy is to target acquisitions that will allow it to increase market share, broaden geographic coverage and augment existing service offerings with new capabilities and industry-specific experience, while maintaining the Company's high standards for customer service. The Company believes its experience in acquiring and integrating the Operating Centers and its knowledge of the industry will be instrumental in successfully identifying and negotiating additional acquisitions. The Company further believes that its position as the largest publicly-traded company focused solely on the conferencing market will make it attractive to potential acquisition candidates. The Company's Conferencing Services Audioconferencing. The Company offers a broad range of audioconferencing services and related services, primarily to businesses in the financial, retail, professional services and pharmaceutical industries, as well as to government agencies and trade associations. The Company generates revenues from these services by charging on a per-line, per-minute basis, similar to standard telephone pricing practices. The Company's audioconferencing services are divided into two major service categories: operator-attended and operator- on- 8 demand. Each category offers standard services such as dialing out to late participants and conducting a roll call at no additional cost as well as enhanced services at additional cost. There are three different types of operator-attended service: Meet-Me, Dial Out and a combination of the two. Meet-Me audioconferences allow participants to join a conference either by dialing a toll free number provided by the Company or by using their own local or long distance service providers. Dial Out audioconferences consist of having the Company's operators call participants and join them together in a conference. A combination of the two service types is also available. Participants may join an operator-on-demand conference either by dialing a toll free number provided by the Company or by using their own local or long distance service providers, then entering a passcode on their touchtone keypad. For additional security and to verify attendance, participants may be required to enter a Personal Identification Number (PIN) after they enter the conference passcode. While Company operators are not necessary for an operator-on-demand audioconference, they can be reached for assistance by pressing "*0." In addition to the many standard services offered by the Company, the following enhanced services are offered for an extra charge to increase the productivity of an audioconference. . Communication line. During a conference, the Company can keep a separate line open with the conference host to verify participant attendance, provide updates on the number of participants which have joined, and have other discussions relative to the conference that may be inappropriate to conduct in the conference. . Digital replay. The Company can digitally record a conference and make it available for playback over the telephone or otherwise by parties who were unable to attend the conference. . Electronic Q&A. Participants can join a queue to ask questions or speak with the moderator by pressing codes on their touchtone keypads. . Participant list. The Company can send a list of participants via fax or email, either during or at the conclusion of the conference. . Participant notification. The Company can call or fax reminders to participants in advance of the conference. . Polling/voting. Participants can respond to questions by pressing codes on their touchtone keypads. Tabulations and results are available immediately or at the conclusion of the conference. . Recording. The Company can record the conference on audiocassette tape or compact disc, and send recordings via regular, overnight or second- day mail. . Transcription. The conference can be transcribed in its entirety and provided in written format, on a 3 1/2" diskette, via e-mail, or all three. . Audio streaming. Participants can listen to an audioconference being "streamed" live over the Internet. Listen-only participants can access the audioconference by logging on to a web site and listening via a multimedia PC. Videoconferencing. In 1996, the Company began to offer videoconferencing services, which enable remote sites equipped with industry standard compliant video equipment to conduct interactive multipoint sharing of video images and audio among three or more participants. Similar to audioconferencing, this service is charged on a per-line, per-minute basis, with enhanced services charged on a fee basis. Videoconferencing requires the use of a video MCU and telecommunications facilities of greater bandwidth than that required for a standard audioconference. The Company has three MCUs dedicated to videoconferencing. Videoconferences can be assembled in two ways: Meet-Me and Dial Out. Meet-Me videoconferences are those in which participating sites dial in to the Company's video MCU at a scheduled date and time, using an assigned telephone number. Each site may be greeted by an operator or be connected directly, without the operator's presence. Dial Out videoconferences are those in which a Company operator dials out to participating 9 sites prior to a videoconference and connects them to the conference. The Company tests the standards of all participating sites to assure quality standards. The Company offers "continuous presence" service, which allows participating sites to view each other simultaneously. Continuous presence has two display options. The first divides each participant's monitor into quadrants that display up to four selected sites throughout the entire conference. The second is broadcast mode, in which the speaker or lecturer can view up to four other sites, but all of the sites view only the speaker. The Company also offers "voice activated switching" which allows the Company's MCU to automatically select the site whose video image is broadcast at any given point in the videoconference, based on audio level. When one person speaks, all other sites in the videoconference see that site until another site replies and replaces the picture with its own. Whoever is currently speaking will continue to see the site whose participant spoke last. The Company offers PC-based application sharing via the Company's videoconferencing MCUs. Multiple users can view and edit the same document on their own PCs while participating in an audio or video conference, enabling them to present, discuss and/or modify documents in real-time. VIALOG fully supports the International Telecommunications Union (ITU) T.120 data conferencing series standards. The Company believes that the use of multipoint videoconferencing services will grow in relationship to the installed base of compatible video equipment. The Company estimates that over 330,000 video conferencing units were sold in 1997, and that over 820,000 units were sold in 1998. Internet Conferencing Services. In the fourth quarter of 1998, the Company launched its Internet conferencing services with the introduction of a web presentation sharing service. This service connects multiple computer users over the Internet, enabling them to present documents and presentations in real-time. Internet-based presentation sharing programs are used in conjunction with audioconferencing to enable simultaneous group discussions and presentations. In the first quarter of 1999, the Company introduced its audio streaming service that allows listen-only participants to hear an audioconference via the Internet. Listen-only participants can access the audioconference by logging on to a web site and listening via a multimedia PC. . Teleservices. To complement its audio, video and Internet conferencing services, the Company offers teleservices, such as MessageCast, Interactive Voice Response, broadcast fax and fax on-demand. . MessageCast. The Company's MessageCast voicemail broadcast service delivers a personalized message quickly to a large number of recipients via the telephone. MessageCast delivers a custom voice message instantly to any individual with a phone number--either live or to a voicemail box. . Interactive Voice Response ("IVR"). The Company's IVR service uses voice and touch tone prompts to provide and/or retrieve important information via a telephone. Applications for IVR include digital replay of an audioconference; automated registration for events and programs; and test administration whereby the Company's IVR system is used to generate a test containing specific sets of questions or customized on a user-by- user basis from a database of categorized questions. . Broadcast Fax. This service enables customers to send faxes to a large number of recipients simultaneously. . Fax on-Demand. This service enables clients and employees to call a toll-free number for 24-hour access to essential information. Information requests can be fulfilled immediately via fax. Client Education Services. The Company offers client education services to help clients run a successful teleconference. Coaching sessions are conducted via audio teleconference or video conference, giving moderators and speakers the ability to practice in the same environment in which the teleconference will take place. After the teleconference, the Company can provide a detailed evaluation of conference effectiveness and the speaker's performance. 10 Sales and Marketing VIALOG believes it is the first independent conferencing company to employ a comprehensive marketing program to establish a national brand for conferencing services. The Company's retail national sales organization offers a full range of conferencing services to its customers. The Company's wholesale account executives offer these same services to facilities-based carriers and non- facilities-based telecommunications service providers who desire to offer outsourced conferencing services to their customers under their own brands. Establishing a national brand. The Company's marketing and sales strategy centers on establishing VIALOG as the brand identified with high value, expert delivery of conferencing services. The Company is implementing a corporate marketing program focused on customers who have the potential for high use. This marketing program will employ targeted database marketing techniques based on the combined customer data of the Operating Centers, emerging trends and other market segment information. Retail sales. The Company has implemented a national retail sales strategy utilizing both an outside and inside sales group. This new strategy has consolidated the Company's existing sales force and at the same time provided new national account coverage and presence in additional geographic markets. The sales force leverages VIALOG's increased network capacity by cross-selling existing accounts with new and enhanced services, expanding the Company's penetration of key industries (for example, pharmaceutical companies) and targeting key vertical industries and accounts. An outside sales group of approximately 35 professionals operates from six regional offices, and is primarily responsible for origination of new business. An inside sales group of approximately 25 professionals responds to inbound requests, assists customers in implementing VIALOG's service offerings and supports the outside sales force. Wholesale sales. The Company has deployed a wholesale sales organization which intends to capitalize on what the Company believes to be significant opportunities for revenue growth by providing outsourced services to IXCs, LECs, and RBOCs. While conferencing services make up a small portion of these companies' overall business, they are an important part of a full-service service provider's portfolio. The Company offers these companies the ability to efficiently outsource all conferencing services and support. The Company believes its wholesale sales initiative is justified by an increasing trend among telecommunications companies to outsource non-core, labor intensive services. The Company believes that this trend has been evidenced by existing outsourcing of services, such as billing and telemarketing and downsizing of personnel as these companies move away from labor-intensive activities. In addition, potential opportunities exist as a result of the Telecommunications Act of 1996 to provide services in new markets. The Company currently has contracts to provide outsourced services to a number of facilities-based and non-facilities-based telecommunications service providers. An important element of the Company's marketing strategy will be to secure additional outsourcing contracts and to expand net revenues from its existing customer base. In order to capitalize on this market, the Company has hired a vice president of wholesale sales and three senior telecom sales professionals who have extensive experience in the industry. Customer Service The Company believes that it has successfully obtained and retained customers due to quality customer service provided by a highly skilled staff. Reservationists and operators become the Company's primary contacts with its customers after the initial sales effort, thereby providing opportunities to support the sales effort with personalized service. The Company uses a team approach, whereby a customer can work with the same small group of customer service personnel. In some cases, customers have become accustomed to working with a particular reservationist or operator and insist upon continued assistance from these specific individuals. Reservationists assist the Company's customers in scheduling their conferences. Reservationists access the conferencing system to determine time and ports available and to confirm the conferences. Operators monitor calls and provide the services requested in the reservation. Operators are also trained to provide assistance to the moderator (usually the person initiating the conference) to ensure a successful conference. Supervisors are available to assist in the setup and execution of a conference. The Company's staff is trained to facilitate effective conferences through a combination of classroom, mentoring, teaming, and on-the-job supervision. 11 Customers The Company provided services to over 5,000 customers in 1998. The customers ranged in size from major multinational corporations and Fortune 500 companies to small businesses, professional organizations, public institutions and individuals. A breakdown of the Company's top 20 customers (based on 1998 consolidated net revenues), including both wholesale and retail customers, by industry is as follows: financial services (five), retail (five), telecommunications (three), industrial (three), health and pharmaceutical (two) and high technology (two). No account represented more than 10% of the Company's consolidated net revenues in 1998. The top 10 customers of the Company represented approximately 23% of the Company's combined net revenues in 1997 and 22% of the Company's consolidated net revenues in 1998. Billing and Management Information Systems Presently the entire billing and collection process is performed by the Operating Centers. The data needed to develop an invoice is captured by and stored on each MCU and entered into the billing system automatically or by the staff. This data includes the account number, which identifies the entity paying for the call and the moderator number, which identifies the person who organized the call. The MCU software creates a call detail record which is augmented by the operator to capture any additional services. Billing is on a one minute increment basis for the duration of each connected line. A billing database is maintained by each of the Operating Centers, and can be used to customize billing formats to respond to individual customer preferences. The frequency with which invoices are delivered to the customer for payment varies by Operating Center and by customer. Each Operating Center generates reports and files which provide detailed customer activity including usage and rate profiles, payments, adjustments, accounts receivable aging, credit status and commission summaries. All of these files are input into a centralized database being implemented by the Company to provide management with the ability to monitor customer value and make informed marketing, sales, financial and operational decisions. The Company believes that the flexibility and capabilities of its billing systems represent a significant competitive advantage by allowing the Company to customize invoices according to a number of variables such as detail level, frequency of billing and class of service. The Company has spent several years developing and refining the proprietary software used in the billing services provided to long distance service carriers that outsource their teleconferencing function to the Company. The Company is consolidating its billing function and expects to complete the consolidation of the Original Acquisitions by the end of 1999. The Company believes that centralization of the billing system will enable the Company to deliver additional customized pricing, billing and reporting features to satisfy both customer and internal requests. Each of the Operating Centers will continue to process invoices with its existing system until the new centralized system has been implemented and management has verified that the centralized system is performing at designed proficiency. Competition The conferencing service industry is highly competitive and subject to rapid change. The Company currently competes, or expects to compete in the near future, with the following categories of companies: (i) IXCs, such as AT&T, MCI, Sprint, Frontier and Cable & Wireless, (ii) independent LECs, such as GTE and Cincinnati Bell, and (iii) other PCSBs. According to estimates from industry sources, the IXCs currently serve approximately 80% of the audio teleconferencing market. The IXCs generally do not market conferencing services separately, but rather offer such services as part of a "bundled" telecommunications offering. The IXCs have not emphasized enhanced services or customized communications solutions to meet customer needs. However, there can be no assurance that these competitors will not alter their current strategies and begin to focus on services-specific selling, customized solutions and operator-attended services, the occurrence of any of which could 12 increase competition. Under the Telecommunications Act of 1996, the RBOCs may also be allowed to provide long distance services within the regions in which they also provide local exchange services ("in-region long distance services") upon the satisfaction of certain conditions, including the specific approval of the Federal Communications Commission, the introduction of or a defined potential for facilities-based local competition, the offering of local services for resale, and compliance with access and interconnection requirements for facilities-based competitors. Upon entrance into the long distance market, the ability of an RBOC to gain immediate and significant conferencing market share could be enhanced by its status as the incumbent primary provider of local services to its customers. Management expects that there will be additional competition in video and Internet conferencing from existing providers of audio teleconferencing services, as well as new competitors dedicated to video and/or Internet conferencing. The Company believes that the principal competitive factors influencing the market for its services are brand identity, quality of customer service, breadth of service offerings, price and vendor reputation. There can be no assurance that the Company will be able to compete successfully with respect to any of these factors. Competition may result in significant price reductions, decreased gross margins, loss of market share and reduced acceptance of the Company's services. The Company derived approximately 10% of its 1998 consolidated net revenues from IXCs and LECs which outsource conferencing services provided to their respective customers. These telecommunications companies have the financial capability and expertise to deliver such services internally. There can be no assurance that the Company's current IXC and LEC customers will not begin to provide the conferencing services now being provided by the Company and pursue such market actively and in direct competition with the Company, which could have a material adverse effect on the Company's business, financial condition, results of operations and prospects. Moreover, the Company believes that part of its growth will occur from RBOCs which may enter the long distance market and outsource their conferencing services. There can be no assurance that any telecommunications company able to offer conferencing services legally, now or in the future, will choose to do so or that those choosing to do so will outsource their conferencing services or choose the Company as their provider in case they do outsource conferencing. Two of the Company's largest outsourcing customers have acquired or merged with competitors of the Company. Collectively, these customers accounted for approximately 12% of the Company's 1998 consolidated net revenues. Although one of these customers, representing approximately 9% of the Company's 1998 consolidated net revenues, has verbally informed the Company that it will honor its current outsourcing contract with the Company, which expires in August 1999, there can be no assurance that such customer will continue to use the Company's services going forward. The second customer, representing approximately 3% of the Company's 1998 consolidated net revenues, has moved its conferencing business to a conferencing company it has recently acquired. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company also believes that many of its current and prospective customers have sufficient resources to purchase the equipment and hire the personnel necessary to establish and maintain conferencing capabilities sufficient to meet their own respective conferencing needs. If the manufacturers of PBXs develop improved, cost-effective PBX capabilities for handling conferences with the quality of existing MCUs used in the conferencing business, the Company's customers could choose to purchase such equipment and hire the personnel necessary to service their conferencing needs through internal telephone systems. The loss of such customers could have a material adverse effect on the Company's business, financial condition, results of operations and prospects. Additionally, if internet technology can be modified to accommodate multipoint voice transmission comparable to existing MCUs used in the conferencing business, there could be a material adverse effect on the Company's business, financial condition, results of operations and prospects. Many of the Company's current and potential competitors have substantially greater financial, sales, marketing, managerial, operational and other resources, as well as greater name recognition, than the Company and may be able to respond more effectively than the Company to new or emerging technologies and changes in 13 customer requirements. In addition, such competitors may be capable of initiating or withstanding significant price decreases or devoting substantially greater resources than the Company to the development, promotion and sale of new services. Because MCUs are not prohibitively expensive to purchase or maintain, companies previously not involved in conferencing could choose to enter the marketplace and compete with the Company. There can be no assurance that new competitors will not enter the Company's markets or that consolidations or alliances among current competitors will not create significant new competition. In order to remain competitive, the Company will be required to provide superior customer service and to respond effectively to the introduction of new and improved services offered by its competitors. Any failure of the Company to accomplish these tasks or otherwise to respond to competitive threats may have a material adverse effect on the Company's business, financial condition, results of operations and prospects. Suppliers The Company's services require two material components which it purchases from outside suppliers: Telecommunications Services. A significant portion of the Company's direct costs are attributable to the purchase of local and long distance telephone services. The Operating Centers have purchased telecommunications services from a number of vendors, including AT&T, Sprint, MCI, and Qwest Communications International, Inc. The Company believes that multiple suppliers will continue to compete for the Company's telecommunications contracts. Since the minutes of use generated by the Company will be substantially higher than the largest of the Operating Centers, the Company's experience subsequent to the Acquisistions is that it has been able to to negotiate telecommunications contracts with lower prices and improved service guarantees. In light of what the Company believes to be increased competition among long distance service providers, the Company has been entering into shorter-term contracts for long distance services in order to obtain the benefit of anticipated reduced costs over time. However, there can be no assurance that competition in the long distance services market will continue to increase, that any increased competition will reduce the cost of long distance services or that the Company's purchasing strategy will result in cost savings. If the costs of long distance services increase over time, the Company's current purchasing strategy (which calls for shorter-term contracts) may place it at a competitive disadvantage with respect to competitors that have entered into longer-term contracts for long distance services. There can be no assurance that the Company's analysis of the future costs of long distance services will be accurate, and the failure to predict future cost trends accurately could have a material adverse effect on the Company's business, financial condition, results of operations and prospects. Bridging Hardware and Software Support Systems. The Company uses MCU equipment produced by four different manufacturers. At present, the equipment being utilized is not functionally identical, but is compatible with substantially all network standards. As of December 31, 1998, approximately 53% of the Operating Centers' port capacity was manufactured by one vendor, MultiLink, Inc. ("MultiLink"), which was acquired by PictureTel Corporation in 1997. However, a number of other vendors offer similar MCU equipment. In February 1998, the Company entered into a two year non-exclusive volume purchase agreement with MultiLink which provides for graduated MCU price discounts based on the number of ports purchased by VIALOG during the term of the agreement. The Company may negotiate similar volume contracts with other manufacturers in the future. In addition, one of the Operating Centers has MCU design and manufacturing resources that are utilized to build equipment for internal use. The Company intends to develop its internal MCU capabilities further to provide advanced feature functionality to address specific client applications, remote operations (network or client based) and improved integration of the MCU into existing management information systems. Employees As of March 1, 1999 the Company had 573 employees, 333 of whom were employed full time or part time as operators or reservationists. None of the Company's employees are represented by unions. The Company has experienced no work stoppages and believes its relationships with its employees are good. 14 Regulation In general, the telecommunications industry is subject to extensive regulation by federal, state and local governments. Although there is little or no direct regulation in the United States of the core group communications services offered by the Company, various government agencies, such as the FCC, have jurisdiction over some of the Company's current and potential suppliers of telecommunications services, and government regulation of those services has a direct impact on the cost of the Company's group communications services. There can be no assurance that the FCC or other government agencies will not seek in the future to regulate the Company as a common carrier and regulate the prices, conditions or other aspects of the group communications services offered by the Company, that the FCC will not impose registration, certification or other requirements on the provision of those services, or that the Company would be able to comply with any such requirements. A central element of the Company's business strategy is to capitalize on outsourcing opportunities. With the passage of the Telecommunications Act of 1996, the Company believes that the RBOCs will seek to enter the market for long distance services and that competition in the markets for both local and long distance telephone services will increase. In order to compete successfully in those markets, the Company believes that the IXCs, LECs and RBOCs will seek to provide teleconferencing and other group communications services, but will outsource such services. Because the Company's outsourcing strategy in part depends on the entrance of the RBOCs into the long distance market, any factor that delays or prevents the entrance of the RBOCs into that market could impact the Company's strategy. For example, the Telecommunications Act of 1996 imposes strict pre-conditions to the provision of in-region long distance services by the RBOCs, including the specific approval of the FCC, the availability of unbundled network elements, the offering of local services for resale, compliance with access and interconnection requirements for competitive LECs, and the establishment of a separate operating subsidiary with separate financing, management, employees, and books and records. There can be no assurance that the RBOCs will be able to meet all of the requirements of the Telecommunications Act of 1996 on a timely basis, if at all. Even if one or more RBOCs meets these requirements, there can be no assurance that the entrance of such RBOCs into the long distance market will cause any IXCs, LECs or RBOCs to seek to outsource their audio teleconferencing services or that a significant number of IXCs, LECs or RBOCs will not continue to provide audio teleconferencing services in direct competition with the Company. Finally, there can be no assurance that any IXCs, LECs or RBOCs seeking to outsource audio teleconferencing services will obtain such services from the Company. The failure of IXCs, LECs and RBOCs to outsource audio teleconferencing services to the Company could have a material adverse effect on the Company's growth strategy and business, financial condition, results of operations and prospects. The Telecommunications Act of 1996 is being contested both administratively and in the courts, and opinions vary widely as to the effects and timing of various aspects of the law. There can be no assurances at this time that the Telecommunications Act of 1996 will create any opportunities for the Company, that local access services will be provided by the IXCs, or that the RBOCs will be able to offer long distance services, including teleconferencing. The Telecommunications Act of 1996 has caused changes in the telecommunications industry, and the Company is unable to predict the extent to which such changes may ultimately affect its business. The Company is subject to laws and regulations that affect its ability to provide certain of its enhanced services, such as those relating to the recording of telephone calls. Changes in the current federal, state or local legislation or regulation could have a material adverse effect on the Company's business, financial condition, results of operations and prospects. Moreover, government regulations in countries other than the United States vary widely and may restrict the Company's ability to offer its services in those countries. The Company believes that it is currently in material compliance with applicable communications laws and regulations. Item 2. Properties. The Company's corporate headquarters are currently located in approximately 11,900 square feet of office space in Andover, Massachusetts under a lease expiring in June, 2004. 15 The Operating Centers are located in leased locations in Virginia, Georgia, Alabama, Massachusetts, New Jersey, Connecticut, Minnesota, Texas and California. The Company believes all of its locations are fully utilized except for its approximately 41,000 square foot facility in Reston, Virginia and its 12,000 square foot facility in Oradell, New Jersey, each of which is approximately 80% utilized, and its approximately 8,219 square foot facility in Atlanta, Georgia which has been vacated in connection with the consolidation of the Atlanta, Georgia and Montgomery, Alabama Operating Centers (discussed below). The Company occupies the Operating Centers and other facilities under leases which provide for a total of approximately 106,171 square feet at rates ranging from $5.00 to $23.00 per square foot with expiration dates, excluding month-to-month leases, ranging from May 1999 to May 2008. The Company's total lease expense related to its facilities was approximately $961,000 and $1.4 million for the years ended December 31, 1997 and 1998, respectively. The Company believes its properties are adequate for its needs. The Company's facilities are located either within one mile of central telephone switching locations or on a sonet fiberoptic loop in metropolitan locations. Each facility has dual sources of power or back-up generating capabilities. While the Company's telephone and power requirements may preclude it from locating in some areas, the Company believes alternative locations are available for its facilities at competitive prices. The Company determined that operational efficiencies would be achieved by consolidating the Operating Centers located in Atlanta, Georgia and Montgomery, Alabama into a new leased facility in Montgomery. In connection with the consolidation plan being implemented by the Company, the Atlanta Operating Center remained staffed through January 31, 1999, after which time its traffic has been managed by operators in the Montgomery Operating Center as well as other Operating Centers. The Company anticipates relocating its Montgomery Operating Center into a new leased facility by May 1999. The lease for the new Montgomery Operating Center provides for a total of approximately 23,500 square feet at a base rate of $12.25 per square foot with an expiration date of December 31, 2004. Item 3. Legal Proceedings. Other than as described below, there are no material pending legal proceedings to which the Company is a party or to which any of its properties are subject. A former employee of CSI, the Atlanta Center, has claimed in writing that he may be entitled to up to five percent of the stock of CSI, based on an unsigned paper outlining possible employment terms. Based on the $18.7 million consideration paid to CSI's stockholders upon the consummation of the Acquisition of CSI by VIALOG Corporation, the value of a five percent equity interest in CSI would be approximately $934,000. CSI's position is that the only agreements with such employee were set forth in two successive executed employment agreements, each of which had a specific provision that such agreement was inclusive as to the terms of employment. The Company and the former stockholders of CSI believe that such claim is without merit. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. PART II Item 5. Market for Company's Common Equity and Related Stockholder Matters. General The Company's authorized capital stock as of December 31, 1998 consisted of 30,000,000 shares of common stock $0.01 par value ("Common Stock") and 10,000,000 shares of preferred stock, $0.01 par value ("Preferred Stock"). As of December 31, 1998, the Company had outstanding 3,693,672 shares of Common Stock and no shares of Preferred Stock. The Company has reserved 3,250,000 shares of Common Stock for issuance pursuant to the Stock Plan. (See Item 11-- Executive Compensation, 1996 Stock Plan). 16 On February 10, 1999, the Company completed an initial public offering ("IPO") of its Common Stock. The Company's Common Stock is quoted on the Nasdaq Stock Market's National Market, under the symbol "VLOG". Prior to the IPO, there was no established public trading market for the Common Stock. As of March 22, 1999 the Company had outstanding 8,298,670 shares of Common Stock held by approximately 129 shareholders of record. Dividends The Company has not declared any dividends on any class of common equity during the past three fiscal years and has no intention of paying dividends in the foreseeable future. Additionally, pursuant to the terms of the Indenture and the Senior Credit Facility, the Company is prohibited from declaring or paying any dividends or distributions other than dividends or distributions payable solely in certain qualified capital stock of the Company. Sales of Unregistered Securities in 1997 and 1998 The Company issued options in 1998 to purchase an aggregate of 823,175 shares of Common Stock to various employees of the Company under the Company's 1996 Stock Plan. The exercise price for the options ranged from $5.75 to $10.00 per share. The vesting schedule for the options varies from recipient to recipient based on the circumstances under which the options were granted and the identity of the recipient. These options were issued in accordance with Section 4(2) of the Securities Act or Rule 701 under Section 3(b) of the Securities Act. Use of Proceeds from Registered Offerings Common Stock. On February 4, 1999, the Securities and Exchange Commission declared effective a Form S-1 Registration Statement (File No. 333-53395) filed by the Company in connection with an initial public offering of 4,867,826 shares of its Common Stock, 4,600,000 shares of which were sold by the Company and 267,826 shares of which were sold by a selling stockholder (the "'Selling Stockholder"). The offering of Common Stock closed on February 10, 1999 with all of the 4,867,826 shares sold. Bear, Stearns & Co. Inc., and Prudential Securities Incorporated were the joint lead managers of the offering. The gross proceeds of the offering were approximately $38.9 million, of which $36.8 million related to the Company and $2.1 million related to the Selling Stockholder. The Company incurred approximately $4.1 million of expenses in connection with the offering, of which approximately $2.6 million represented underwriting discounts and commission, and an estimated $1.5 million represented offering costs, including legal fees, accounting fees, underwriters' out-of-pocket expenses and printing expenses. The Company received approximately $32.7 million of net proceeds from the offering. Approximately $29.1 million was used to complete the New Acquisitions. In addition, approximately $305,000 of indebtedness was paid to the former stockholder of one of the New Acquisitions. The remaining $3.3 million of net proceeds will be used for working capital and general corporate purposes. Pending such uses, the net proceeds have been invested in short- term, interest-bearing, investment grade securities or direct or guaranteed obligations of the U.S. government. Item 6. Selected Financial Data. Contemporaneously with the closing of the Private Placement, VIALOG consummated agreements to acquire six PCSBs, all of which became wholly-owned subsidiaries of VIALOG Corporation. Prior to November 12, 1997, VIALOG did not conduct any operations, and all activities conducted by it related to the acquisitions and the completion of financing transactions to fund the acquisitions. The following selected financial data of VIALOG for the years ended December 31, 1996, 1997 and 1998 have been derived from the audited consolidated financial statements of VIALOG Corporation included elsewhere in this Report. 17 Year Ended December 31, ------------------------------- 1996 1997 1998 --------- --------- --------- (in thousands, except share and per share data) Consolidated Statement of Operations Data: Net revenues................................. $ -- $ 4,816 $ 46,820 Cost of revenues, excluding depreciation..... -- 2,492 24,321 Selling, general and administrative expenses.................................... 1,308 7,178 15,196 Depreciation expense......................... -- 273 2,835 Amortization of goodwill and intangibles..... -- 306 2,490 Non-recurring charges........................ -- 8,000 1,200 --------- --------- --------- Operating income (loss) ..................... (1,308) (13,433) 778 Interest income (expense), net............... 1 (1,866) (12,629) --------- --------- --------- Loss before income taxes..................... (1,307) (15,299) (11,851) Income tax benefit (expense)................. 522 (522) (26) --------- --------- --------- Net loss..................................... $ (785) $ (15,821) $ (11,877) ========= ========= ========= Net loss per share--basic and diluted........ $ (0.38) $ (5.48) $ (3.27) ========= ========= ========= Weighted average shares outstanding.......... 2,088,146 2,889,005 3,632,311 ========= ========= ========= Other Financial Data: EBITDA (1)................................... $ (1,308) $ (4,854) $ 6,103 Cash flows used in operating activities...... (178) (4,148) (5,346) Cash flows used in investing activities...... (7) (53,762) (7,848) Cash flows provided by financing activities.. 522 67,140 3,931 December 31, ------------------------------- 1996 1997 1998 --------- --------- --------- (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents.................... $ 337 $ 9,567 $ 232 Working capital (deficit).................... (249) 7,259 (2,378) Total assets................................. 1,263 75,083 69,266 Total long-term debt, including current portion (2)................................. -- 71,936 75,654 Stockholders' equity (deficit)............... 287 (4,882) (16,592) - -------- (1) EBITDA represents income from continuing operations before income taxes, depreciation and amortization. EBITDA is not a measurement presented in accordance with generally accepted accounting principles and should not be considered as an alternative to net income as a measure of operating results or as an alternative to cash flows as a better measure of liquidity. EBITDA does not represent funds available for management's discretionary use. The Company believes that EBITDA is accepted by the telecommunications industry as a generally recognized measure of performance and is used by analysts to report publicly on the performance of telecommunications companies. (2) Net of unamortized original issue discount of $4.2 million and $3.1 million at December 31, 1997 and 1998, respectively. Access and CSI Selected Financial Data VIALOG reports operating results commencing with its inception on January 1, 1996. For the purpose of providing five full years of selected historical financial data, as required under the Securities Act, the following historical selected financial data is presented for the two largest Acquired Companies, Access and CSI. The selected data as of December 31, 1995 and 1996 and for the years ended December 31, 1994, 1995 and 1996 and the period January 1, 1997 to November 12, 1997, the date of their respective Acquisitions, are derived from, and should be read in conjunction with, Access' and CSI's respective audited financial statements and the notes thereto appearing elsewhere in this Report. The selected data as of December 31, 1994 are derived from Access' and CSI's respective audited financial statements. The selected data as of December 31, 1993 and for the year then ended are derived from Access' and CSI's respective unaudited financial statements for that year. The data 18 presented below is neither comparable to nor indicative of the Company's post- Acquisition financial position or results of operations. Year Ended December 31, ------------------------------------ January 1, 1997 to November 12, 1994 1995 1996 1997 ---------- ---------- ------------ ----------------- (In thousands, except share and per share data) Access Statement of Operations Data: Net revenues............. $ 5,114 $ 6,508 $ 9,073 $ 10,945 Cost of revenues, excluding depreciation.. 2,608 3,021 3,564 4,791 Selling, general and administrative expenses................ 1,691 2,484 3,332 4,124 Depreciation and amortization expense.... 269 496 630 823 ---------- ---------- ------------ ------------ Operating income......... 546 507 1,547 1,207 Interest expense, net.... 49 152 174 132 ---------- ---------- ------------ ------------ Earnings before income taxes................... 497 355 1,373 1,075 Income tax expense (benefit)............... 52 (48) -- -- ---------- ---------- ------------ ------------ Net income............... $ 445 $ 403 $ 1,373 $ 1,075 ========== ========== ============ ============ Net income per share-- basic and diluted....... $ 445.00 $ 644.80 $ 2,746.00 $ 2,150.00 ========== ========== ============ ============ Weighted average shares outstanding............. 1,000 625 500 500 ========== ========== ============ ============ Access Other Financial Data: EBITDA(1)................ $ 815 $ 1,003 $ 2,177 $ 2,030 Cash flows provided by operating activities.... 592 821 2,048 2,932 Cash flows used in investing activities.... (557) (1,432) (795) (1,704) Cash flows provided by (used in) financing activities.............. 22 771 (839) (1,549) December 31, ------------------------------------ 1994 1995 1996 ---------- ---------- ------------ (In thousands) Access Balance Sheet Data: Cash and cash equivalents............. $ 230 $ 390 $ 804 Working capital.......... 475 141 759 Total assets............. 1,991 3,672 4,605 Total long-term debt, including current portion................. 626 2,416 2,052 Stockholders' equity..... 1,156 872 1,770 19 Year Ended December 31, January 1, 1997 -------------------------------------- to November 12, 1994 1995 1996 1997 ---------- ----------- ------------- ----------------- (In thousands, except share and per share data) CSI Statement of Operations Data: Net revenues............ $ 2,331 $ 3,808 $ 5,868 $ 5,579 Cost of revenues, excluding depreciation........... 1,256 1,617 2,438 2,052 Selling, general and administrative expenses............... 707 905 998 831 Depreciation expense.... 235 292 393 356 ---------- ----------- ------------- ------------- Operating income (loss)................. 133 994 2,039 2,340 Interest expense, net... 124 160 165 120 ---------- ----------- ------------- ------------- Net income (loss)....... $ 9 $ 834 $ 1,874 $ 2,220 ========== =========== ============= ============= Net income (loss) per share--basic and diluted................ $ 9.00 $ 834.00 $ 1,874.00 $ 2,220.00 ========== =========== ============= ============= Weighted average shares outstanding............ 1,000 1,000 1,000 1,000 ========== =========== ============= ============= CSI Other Financial Da- ta: EBITDA(1)............... $ 368 $ 1,286 $ 2,432 $ 2,696 Cash flows provided by (used in) operating activities............. 53 721 2,128 2,897 Cash flows used in investing activities... (476) (225) (41) (311) Cash flows provided by (used in) financing activities............. 426 (144) (2,144) (2,801) December 31, -------------------------------------- 1994 1995 1996 ---------- ----------- ------------- (In thousands) CSI Balance Sheet Data: Cash and cash equivalents............ $ 23 $ 375 $ 318 Working capital (deficit).............. (805) (322) 445 Total assets............ 1,378 2,037 2,293 Total long-term debt, including current portion................ 1,590 1,446 1,405 Stockholders' equity (deficit).............. (474) 360 676 - -------- (1) EBITDA represents income from continuing operations before income taxes, depreciation and amortization. EBITDA is not a measurement presented in accordance with generally accepted accounting principles and should not be considered as an alternative to net income as a measure of operating results or as an alternative to cash flows as a better measure of liquidity. EBITDA does not represent funds available for management's discretionary use. The Company believes that EBITDA is accepted by the telecommunications industry as a generally recognized measure of performance and is used by analysts to report publicly on the performance of telecommunications companies. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. VIALOG Corporation was founded on January 1, 1996. On November 12, 1997, VIALOG Corporation consummated agreements to acquire six private conference service bureaus, all of which became wholly-owned subsidiaries of VIALOG Corporation. Contemporaneously, with the closing of the Original Acquisitions, VIALOG Corporation closed the Private Placement. Prior to the Original Acquisitions, VIALOG Corporation did not conduct any operations, and all activities conducted by it were related to the Original Acquisitions and the completion of financing transactions to fund the Original Acquisitions. On February 10, 1999 VIALOG Corporation completed an initial public offering of its Common Stock and consummated agreements to acquire three private conference service bureaus, all of which became wholly-owned subsidiaries of VIALOG Corporation. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and related notes thereto for 20 the years ended December 31, 1996, 1997, and 1998 and the financial statements and related notes thereto of certain of the Operating Centers prior to the acquisitions for the years ended December 31, 1994, 1995, 1996 1997 and 1998 and "Selected Financial Data" appearing elsewhere in this Report. Introduction The Company's net revenues are derived primarily from fees charged to customers for audioconferencing services as well as videoconferencing and enhanced and customized communication services. Cost of revenues, excluding depreciation consists primarily of long distance telephone and network charges, salaries and benefits for operators and reservationists, and maintenance of telephone bridging equipment. Selling, general and administrative expenses consist primarily of compensation and benefits to sales and marketing personnel, executive officers and general and administrative employees, marketing expenses, occupancy costs and professional fees. Prior to the acquisitions, the Operating Centers were managed as independent private companies, and, as such, their results of operations reflect different tax structures (S corporations and C corporations) which have influenced, among other things, their levels of historical compensation. Certain officers and employees of the Operating Centers agreed to reductions in their compensation and benefits in connection with the acquisitions. The difference between the historical compensation and benefits of such individuals and the compensation and benefits they agreed to accept subsequent to the acquisitions is referred to as "Compensation Differential." This Compensation Differential and the related income tax effect have been reflected as pro forma adjustments in the Company's pro forma combined financial statements included elsewhere herein. The Company, which has only conducted operations since November 12, 1997 (other than in connection with certain financing transactions, the Private Placement and the Original Acquisitions), has integrated several of its operations, including sales, marketing, and most human resource, benefits administration and cash management functions, and intends to continue to integrate certain operations and administrative functions of the Operating Centers over a period of time. Specifically, over the next 3 to 9 months, the Company plans to complete the integration of the reservations, billing, purchasing, management information systems and accounting functions. The Company estimates that the cost to integrate these activities will be between $1.0 million and $1.5 million. This integration process is expected to present opportunities to reduce costs through the elimination of duplicative functions and through economies of scale, particularly from reductions in long distance telephone charges as a result of new agreements recently entered into by the Operating Centers. It is anticipated that these savings will be partially offset by the costs related to the Company's new management. In addition, it is anticipated that increased marketing costs will initially be required to establish the Company's brand name in the marketplace. As a result of these various costs and possible cost-savings, comparisons of historical operating results may not be meaningful, and such results may not be indicative of future performance. VIALOG Corporation Results of Operations Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Net revenues and cost of revenues, excluding depreciation. As VIALOG Corporation did not conduct any operations prior to November 12, 1997, the revenues and cost of revenues, excluding depreciation for the year ended December 31, 1997 represent only activity for the period November 12, 1997 through December 31, 1997. Net revenues and cost of revenues, excluding depreciation for the year ended December 31, 1998 represent the consolidated results of the Company, including the Original Acquisitions for the full year. Two of the Company's largest outsourcing customers have acquired or merged with competitors of the Company. Collectively, these customers accounted for approximately 12% of the Company's 1998 consolidated net revenues. One of these customers, representing approximately 9% of the Company's 1998 consolidated net 21 revenues, has verbally informed the Company that it will honor its current outsourcing contract with the Company, which expires in August, 1999. The second customer, representing approximately 3% of the Company's 1998 consolidated net revenues, has moved its conferencing business to a conferencing company it has recently acquired. Although a significant reduction in or loss of net revenues from these customers could reduce the Company's expected net revenues and operating results in the near term, the Company believes that the long-term impact to net revenues and results of operations will not be significant. Selling, general and administrative expenses. Selling, general and administrative expenses increased $8.0 million, or 112%, from $7.2 million to $15.2 million for the years ended December 31, 1997 and 1998, respectively. The increase was primarily due to the fact that selling, general and administrative expenses for the year ended December 31, 1997 represented only general and administrative expenses related to the organization of VIALOG Corporation and the consummation of business combination agreements with the Original Acquisitions prior to November 12, 1997 and consolidated selling, general and administrative expenses of the Company including the Original Acquisitions for the period November 12, 1997 through December 31, 1997, while the expenses for the year ended December 31, 1998 represent consolidated selling, general and administrative expenses of the Company, including the Original Acquisitions for the full year. Selling, general and administrative expenses for the years ended December 31, 1997 and 1998 consisted primarily of the following: (i) compensation, benefits and travel expenses of $3.0 million and $10.4 million, respectively, (ii) certain marketing expenses, including advertising, promotions, trade shows and consulting, of $490,000 and $1.5 million, respectively, (iii) professional services expenses of $3.4 million and $721,000, respectively, (iv) occupancy costs of $216,000 and $851,000, respectively, (v) materials, supplies and equipment related costs of $0 and $755,000, respectively, (vi) taxes and insurance costs of $0 and $421,000, respectively, and (vii) all other costs of $92,000 and $540,000, respectively. Included in professional services expenses for the year ended December 31, 1997 is approximately $2.0 million related to an initial public offering which was terminated in early 1997. Included in selling, general and administrative expenses for the year ended December 31, 1998 is approximately $508,000 for compensation and legal expenses related to severance agreements for two former employees. Depreciation and amortization expense. Depreciation and amortization expense increased $4.7 million from $579,000 to $5.3 million for the years ended December 31, 1997 and 1998, respectively. The increase was primarily due to the fact that VIALOG Corporation did not conduct operations prior to November 12, 1997. Thus, depreciation and amortization expense in 1997 represents consolidated depreciation and amortization expense of the Company including the Original Acquisitions for the period November 12, 1997 through December 31, 1997, while depreciation and amortization expense in 1998 represents consolidated depreciation and amortization expense of the Company, including the Original Acquisitions for the full year. Non-recurring charge. The results for the year ended December 31, 1998 include a non-recurring charge of $1.2 million related to the consolidation of the Atlanta and Montgomery Operating Centers. In connection with the consolidation plan being implemented by the Company, the Atlanta Operating Center remained staffed through January 31, 1999, after which time its traffic has been managed by operators in the Montgomery Operating Center as well as other Operating Centers. The Company anticipates relocating its Montgomery Operating Center into a new leased facility by May, 1999. The Company believes that, over the long term, the consolidation of the two Centers will provide operational efficiencies as well as reduce operating costs. During the period that the Atlanta Center remained staffed, the Company incurred a modest amount of incremental costs associated with increased staffing in the Montgomery Center in anticipation of the additional conferencing volume to be managed by the Montgomery Operating Center as a result of the consolidation. The non- recurring charge includes (i) $373,000 associated with personnel reductions of approximately 45 operator, customer service, technical support and general and administrative positions in the Atlanta Operating Center, (ii) $400,000 associated with lease costs for the Atlanta facility from the exit date through the lease termination date (net of estimated sublease income), (iii) $135,000 associated with legal fees and other exit costs, (iv) $77,000 associated with the disposal of furniture and equipment in both the Atlanta and Montgomery Operating Centers, and (v) $215,000 associated with the impairment of intangible assets (assembled workforce) in the Atlanta Operating Center. As of December 31, 1998, approximately $324,000 of such costs had been paid. 22 Interest expense, net. Interest expense, net increased $10.8 million for the year ended December 31, 1998 compared to the year ended December 31, 1997. The increase was primarily due to (i) approximately $8.3 million of increased interest expense on the $75.0 million of Senior Notes issued on November 12, 1997 and (ii) approximately $2.4 million of increased non-cash interest expense related to the amortization of deferred debt issuance costs and original issue discount on the Senior Notes, both of which were partially offset by increased interest income of approximately $177,000 due to increased cash balances. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 VIALOG Corporation incurred a net loss of $785,000 and $15.8 million for the years ended December 31, 1996 and 1997, respectively. The 1996 net loss represented general and administrative expenses, which consisted primarily of legal costs of $93,000, travel costs of $133,000, salaries of $583,000, consulting fees of $301,000, occupancy costs of $71,000 and all other costs of $126,000, which were offset by an income tax benefit of $522,000, all related to the organization of VIALOG Corporation and the consummation of business combination agreements with the Original Acquisitions. The 1997 net loss included expenses incurred prior to the Original Acquisitions, as well as consolidated net revenues and expenses of the Original Acquisitions from the date of the Original Acquisitions through December 31, 1997. The $15.8 million net loss included $4.8 million of consolidated net revenues and $2.5 million of consolidated cost of revenues, excluding depreciation from the date of the Original Acquisitions through December 31, 1997, $7.2 million of selling, general and administrative expenses (which included approximately $2.0 million related to an offering of Common Stock which was terminated in early 1997 and a $958,000 non-cash charge relating to the modification of certain stock options), $306,000 of amortization of goodwill and intangibles related to the Original Acquisitions, $273,000 of depreciation expense, an $8.0 million non- recurring charge relating to the write-off of purchased in-process research and development, $1.8 million of interest expense relating primarily to the Senior Notes and $522,000 of income tax expense. Selling, general and administrative expenses of $7.2 million for the year ended December 31, 1997 consisted primarily of the following: compensation, benefits and travel expenses of $3.0 million (including the $958,000 non-cash charge discussed above), certain marketing expenses, including advertising, promotions, and consulting, of $490,000, professional services expenses of $3.4 million (including the approximate $2.0 million charge discussed above), occupancy costs of $216,000 and all other costs of $92,000. The $8.0 million write-off of purchased in-process research and development noted above represents the amount of the purchase price of the Acquisitions allocated to incomplete research and development projects. This allocation represents the estimated fair value based on risk-adjusted cash flows related to the incomplete products. The acquired in-process research and development represents engineering and test activities associated with the introduction of new enhanced services and information systems. The Original Acquisitions are working on projects that are essential to offering high quality, secure and reliable products including unattended audio conferencing, video and data teleconferencing, integrated voice response and broadcast fax services. Since these projects had not yet reached technological feasibility and have no alternative future uses, there can be no guarantee as to the achievability of the projects or the ascribed values. Accordingly, these costs were expensed as of November 12, 1997, the date VIALOG Corporation acquired the Original Acquisitions. These projects are expected to be completed within 18 months at a cost of approximately $2.0 million in 1998 and $300,000 in 1999. The Company expects to begin realizing incremental benefits as the projects are completed. The failure of the Company to successfully complete the research and development projects could have a material adverse effect on the Company's future results of operations and financial condition. VIALOG had net operating loss carryforwards of $0, $3.9 million and $13.1 million at December 31, 1996, 1997 and 1998, respectively, of which $3.9 million expires in 2013 and $13.1 million expires in 2018. Utilization of the net operating losses may be subject to an annual limitation provided by change in ownership provisions of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code") and similar state provisions. In assessing the realizability of deferred tax assets, VIALOG considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on management's projections for future taxable income, a valuation allowance has been established for the deferred tax assets. See Note 12 to VIALOG's Consolidated Financial Statements. 23 Liquidity and Capital Resources The Company generated negative cash flows of $178,000, $4.1 million and $5.3 million from operating activities for the years ended December 31, 1996 and 1997 and 1998, respectively. Cash flows used in investing activities of $7,000, $53.8 million and $7.8 million for the years ended December 31, 1996, 1997 and 1998, respectively, represent cash paid in connection with the Original Acquisitions of $0, $53.3 million and $0, respectively, purchases of property and equipment of $7,000, $454,000 and $7.4 million, respectively, and $493,000 related to deferred acquisition costs for the year ended December 31, 1998. Cash provided by financing activities of $522,000, $67.1 million and $3.9 million for the years ended December 31, 1996, 1997, and 1998, respectively, represent issuance of long-term debt and common stock, offset by payments of previously issued debt and payments of indebtedness of the Original Acquisitions. On November 12, 1997, VIALOG completed a Private Placement of $75.0 million of Senior Notes, Series A. The Senior Notes bear interest at 12 3/4% per annum, payable semi-annually on May 15 and November 15 of each year, commencing May 15, 1998. The Senior Notes are guaranteed by the Operating Centers and mature on November 15, 2001. The Senior Notes are redeemable in whole or in part at the option of VIALOG on or after November 15, 1999 at 110% of the principal amount thereof, and on or after November 15, 2000 at 105% of the principal amount thereof until maturity, in each case together with accrued interest to the date of redemption. In addition, there are certain other early redemption options available to VIALOG at any time on or prior to November 15, 1999 at certain premiums, as specified in the Indenture. In the event of a change in control, as defined in the Indenture, the Company may be required to repurchase all of the outstanding Senior Notes at 101% of the principal amount plus accrued interest and additional interest, if any. The Indenture contains restrictive covenants with respect to the Company that among other things, create limitations (subject to certain exceptions) on (i) the incurrence of additional indebtedness, (ii) the ability of the Company to purchase, redeem or otherwise acquire or retire any Common Stock or warrants, rights or options to acquire Common Stock, to retire any subordinated indebtedness prior to final maturity or to make investments in any person, (iii) certain transactions with affiliates, (iv) the ability to materially change the present method of conducting business, (v) the granting of liens on property or assets, (vi) mergers, consolidations and the disposition of assets, (vii) declaring and paying any dividends or making any distribution on shares of Common Stock, and (viii) the issuance or sale of any capital stock of the Company's subsidiaries. The Indenture does not require VIALOG to maintain compliance with any financial ratios or tests, except with respect to certain restrictive covenants noted above. The Company is in compliance with all covenants contained in the Indenture. On October 6, 1998, the Company closed a two year, $15.0 million credit facility (the "Senior Credit Facility") with Coast Business Credit, a division of Southern Pacific Bank. Subject to the meeting of certain conditions, the Senior Credit Facility provides for (i) a term loan in the principal amount of $1.5 million, (ii) a term loan of up to 80% of the purchase price of new and used equipment, not to exceed $4.0 million, and (iii) a revolving loan based on a percentage of eligible accounts receivable. Loans under the Senior Credit Facility bear interest at the higher of 7% or the Prime Rate plus 1 1/2%, and interest is based on a minimum outstanding principal balance of the greater of $5.0 million or 33% of the available Senior Credit Facility. The Senior Credit Facility includes certain early termination fees. The Senior Credit Facility is secured by the assets of each of the Operating Centers and the assets of VIALOG Corporation, excluding the ownership interest in each of the Operating Centers. The Company is required to maintain compliance with certain financial ratios and tests, consisting of a debt service coverage ratio of not less than 1.2:1 determined on a monthly basis and a minimum net worth level of not less than $50.0 million determined on an ongoing basis. As of December 31, 1998, the Company was in compliance with such financial ratios and tests. As of December 31, 1998, the Company had borrowed $1.4 million on the term loan, $1.6 million on the equipment term loan, and $2.0 million on the revolving loan. On February 10, 1999, the Company completed an initial public offering for the sale of 4,600,000 shares of Common Stock. The net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, were approximately $32.7 million. Of the net proceeds, approximately $29.1 million was used on February 10, 1999 to complete the acquisitions, in separate transactions, of all of the 24 outstanding capital stock of ABCC, CPI and ABCI. In addition, approximately $305,000 of indebtedness was paid to the former stockholder of one of the acquisitions. The remaining net proceeds of $3.3 million will be used for working capital and general corporate purposes. The Company anticipates that its cash flows from operations and remaining net proceeds from the Company's initial public offering of Common Stock, supplemented by borrowings under the Senior Credit Facility, will meet or exceed its working capital needs, debt service requirements and planned capital expenditures for property and equipment for the next twelve months. The Company expects to meet its longer term liquidity requirements including repayment of the Senior Notes, through a combination of working capital, cash flow from operations, borrowings and future issuances of debt and/or equity securities. However, no assurances can be given that such funds will be available when required or on terms favorable to the Company. The Company intends to continue pursuing attractive acquisition opportunities. The timing, size or success of any acquisition and the associated potential capital commitments are unpredictable. The Company plans to fund future acquisitions primarily through a combination of working capital, cash flow from operations and borrowings, as well as issuances of debt and/or equity securities. However, no assurances can be given that such funds will be available when required or on terms favorable to the Company. The acquisition agreements, pursuant to which the Acquired Companies were acquired (except for the Oradell Center) limit through November 12, 1999 the Company's ability to change the location of an Acquired Company's facilities (except for the Montgomery Center), physically merge the Acquired Company's operations with another operation, change the position of those employees who received employment agreements pursuant to the applicable acquisition agreement, reduce the workforce or terminate employees (except as related to employee performance, the contemplated reorganization of the combined sales and marketing staff and the consolidation of certain accounting functions) without the approval of a majority in interest of the former stockholders of the affected Acquired Company. The acquisition agreement pursuant to which ABCC was acquired contains similar restrictions with respect to changes at ABCC. These restrictions are in effect until February 10, 2001, unless such restrictions are earlier waived by one of the former ABCC stockholders. Based on the term of these limitations and the fact that the Company has been growing and adding additional employees, the Company does not believe that these limitations will have a significant impact on the future results of operations and liquidity. In connection with the consolidation of the Atlanta and Montgomery Centers, the Company has obtained the approvals of a majority in interest of the former stockholders of the Atlanta and Montgomery Centers. The Company is highly leveraged and has a stockholders' deficit at December 31, 1998. This indebtedness requires the Company to dedicate a significant portion of its cash flow from operations to service its indebtedness and makes the Company more vulnerable to unfavorable changes in general economic conditions. Year 2000 Compliance Many currently installed computer systems and software programs were designed to use only a two digit date field. These date fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. Until the date fields are revised, the systems and programs could fail or give erroneous results when referencing dates following December 31, 1999. Such failure or errors could occur prior to the actual change in century. The Company relies on computer applications to manage and monitor its operations, accounting, sales and administrative functions. In addition, the Company's suppliers and service providers (particularly telecommunications companies) are reliant upon computer applications, some of which may contain software that may fail as a result of the upcoming change in century. Failure of the Company's systems or those of its suppliers or service providers could have a material adverse impact on the Company's business, financial condition and results of operations. 25 State of readiness. The Company is in the process of assessing its Year 2000 readiness. The Company's current Year 2000 readiness project will cover the following phases: (i) identification of internal systems and components that will be in service in the 21st century, (ii) assessment of internal system repair or replacement requirements, (iii) assessment of supplier and service provider Year 2000 readiness, (iv) repair or replacement of both internal and external systems or components, (v) testing, (vi) implementation, and (vii) development of a contingency plan in the event of Year 2000 failures. The Company has completed the identification phase of its Year 2000 readiness project. The Company has prepared a comprehensive inventory of all systems and system components in use, and has identified which systems and system components will be in use beyond the year 1999. The Company has also completed the assessment of internal systems phase. For each internal system and system component which will be in use beyond 1999, the Company has determined its Year 2000 readiness. For each system and system component which is not Year 2000 compliant, the Company has identified the repair or replacement required to become Year 2000 compliant and has scheduled such repair or replacement. Additionally, in connection with its plans to integrate the Operating Centers, the Company is in the process of implementing certain common systems in both the operations and financial management areas. Such common systems are Year 2000 compliant, a criteria of the systems integration plan. The Company expects all of its internal systems and system components to be Year 2000 compliant by June 1999. The Company has substantially completed the assessment of its supplier and service provider Year 2000 readiness phase. The Company has contacted all major suppliers and service providers and has received Year 2000 certifications from substantially all major suppliers and service providers. However, there is no assurance that the Company's suppliers or service providers will not suffer a Year 2000 business disruption which could have a material adverse impact on the Company's business, financial condition and results of operations. Costs. To date, the Company has not incurred any material expenditures in connection with its Year 2000 assessment and remediation efforts. Most of its expenses have related to the opportunity cost of time spent by employees of the Company evaluating Year 2000 compliance matters. As the Company continues with the deployment of new systems related to its planned efforts to integrate the Operating Centers, such new systems will be Year 2000 compliant. The cost of purchasing, or developing, and deploying these new systems are not considered Year 2000 costs as they were included in the Company's integration plan and were not accelerated due to Year 2000 issues. Risks. The Company relies heavily on the use of telecommunications systems and services--both internally deployed and from multiple third party service providers. Thus, the Company believes that telecommunications is the area most sensitive to problems with Year 2000 readiness. Failure of one or more of the Company's telecommunications service providers to become Year 2000 compliant on a timely basis could, in a worst case scenario, render the Company unable to schedule or conduct conference calls and other group communication services, and could have a material adverse impact on the Company's business, financial condition and results of operations. However, the Company believes that its ability to redistribute certain of its telecommunications services among its multiple third party service providers could lessen any potential adverse impact. Contingency plan. The Company has not yet developed a Year 2000-specific contingency plan as the Company expects its systems and system components to be Year 2000 compliant by June, 1999. The Company intends to prepare a contingency plan as it becomes aware of Year 2000 problems or risks. Combined Operating Centers and VIALOG Corporation The combined Operating Centers' and VIALOG Corporation's Statements of Operations data for the years ended December 31, 1996, 1997 and 1998 do not purport to present the financial results or the financial condition of the combined Operating Centers and VIALOG Corporation in accordance with generally accepted accounting 26 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, -------------------------------------------- 1996 1997 1998 ------------- ------------- -------------- (Dollars in thousands) Net revenues................... $37,558 100.0% $45,583 100.0% $59,819 100.0% Cost of revenues, excluding de- preciation.................... 17,979 47.9% 22,296 48.9% 29,016 48.5% Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Net revenues. All Operating Centers reflected an increase in net revenues for the year ended December 31, 1998 compared to the year ended December 31, 1997. Net revenues increased $14.2 million, or 31.2%, from net revenues of $45.6 million in 1997 to net revenues of $59.8 million in 1998. Overall, the increase was primarily due to increased call volumes for audio and video conferencing services. The major components of this increase were (i) an increase in the Reston Center's net revenues of $5.8 million, or 46.0%, from $12.6 million in 1997 to $18.4 million in 1998, which consisted of increased sales of conferencing services of approximately $3.9 million and $1.9 million to existing and new customers, respectively, including the introduction of video equipment sales in the first quarter of 1998, (ii) an increase in the Cambridge Center's net revenues of $1.8 million, or 44.1%, which was primarily attributable to increased audioconferencing services to existing customers and new customers, (iii) an increase in the Chaska Center's net revenues of $1.8 million, or 31.1%, which was primarily attributable to increased audioconferencing services to existing customers and new customers, (iv) an increase in the Atlanta Center's net revenues of $1.2 million, or 18.1%, which was primarily due to increased revenues from two significant customers, which represented 71.6% and 69.4% of the Atlanta Center's net revenues for the years ended December 31, 1997 and 1998, respectively, and (v) an increase in the Montgomery Center's net revenues of $1.6 million, or 19.6%, which was primarily due to increased revenues for audioconferencing services to existing retail and financial services customers. Cost of revenues, excluding depreciation. Cost of revenues, excluding depreciation for the year ended December 31, 1998 increased $6.7 million, or 30.1%, from $22.3 million in 1997 to $29.0 million in 1998, and remained flat as a percentage of revenue. The dollar increase was primarily attributable to (i) an increase in the Reston Center's cost of revenues, excluding depreciation of $3.0 million, or 54.7%, resulting from increased telecommunications costs and personnel and related costs associated with increased call volumes, and equipment costs related to the introduction of video equipment sales in the first quarter of 1998 (which generate a lower gross margin than teleconferencing services), (ii) an increase in the Atlanta Center's cost of revenues, excluding depreciation of $863,000, or 36.5%, resulting from increased telecommunications costs associated with increased call volumes as well as increased operating costs due to increased staffing to support current and projected revenue growth, (iii) an increase in the Montgomery Center's cost of revenues, excluding depreciation of $835,000, or 14.1%, resulting primarily from increased telecommunications costs associated with increased call volumes and (iv) an increase in the Cambridge Center's cost of revenues, excluding depreciation of $1.1 million, or 55.4%, resulting from increased telecommunications costs associated with increased call volumes as well as increased operating costs due to increased staffing to support current and projected revenue growth. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Net revenues. All Operating Centers reflected an increase in net revenues during the year ended December 31, 1997 compared to the year ended December 31, 1996. Combined net revenues increased $8.0 million, or 27 21.4%, from $37.6 million in 1996 to $45.6 million in 1997. Overall, the increase was primarily due to increased call volumes for audio conferencing services. The major components of this increase were (i) an increase in the Reston Center's net revenues of $3.5 million, or 38.5%, from $9.1 million in 1996 to $12.6 million in 1997, which consisted of increased sales of conferencing services of $2.2 million and $1.3 million to existing and new customers, respectively, (ii) an increase in the Montgomery Center's net revenues of $1.0 million, or 12.9%, from $7.5 million in 1996 to $8.5 million in 1997, which was primarily attributable to sales of conferencing services to existing customers and sales to new customers, and (iii) an increase in the Cambridge Center's net revenues of $725,000, or 21.3%, from $3.4 million in 1996 to $4.1 million in 1997, which was primarily attributable to sales to existing customers and new customers. This growth was achieved despite the fact that the Cambridge Center's net revenues for 1996 included $707,000 of net revenues from a portion of Cambridge's business that was divested in December, 1996. Cost of revenues, excluding depreciation. Combined cost of revenues, excluding depreciation increased $4.3 million, or 24.0%, from $18.0 million in 1996 to $22.3 million in 1997 and increased slightly as a percentage of net revenues from 47.9% in 1996 to 48.9% in 1997. The dollar increase was primarily attributable to (i) an increase in the Reston Center's cost of revenues, excluding depreciation of $1.9 million, or 54.3%, from $3.6 million in 1996 to $5.5 million in 1997 related to the substantial investment made in personnel and related costs associated with video conferencing and increased telecommunications and personnel expense associated with the growth in revenues, (ii) an increase in the Oradell Center's cost of revenues, excluding depreciation of $609,000, or 74.4%, from $818,000 in 1996 to $1.4 million in 1997 primarily due to telecommunications costs and personnel expenses to support the current and expected call volume, and (iii) an increase in the Montgomery Center's cost of revenues, excluding depreciation of $626,000, or 11.9%, from $5.3 million in 1996 to $5.9 million in 1997, which was primarily attributable to increased telecommunications costs and personnel expenses to support the increased call volume. New Accounting Pronouncements In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Under this concept, all revenues, expenses, gains and losses recognized during the period are included in income, regardless of whether they are considered to be the results of operations of the period. The adoption of SFAS 130 effective January 1, 1998 did not have a material impact on the Company's consolidated financial statements. In June, 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report selected information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company operates in one segment. The adoption of SFAS 131 effective January 1, 1998 did not impact the Company's consolidated financial statements. In March, 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use, and is effective for fiscal years beginning after December 31, 1998, with earlier application encouraged. The adoption of SOP 98-1 is not expected to have a material impact on the Company's consolidated financial statements. In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. SFAS 133 is 28 effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The Company does not anticipate the adoption of this standard will have a material impact on the Company's consolidated financial statements. Access and CSI The selected historical financial information presented in the tables below for the selected Operating Centers is derived from, and should be read in conjunction with, the respective audited financial statements and related notes thereto of the individual Operating Centers included elsewhere herein and "Access and CSI Selected Financial Data." The individual selected financial information for Access and CSI is presented because Access and CSI are the Operating Centers that are considered to represent a significant percentage of the operating results of the Company. Specifically, Access and CSI represented 29% and 57%, respectively, of the operating income of the Operating Centers on a combined basis for the period from January 1, 1997 to November 12, 1997. The selected historical financial information for all Operating Centers on a combined basis, and VIALOG Corporation is included elsewhere herein. Access Founded in 1987, Access specializes in providing conferencing services to numerous organizations, including financial institutions, government agencies, trade associations and professional service companies. Access is headquartered and maintains its operations center in Reston, Virginia. Results of Operations--Access The following table sets forth certain historical financial data of Access and such data as a percentage of net revenues for the periods presented: January 1, November 13, Year Ended December 31, 1997 to 1997 to ---------------------------------------- November 12, December 31, 1994 1995 1996 1997 1997 ------------ ------------ ------------ ------------- --------------- (In thousands, except percentages) Net revenues............ $5,114 100.0% $6,508 100.0% $9,073 100.0% $10,945 100.0% $ 1,620 100.0% Cost of revenues, excluding depreciation........... 2,608 51.0% 3,021 46.4% 3,564 39.3% 4,791 43.8% 709 43.8% Selling, general and administrative Expenses............... 1,691 33.1% 2,484 38.2% 3,332 36.7% 4,124 37.7% 2,603 160.6% Depreciation and amortization expense... 269 5.2% 496 7.6% 630 6.9% 823 7.5% 183 11.3% ------ ----- ------ ----- ------ ----- ------- ----- ------- ------ Operating income (loss)................. $ 546 10.7% $ 507 7.8% $1,547 17.1% $ 1,207 11.0% $(1,875) (115.7)% ====== ===== ====== ===== ====== ===== ======= ===== ======= ====== Periods January 1 to November 12, 1997 and November 13 to December 31, 1997 compared to Year Ended December 31, 1996 Net revenues. Net revenues increased from $9.1 million for the year ended December 31, 1996 to $10.9 million and $1.6 million for the periods January 1 to November 12, 1997 and November 13 to December 31, 1997, respectively. The increase in net revenues consisted of additional sales of conferencing services, due to increased call volumes, to existing and new customers. Sales to new customers were approximately $1.1 million and $167,000 for the periods January 1 to November 12, 1997 and November 13 to December 31, 1997, respectively. These increases reflect a substantial increase in net revenues from audio and enhanced conferencing services, as well as revenues of $228,000, $53,000 and $13,000 for video conferencing services for the periods January 1 to November 12, 1997 and November 13 to December 31, 1997 and the year ended December 31, 1996, respectively. Cost of revenues, excluding depreciation. Cost of revenues, excluding depreciation increased from $3.6 million for the year ended December 31, 1996 to $4.8 million and $709,000 for the periods January 1 to November 12, 1997 and November 13 to December 31, 1997, respectively. As a percentage of net revenues, cost of revenues increased 4.5 percentage points, from 39.3% for the year ended December 31, 1996 to 43.8% 29 for each of the periods January 1 to November 12, 1997 and November 13 to December 31, 1997. The percentage increase is primarily the result of the substantial investment in personnel and related costs made in video conferencing during the periods January 1 to November 12, 1997 and November 13 to December 31, 1997. Selling, general and administrative expenses. Selling, general and administrative expenses increased from $3.3 million for the year ended December 31, 1996 to $4.1 million and $2.6 million for the periods January 1 to November 12, 1997 and November 13 to December 31, 1997, respectively. The dollar increase was primarily the result of (i) a $2.2 million write-off of in-process research and development costs during the period November 13 to December 31, 1997, relating to the acquisition of Access by VIALOG Corporation, (ii) a $481,000 charge related to acquisition consulting services provided to the former stockholders of Access in connection with the sale of Access to VIALOG Corporation and the write-off of a consulting agreement and an agreement not to compete which were determined by Access to have no future value as of November 12, 1997 and (iii) additional operating expenses consistent with the increase in net revenues experienced by Access. Depreciation and amortization expense. Depreciation and amortization expense increased from $630,000 for the year ended December 31, 1996 to $823,000 and $183,000 for the periods January 1 to November 12, 1997 and November 13 to December 31, 1997, respectively. The dollar increase is the result of additional property and equipment of $1.7 million and $380,000 acquired during the periods January 1 to November 12, 1997 and November 13 to December 31, 1997, respectively, to support the growth in net revenues and the amortization of goodwill and intangible assets since November 12, 1997, related to the acquisition of Access by VIALOG Corporation. Year Ended December 31, 1996 compared to Year Ended December 31, 1995 Net revenues. Net revenues increased $2.6 million, or 39.4%, from $6.5 million for the year ended December 31, 1995 to $9.1 million for the year ended December 31, 1996. The increase in net revenues consisted of additional sales of audioconferencing services, due to increased call volumes, of $1.4 million and $1.2 million to existing and new customers, respectively. Cost of revenues, excluding depreciation. Cost of revenues, excluding depreciation increased $543,000, or 18.0%, from $3.0 million for the year ended December 31, 1995 to $3.6 million for the year ended December 31, 1996. The dollar increase was primarily attributable to increased telecommunications costs related to increased call volume and occupancy costs and the salaries and benefits for 16 additional operators. As a percentage of net revenues, cost of revenues, excluding depreciation decreased 7.1 percentage points, from 46.4% for the year ended December 31, 1995 to 39.3% for the year ended December 31, 1996. Selling, general and administrative expenses. Selling, general and administrative expenses increased $848,000, or 34.1%, from $2.5 million for the year ended December 31, 1995 to $3.3 million for the year ended December 31, 1996. The dollar increase was primarily the result of increased occupancy costs, non-recurring executive compensation and bad debt expense. As a percentage of net revenues, selling, general and administrative expenses decreased 1.5 percentage points from 38.2% for the year ended December 31, 1995 to 36.7% for the year ended December 31, 1996. Depreciation and amortization expense. Depreciation and amortization expense increased $134,000, or 27.0% from $496,000 for the year ended December 31, 1995 to $630,000 for the year ended December 31, 1996. The dollar increase is the result of additional property and equipment of $783,000 acquired during 1996 to support the growth experienced in net revenues. As a percentage of net revenues, depreciation expense decreased 0.7 percentage points from 7.6% for the year ended December 31, 1995 to 6.9% for the year ended December 31, 1996. Year Ended December 31, 1995 compared to Year Ended December 31, 1994 Net revenues. Net revenues increased $1.4 million, or 27.3%, from $5.1 million for the year ended December 31, 1994 to $6.5 million for the year ended December 31, 1995. The increase in net revenues consisted 30 primarily of additional sales of conferencing services, due to increased call volumes, of $730,000 and $664,000 to existing and new customers, respectively. Cost of revenues, excluding depreciation. Cost of revenues, excluding depreciation increased $413,000, or 15.8%, from $2.6 million for the year ended December 31, 1994 to $3.0 million for the year ended December 31, 1995. The dollar increase was primarily attributable to salaries and benefits for 10 additional operators. As a percentage of net revenues, cost of revenues, excluding depreciation decreased 4.6 percentage points, from 51.0% for the year ended December 31, 1994 to 46.4% for the year ended December 31, 1995. Selling, general and administrative expenses. Selling, general and administrative expenses increased $793,000, or 46.9%, from $1.7 million for the year ended December 31, 1994 to $2.5 million for the year ended December 31, 1995. The dollar increase was primarily the result of moving expenses and additional occupancy costs associated with relocating to a larger facility. As a percentage of net revenues, selling, general and administrative expenses increased 5.1 percentage points from 33.1% for the year ended December 31, 1994 to 38.2% for the year ended December 31, 1995. Depreciation and amortization expense. Depreciation and amortization expense increased $227,000, or 84.4% from $269,000 for the year ended December 31, 1994 to $496,000 for the year ended December 31, 1995. The dollar increase is the result of $1.4 million in purchases of additional property and equipment during the year ended December 31, 1995 to support the growth experienced in net revenues and the relocation to a larger facility. As a percentage of net revenues, depreciation expense increased 2.4 percentage points from 5.2% for the year ended December 31, 1994 to 7.6% for the year ended December 31, 1995. Liquidity and Capital Resources--Access The following table sets forth selected financial information from Access' statements of cash flows: Year Ended December 31, ------------------------- January 1, 1997 to 1994 1995 1996 November 12, 1997 ------- -------- ------- ------------------ (In thousands) Net cash provided by (used in): Operating activities.......... $ 592 $ 821 $ 2,048 $ 2,932 Investing activities.......... (557) (1,432) (795) (1,704) Financing activities.......... 22 771 (839) (1,549) ------ -------- ------- ------- Net increase (decrease) in cash and cash equivalents........... $ 57 $ 160 $ 414 $ (321) ====== ======== ======= ======= Access had positive cash flow from operations in each year ended December 31, 1994, 1995 and 1996 and the period January 1, 1997 to November 12, 1997. Cash used in investing activities related primarily to the acquisition of property and equipment. Net cash provided by financing activities was primarily the result of borrowings on notes payable to finance the acquisition of property and equipment. Net cash used in financing activities consisted of the repayment of notes payable, principal payments under capital lease obligations, payments to a former stockholder and distributions to stockholders. Distributions to stockholders totaled $39,000, $0, $475,000 and $1,284,000 for the years ended December 31, 1994, 1995, and 1996 and the period January 1, 1997 to November 12, 1997, respectively. CSI Founded in 1992, CSI specializes in providing audioconferencing services and enhanced services to certain facilities-based and non-facilities-based telecommunications providers. CSI is headquartered and maintains its operations center in Atlanta, Georgia. 31 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, 1994 1995 1996 1997 1997 ------------ ------------ ------------ ------------ ---------------- (In thousands, except percentages) Net revenue............. $2,331 100.0% $3,808 100.0% $5,868 100.0% $5,579 100.0% $ 854 100.0 % Cost of revenues, excluding depreciation........... 1,256 53.9% 1,617 42.5% 2,438 41.6% 2,052 36.8% 322 37.7 % Selling, general and administrative expenses............... 707 30.3% 905 23.8% 998 17.0% 831 14.9% 3,493 409.0 % Depreciation and amortization expense... 235 10.1% 292 7.6% 393 6.7% 356 6.4% 168 19.7 % ------ ----- ------ ----- ------ ----- ------ ----- ------- ------- Operating income (loss)................. $ 133 5.7% $ 994 26.1% $2,039 34.7% $2,340 41.9% $(3,129) (366.4)% ====== ===== ====== ===== ====== ===== ====== ===== ======= ======= Periods January 1 to November 12, 1997 and November 13 to December 31, 1997 Compared to Year Ended December 31, 1996 Net Revenues. Net revenues increased from $5.9 million in 1996 to $5.6 million and $854,000 for the periods January 1 to November 12, 1997 and November 13 to December 31, 1997, respectively. The increase is primarily due to increased revenues from CSI's two significant customers. Net revenues from such customers represented 70.0% of CSI's net revenues for the year ended December 31, 1996 and approximately 71.6% and 71.4% of CSI's net revenues for the periods January 1 to November 12, 1997 and November 13 to December 31, 1997, respectively. Cost of revenues, excluding depreciation. Cost of revenues, excluding depreciation decreased slightly from $2.4 million in 1996 to $2.1 million and $322,000 for the periods January 1 to November 12, 1997 and November 13 to December 31, 1997, respectively. The decrease in cost of revenues, excluding depreciation on increased call volumes was primarily the result of lower telecommunications rates included in a contract which became effective in November, 1996. Selling, general and administrative expenses. Selling, general and administrative expenses increased from $998,000 in 1996 to $831,000 and $3.5 million for the periods January 1 to November 12, 1997 and November 13 to December 31, 1997, respectively. The increase was primarily the result of a $3.4 million write-off of in-process research and development costs relating to the acquisition of CSI by VIALOG Corporation. Depreciation and amortization expense. Depreciation and amortization expense increased from $393,000 for the year ended December 31, 1996 to $356,000 and $168,000 for the periods January 1 to November 12, 1997 and November 13 to December 31, 1997, respectively. The increase was the result of additional property and equipment acquired to support the growth in net revenues and the amortization of goodwill and intangible assets since November 12, 1997, related to the acquisition of CSI by VIALOG Corporation. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Net revenues. Net revenues increased $2.1 million, or 54.1%, from $3.8 million in 1995 to $5.9 million in 1996. Virtually all of this increase was the result of a $2.2 million increase in net revenues from two significant customers of CSI. Net revenues from such customers represented 54.0% and 70.0% of CSI's net revenues for the years ended December 31, 1995 and 1996, respectively. Cost of revenues, excluding depreciation. Cost of revenues, excluding depreciation increased $821,000, or 50.8%, from $1.6 million in 1995 to $2.4 million in 1996. As a percentage of net revenues, cost of revenues, 32 excluding depreciation decreased 0.9 percentage points from 42.5% in 1995 to 41.6% in 1996. The dollar increase was primarily attributable to increased telecommunications expenses associated with increased call volumes and costs associated with the addition of nine operators. Selling, general and administrative expenses. Selling, general and administrative expenses increased $93,000, or 10.3%, from $905,000 in 1995 to $998,000 in 1996. As a percentage of net revenues, selling, general and administrative expenses decreased 6.8 percentage points from 23.8% in 1995 to 17.0% in 1996. This percentage decrease was primarily attributable to spreading fixed costs over a larger revenue base. Depreciation and amortization expense. Depreciation and amortization expense increased $101,000, or 34.6%, from $292,000 for the year ended December 31, 1995 to $393,000 for the year ended December 31, 1996. The increase was the result of additional property and equipment acquired to support the growth in net revenues. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Net revenues. Net revenues increased $1.5 million, or 63.4%, from $2.3 million in 1994 to $3.8 million in 1995. Virtually all of this increase was the result of a $1.4 million increase in net revenues from two significant customers of CSI. Net revenues from such customers represented 28.0% and 54.0% of total net revenues for the years ended December 31, 1994 and 1995, respectively. Cost of revenues, excluding depreciation. Cost of revenues, excluding depreciation increased $361,000, or 28.7%, from $1.3 million in 1994 to $1.6 million in 1995. As a percentage of net revenues, cost of revenues decreased 11.4 percentage points from 53.9% in 1994 to 42.5% in 1995. This percentage decrease was primarily attributable to a reduction in local access charges, telecommunications expenses and the termination of a lease for network access. Selling, general and administrative expenses. Selling, general and administrative expenses increased $198,000, or 28.0%, from $707,000 in 1994 to $905,000 in 1995. As a percentage of net revenues, selling, general and administrative expenses decreased 6.5 percentage points from 30.3% in 1994 to 23.8% in 1995. This percentage decrease was primarily attributable to spreading such costs over a larger revenue base. Depreciation and amortization expense. Depreciation and amortization expense increased $57,000, or 24.3%, from $235,000 for the year ended December 31, 1994 to $292,000 for the year ended December 31, 1995. The increase was the result of additional property and equipment acquired to support the growth in net revenues. Liquidity and Capital Resources--CSI The following table sets forth selected financial information from CSI's statements of cash flows: Year Ended December 31, January 1, 1997 --------------------- to November 12, 1994 1995 1996 1997 ----- ----- ------- --------------- (In thousands) Net cash provided by (used in): Operating activities................. $ 53 $ 721 $ 2,128 $ 2,897 Investing activities................. (476) (225) (41) (311) Financing activities................. 426 (144) (2,144) (2,801) ----- ----- ------- ------- Net increase (decrease) in cash and cash equivalents...................... $ 3 $ 352 $ (57) $ (215) ===== ===== ======= ======= CSI had a positive cash flow from operations in each year ended December 31, 1994, 1995, 1996 and the period January 1, 1997 to November 12, 1997. Cash used in investing activities in 1994, 1995, 1996 and the period January 1, 1997 to November 12, 1997 related solely to the acquisition of property and equipment. Cash provided by financing activities consisted of the proceeds of borrowings on long-term debt and from the 33 refinancing of capital lease obligations. Cash used in financing activities consisted of repayments of long-term debt and capital lease obligations and distributions to stockholders. Stockholder distributions totaled $1.6 million and $2.6 million for the year ended December 31, 1996 and the period January 1, 1997 through November 12, 1997, respectively. There were no stockholder distributions in 1994 and 1995. As of November 12, 1997, CSI had a working capital deficit of $23,000. Safe Harbor for Forward Looking Statements The Company is including the following cautionary statements to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company in this Annual Report on Form 10-K. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Such forward-looking statements may be identified, without limitation, by the use of the words "anticipates," "estimates," "expects," "intends," "plans," "predicts," "projects," and similar expressions. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such forward-looking statements, whether written or oral, and whether made by or on behalf of the Company, are expressly qualified by these cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, the Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof. Forward-looking statements involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, some of the important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statements include the following: Absence of Consolidated Operating History. VIALOG Corporation was founded on January 1, 1996 and has only conducted operations and generated revenues since November 12, 1997, the date of the Original Acquisitions. Prior to that time, the Operating Centers each operated as separate, independent businesses. In addition, the Company used the purchase method of accounting to record the Acquisitions and consequently, the pro forma and consolidated financial information contained in this Report may not be indicative of the Company's future operating results and financial condition. Difficulty of Integrating the Operating Centers. The successful and timely integration of the Operating Centers is critical to the Company's future financial performance. Prior to the acquisitions, the Operating Centers used different operating practices and procedures and management information systems. Until the Company completes the centralization of the accounting and other administration systems, it will rely on the separate systems of the Operating Centers. The continued integration of the Operating Centers will require the Company, among other things, to retain key employees, assimilate diverse corporate cultures and manage geographically dispersed operations, each of which could pose significant challenges to the Company and its management. The Company's success will depend on the ability of its executive officers to continue to establish and integrate themselves into the Company's daily operations as well as to continue to gain the confidence of the employees of the Operating Centers. Prior to the acquisitions, the Operating Centers had a variety of sales strategies and methods. The Company has deployed a nationwide sales organization, which is more costly and may prove to be ineffective at increasing net revenues. There can be no assurance that the Company will be successful in completing the integration of any of the operations of the Operating Centers or, if completed, that such combined operations will demonstrate significant operating efficiencies. The failure of the Company to integrate the Operating Centers successfully could have a material adverse effect on the Company's business, financial 34 condition, results of operations and prospects which could adversely impact the market for the Company's Common Stock. See "Business--Operating Strategy" and "Business--Billing and Management Information Systems." The acquisition agreements pursuant to which the Acquired Companies were acquired (except for the Oradell Center) limit until November 12, 1999 the Company's ability to change the location of an Acquired Company's facilities (except for the Montgomery Center), physically merge the Acquired Company's operations with another operation, change the position of those employees who received employment agreements pursuant to the applicable acquisition agreement, reduce the workforce or terminate employees (except as related to employee performance, the contemplated reorganization of the combined sales and marketing staff and the consolidation of certain accounting functions) without the approval of a majority in interest of the former stockholders of the affected Acquired Company. The acquisition agreement pursuant to which ABCC was acquired contains similar restrictions with respect to changes at ABCC. These restrictions are in effect until February 10, 2001, unless such restrictions are earlier waived by one of the former ABCC stockholders. Such limitations could restrict the Company's ability to integrate the operations of the Acquired Companies successfully and could limit the Company's ability to respond to competitive pressures on its labor costs and materially adversely affect the Company's growth plans. See "Business--Properties" and "Certain Relationships and Related Transactions--Organization of the Company." Pre-tax Losses. The Oradell Center incurred a pretax loss in 1997 of approximately $423,000 ($330,000 for the period from January 1, 1997 to the date of the Acquisition and $93,000 from the date of the Acquisition to December 31, 1997), excluding the non-recurring charge related to the fair value of purchased in-process research and development. Three of the Operating Centers--Montgomery, Oradell and Danbury--incurred pretax losses in 1996 of approximately $311,000, $73,000 and $72,000, respectively. Montgomery and Danbury incurred pretax losses in 1995 of approximately $371,000 and $28,000, respectively. There can be no assurance that such Operating Centers will achieve profitability going forward. The failure of such Operating Centers to achieve profitability will have a material adverse effect on the Company's business, financial condition, results of operations and prospects. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Substantial Leverage and Ability to Service Debt. The Company is highly leveraged, with substantial debt service in addition to operating expenses and planned capital expenditures. At December 31, 1998, the total indebtedness of the Company was approximately $75.7 million, net of unamortized original issue discount of $3.1 million. In October 1998, the Company closed a senior credit facility for a principal amount of up to $15.0 million (the "Senior Credit Facility"). As of December 31, 1998, the Company had approximately $5.0 million of borrowings outstanding under the Senior Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's level of indebtedness will have several important effects on its future operations, including, without limitation, (i) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of interest and principal on its indebtedness, (ii) covenants contained in the Indenture and the Senior Credit Facility require the Company to meet certain financial tests, and other restrictions contained in the Indenture and the Senior Credit Facility limit its ability to borrow additional funds or to dispose of assets, and may affect the Company's flexibility in planning for, and reacting to, changes in its business, including possible acquisition activities, (iii) the Company's leveraged position has substantially increased its vulnerability to adverse changes in general economic, industry and competitive conditions and (iv) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes may be limited. The Company's ability to meet its debt service obligations and to reduce its total indebtedness will be dependent upon the Company's future performance, which will be subject to general economic, industry and competitive conditions. There can be no assurance that the Company's business will continue to generate cash flow at or above current levels. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt, it may be required, among other things, to seek additional financing in the debt or equity markets, to refinance or restructure all or a portion of its indebtedness, to sell 35 selected assets, or to reduce or delay planned capital expenditures. There can be no assurance that any such measures would be sufficient to enable the Company to service its debt, or that any of these measures could be effected on satisfactory terms, if at all. Restrictions Imposed by Lenders. The Indenture and the Senior Credit Facility contain a number of covenants that restrict the ability of the Company to dispose of assets, merge or consolidate with another entity, incur additional indebtedness, create liens, make capital expenditures or other investments or acquisitions and otherwise restrict corporate activities. The ability of the Company to comply with such provisions may be affected by events that are beyond the Company's control. The breach of any of these covenants could result in a default under the Indenture or the Senior Credit Facility, which would permit the holders of the Senior Notes and/or the lender under the Senior Credit Facility to declare all amounts borrowed thereunder to be due and payable, together with accrued and unpaid interest. If the Company were unable to repay its indebtedness to the lender under the Senior Credit Facility, such lender could proceed against any and all collateral securing such indebtedness. In addition, as a result of these covenants, the ability of the Company to respond to changing business and economic conditions and to secure additional financing, if needed, may be significantly restricted, and the Company may be prevented from engaging in transactions that might otherwise be considered beneficial to the Company. Any of such events could adversely impact the market for the Company's Senior Notes and Common Stock. See "Substantial Leverage and Ability to Service Debt." Competition. The conferencing services industry is highly competitive and subject to rapid change. The Company currently competes with the following categories of companies: (i) IXCs, such as AT&T, MCI, Sprint, Frontier and Cable & Wireless, (ii) independent LECs, such as GTE Corporation ("GTE") and Cincinnati Bell Inc. ("Cincinnati Bell"), and (iii) other private conference service bureaus ("PCSBs"). According to estimates from industry sources, the IXCs currently serve approximately 80% of the audio conferencing market. Under the Telecommunications Act of 1996, the RBOCs will also be allowed to provide long distance services upon the satisfaction of certain conditions, which the Company believes will lead to their entry into the conferencing market. If the Company is able to expand its video and Internet conferencing service offerings, it will encounter additional competition, not only from existing providers of audioconferencing, but also from competitors dedicated to video and/or Internet conferencing. Many of the Company's current and potential competitors have substantially greater financial, sales, marketing, managerial, operational and other resources, as well as greater name recognition, than the Company. As a result, competitors may be able to respond more effectively than the Company to new or emerging technologies and changes in customer requirements, to initiate or withstand significant price decreases or to devote substantially greater resources than the Company in order to develop and promote new services. Because Multipoint Control Units ("MCUs"), the equipment commonly used to provide teleconferencing services, are not prohibitively expensive to purchase or maintain, companies previously not involved in teleconferencing could choose to enter the marketplace and compete with the Company. There can be no assurance that new competitors will not enter the Company's markets or that consolidations or alliances among current competitors will not create significant new competition. In order to remain competitive, the Company will be required to provide superior customer service and to respond effectively to the introduction of new and improved services offered by its competitors. Any failure of the Company to accomplish these tasks or otherwise to respond to competitive threats could have a material adverse effect on the Company's business, financial condition, results of operations and prospects and could adversely impact the market for the Company's Common Stock. The Company derived approximately 10% of its 1998 consolidated net revenues from IXCs and LECs which outsource teleconferencing services provided to their respective customers. These telecommunications companies have the financial capability and expertise to deliver such services internally. There can be no assurance that the Company's current IXC and LEC customers will not begin to provide the teleconferencing services currently provided by the Company and pursue such market actively and in direct competition with the Company. Moreover, the Company expects to derive a portion of its future revenues from RBOCs that enter the long distance market and outsource their teleconferencing services. There can be no assurance that the RBOCs will be able to enter the long distance market on a timely basis, if at all; that any RBOC entering the long distance 36 market will offer teleconferencing services; or that any IXC, LEC or RBOC offering such services will outsource services or choose the Company as the provider of such outsourced teleconferencing services. The failure of any such event to occur could have a material adverse effect on the Company's business, financial condition, results of operations and prospects and could adversely impact the market for the Company's Common Stock. Two of the Company's largest outsourcing customers have acquired or merged with competitors of the Company. Collectively, these customers accounted for approximately 12% of the Company's 1998 consolidated net revenues. Although one of these customers, representing approximately 9% of the Company's 1998 consolidated net revenues, has verbally informed the Company that it will honor its current outsourcing contract with the Company, which expires in August, 1999, there can be no assurance that such customer will continue to use the Company's services going forward. The second customer, representing approximately 3% of the Company's 1998 consolidated net revenues, has moved its conferencing business to a conferencing company it has recently acquired. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Teleconferencing Insourcing. Many of the Company's current and prospective customers have sufficient resources to purchase the equipment and hire the personnel necessary to establish and maintain teleconferencing capabilities sufficient to meet their own respective teleconferencing needs. Moreover, technological improvements will further enhance the ability of these customers to establish internal teleconferencing facilities. There can be no assurance that any of the Company's customers will not establish internal teleconferencing facilities or expand existing facilities, then cease to use the Company's services. The loss of any one or more of such customers could cause a significant and immediate decline in net revenues, which could have a material adverse effect on the Company's business, financial condition, results of operations and prospects and could adversely impact the market for the Company's Common Stock. See "Business--Customers" and "Business-- Competition." Potential Acquisitions. One element of the Company's business strategy is to acquire additional group communications service businesses. However, the Company is aware of only a limited number of potential acquisition candidates. Certain of the Company's principal competitors have each recently acquired a PCSB, which may increase competition for the remaining acquisition opportunities in the teleconferencing industry. Continued consolidation in the industry, and the potential entry of RBOCs into the teleconferencing industry, may intensify such competition and increase the price which the Company would have to pay in connection with any future acquisitions. There can be no assurance that the Company will be able to manage additional businesses profitably or successfully integrate acquired businesses, if any, into the Company without substantial costs, delays or other operational or financial problems. The inability of the Company to implement its acquisition strategy successfully or the failure to integrate new businesses or operations into its current operations could have a material adverse effect on the Company's business, financial condition, results of operations and prospects and could adversely impact the market for the Company's Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources" and "Business--Growth Strategy". Recent Entry into Video and Internet Conferencing Markets. The Company introduced its video conferencing services in 1996, and to date only one of the Operating Centers has invested in video conferencing MCUs or servers. Only two of the Operating Centers offered Internet conferencing services in 1998, and to date no material revenues have been generated from Internet conferencing services, since these services were first offered on a commercial basis in November, 1998. The Company has limited capacity and experience to handle video and Internet conferencing. Furthermore, few sales people, reservationists, operators and technical support people are trained in video and Internet conferencing. There can be no assurance that the Company will be able to obtain significant business from video and Internet conferencing services or, if obtained, that the Company has the ability to service such business. See "Business--The Company's Group Communications Services." Technological Considerations. The Company currently derives a substantial portion of its net revenues from the sale of audio teleconferencing services. If the manufacturers of private branch exchanges ("PBXs"), the equipment used by most businesses and institutions to handle their internal telephone requirements, develop 37 improved, cost-effective PBX capabilities for handling teleconferencing calls with the quality and functionality of existing MCUs used in the teleconferencing business, the Company's customers could choose to purchase such equipment and hire the personnel necessary to service their teleconferencing needs through internal telephone systems. The loss of such customers could have a material adverse effect on the Company's business, financial condition, results of operations and prospects. Additionally, if internet technology can be modified to accommodate multipoint voice transmission with audio quality comparable to that of MCUs used in the teleconferencing business, the availability of such technology could have a material adverse effect on the Company's business, financial condition, results of operations and prospects and could adversely impact the market for the Company's Common Stock. See "Busines--Competition". Long Distance Services Contracts. A significant portion of the Company's direct costs are attributable to the purchase of local and long distance telephone services. It has been management's experience that the costs of long distance services have been decreasing over the past several years. If, however, the costs of long distance services increase over time, the Company's current purchasing strategy, which calls for shorter-term contracts, may place it at a competitive disadvantage with respect to competitors that have entered into longer-term contracts for long distance services. There can be no assurance that competition in the long distance services market will continue to increase, that any increased competition will reduce the cost of long distance services or that the Company's purchasing strategy will result in cost savings. In addition, if the Company experiences a shortfall in projected volume, it may be required to pay a penalty under one or more of its contracts. There can be no assurance that the Company's analysis of the future costs of long distance services will be accurate, and the failure to predict future cost trends accurately could have a material adverse effect on the Company's business, financial condition, results of operations and prospects and could adversely impact the market for the Company's Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Suppliers." Year 2000. The Company recognizes the need to ensure that its operations will not be adversely impacted by Year 2000 software failures. Software failures due to processing errors potentially arising from calculations using the Year 2000 date are a known risk. The Company has prepared a Year 2000 readiness project plan. In connection with this plan, the Company has determined the Year 2000 readiness of all internal systems expected to be used beyond the year 1999. Based on its assessment to date, the Company believes that the Year 2000 issue will not have a significant impact on the operations or the financial results of the Company. However, many of the Company's suppliers and customers may be impacted by Year 2000 complications. The failure of the Company or its suppliers and customers to ensure that their systems are Year 2000 compliant could have a material adverse effect on the Company's business, financial condition, results of operations and prospects and could adversely impact the market for the Company's Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Regulation. In general, the telecommunications industry is subject to extensive regulation by federal, state and local governments. Although there is little or no direct regulation in the United States of the core conferencing services offered by the Company, various government agencies, such as the Federal Communications Commission (the "FCC"), have jurisdiction over some of the Company's current and potential suppliers of telecommunications services, and government regulation of those services may have a direct impact on the cost of the Company's conferencing services. There can be no assurance that the FCC or other government agencies will not seek in the future to regulate the Company as a common carrier and regulate the prices, conditions or other aspects of the conferencing services offered by the Company, that the FCC will not impose registration, certification or other requirements on the provision of those services, or that the Company would be able to comply with any such requirements. The Telecommunications Act of 1996 is being contested both administratively and in the courts, and opinions vary widely as to the effects and timing of various aspects of the law. There can be no assurances at this time that the Telecommunications Act of 1996 will create any opportunities for the Company, that local access services will be provided by the IXCs, or that the RBOCs will be able to offer long distance services including teleconferencing. The Telecommunications Act of 1996 has effected significant changes in the telecommunications industry and the Company is unable to predict the extent 38 to which such changes or the implementation of the Telecommunications Act of 1996 by the FCC may ultimately affect its business. In addition, the Company is subject to laws and regulations that affect its ability to provide certain of its enhanced services, such as those relating to privacy and the recording of telephone calls. Changes in the current federal, state or local legislation or regulation could have a material adverse effect on the Company's business, financial condition, results of operations and prospects and could adversely impact the market for the Company's Common Stock. Moreover, government regulations in countries other than the United States vary widely and may restrict the Company's ability to offer its services in those countries. See "Business--Regulation." Change of Control. In the event of a Change of Control (as defined in the Indenture and which includes the appointment, selection or election of John J. Hassett, a principal stockholder of the Company, as a Director or officer of the Company), the Company may be required to repurchase all of the outstanding Senior Notes at 101% of the principal amount, as the case may be, of the Senior Notes plus any accrued and unpaid interest thereon, and Additional Interest (as defined in the Indenture), if any, to the date of repurchase. The exercise by the holders of the Senior Notes of their rights to require the Company to offer to purchase Senior Notes upon a Change of Control could also cause a default under other indebtedness of the Company, even if the Change of Control itself does not, because of the financial effect of such repurchase on the Company. There can be no assurance that in the event of a Change of Control, the Company will have, or will have access to, sufficient funds, or will be contractually permitted under the terms of outstanding indebtedness, to pay the required purchase price for any Senior Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Potential Fluctuation in Quarterly Results. Quarterly net revenues are difficult to forecast because the market for the Company's services is competitive and subject to variation. In addition, the consolidation of the Operating Centers may result in unanticipated operational difficulties. The Company's expenses are based, in part, on its expectations as to future net revenues. If net revenues are below expectations, the Company may be unable or unwilling to reduce expenses, and the failure to do so may have a material adverse effect on the Company's business, financial condition, results of operations and prospects. As a result, the Company believes that period-to- period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance and could adversely impact the market for the Company's Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Effect of Certain Charter and By-Law Provisions and Anti-Takeover Provisions. The Company's Articles of Organization, its By-Laws and certain Massachusetts laws contain provisions that may discourage acquisition bids for the Company and that may reduce temporary fluctuations in the trading price of the Company's Common Stock which may be caused by accumulations of stock, thereby depriving stockholders of certain opportunities to sell their stock at temporarily higher prices. The Company's Articles of Organization provide for a classified Board of Directors, and that Directors may be removed by the stockholders only for cause. The Company's Articles of Organization also permit the issuance of 10,000,000 shares of Preferred Stock without stockholder approval and upon such terms as the Board of Directors may determine. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding stock of the Company. The Company has no present plans to issue any shares of Preferred Stock. Absence of Dividends. The Company intends to retain future earnings, if any, for use in the development of its business and does not anticipate declaring or paying any cash dividends on the Common Stock in the foreseeable future. In addition, the Company is restricted from paying dividends except in certain limited circumstances pursuant to the terms of the Indenture and the Senior Credit Facility. See "Market for Company's Common Equity and Related Stockholder Matters--Dividends" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 39 Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. Set forth below is a listing of the Consolidated Financial Statements of the Company with reference to the page numbers in this Form 10-K at which such Statements are disclosed. Page Numbers ------- UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation................................................. 41 Pro Forma Consolidated Balance Sheet at December 31, 1998............. 42 Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 1998.................................................... 43 Notes to Unaudited Pro Forma Consolidated Financial Statements........ 44 HISTORICAL FINANCIAL STATEMENTS VIALOG Corporation Report of Management.................................................. 48 Independent Auditors' Report.......................................... 49 Consolidated Balance Sheets........................................... 50 Consolidated Statements of Operations................................. 51 Consolidated Statements of Stockholders' Equity (Deficit)............. 52 Consolidated Statements of Cash Flows................................. 53 Notes to Consolidated Financial Statements............................ 54 Telephone Business Meetings, Inc. ("Access") -- The Reston Center Independent Auditors' Report.......................................... 72 Balance Sheets........................................................ 73 Statements of Operations.............................................. 74 Statements of Stockholders' Equity.................................... 75 Statements of Cash Flows.............................................. 76 Notes to Financial Statements......................................... 77 Conference Source International, Inc. ("CSI") -- The Atlanta Center Independent Auditors' Report.......................................... 83 Balance Sheets........................................................ 84 Statements of Operations.............................................. 85 Statements of Stockholders' Equity.................................... 86 Statements of Cash Flows.............................................. 87 Notes to Financial Statements......................................... 88 A Business Conference Call, Inc. ("ABCC") -- The Chaska Center Independent Auditors' Report.......................................... 93 Balance Sheets........................................................ 94 Statements of Income and Retained Earnings............................ 95 Statements of Cash Flows.............................................. 96 Notes to Financial Statements......................................... 97 40 VIALOG CORPORATION UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The following unaudited pro forma consolidated financial statements give effect to (i) the acquisitions by VIALOG Corporation on February 10, 1999 of all of the stock of A Business Conference-Call, Inc. ("ABCC"), Conference Pros International, Inc. ("CPI"), and A Better Conference, Inc. ("ABCI"), which will be accounted for using the purchase method of accounting, and (ii) the consummation of an initial public offering of common stock. The unaudited pro forma consolidated statement of operations gives effect to the acquisitions of ABCC, CPI and ABCI, and the consummation of the initial public offering as if they had occurred on January 1, 1998. The unaudited pro forma consolidated balance sheet gives effect to the acquisitions of ABCC, CPI and ABCI, and the consummation of the initial public offering as if they had occurred on December 31, 1998. The pro forma statements are based on the historical financial statements of VIALOG Corporation, ABCC, CPI and ABCI and the estimates and assumptions set forth below and in the notes to the unaudited pro forma consolidated financial statements. The pro forma adjustments are based upon estimates, currently available information and certain assumptions that management deems appropriate. The unaudited pro forma consolidated financial data presented herein are not necessarily indicative of the results the Company would have obtained had such events occurred on January 1, 1998, as assumed, or the future results of the Company. The unaudited pro forma consolidated financial statements should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Report. 41 VIALOG CORPORATION UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998 (In thousands) Pro Forma VIALOG ---------------------------- Offering As Corp. ABCC CPI ABCI Adjustments (1) Consolidated Adjustment (1) Adjusted -------- ------ ---- ---- --------------- ------------ -------------- -------- ASSETS Current assets: Cash and cash equivalents........... $ 232 $ 153 $ 10 $ 12 $ (103)(a) $ 294 $33,015(e) $ 4,216 (10)(a) (29,093)(f) Accounts receivable, net................... 7,391 740 203 329 -- 8,663 -- 8,663 Prepaid expenses....... 425 184 -- -- -- 609 -- 609 Deferred offering costs................. 596 -- -- -- -- 596 (596)(e) -- Other current assets... 165 -- 2 29 -- 196 -- 196 -------- ------ ---- ---- ------- -------- ------- -------- Total current assets.............. 8,809 1,077 215 370 (113) 10,358 3,326 13,684 Property and equipment, net.................... 11,987 864 382 471 -- 13,704 -- 13,704 Deferred debt issuance costs.................. 5,429 -- -- -- -- 5,429 -- 5,429 Goodwill and intangible assets, net............ 41,679 -- -- -- 15,273(b) 69,234 -- 69,234 6,185(c) 6,097(d) Other assets............ 1,362 3 -- 75 -- 1,440 -- 1,440 -------- ------ ---- ---- ------- -------- ------- -------- Total assets......... $ 69,266 $1,944 $597 $916 $27,442 $100,165 $ 3,326 $103,491 ======== ====== ==== ==== ======= ======== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Revolving line of credit................ $ 2,057 $ -- $-- $-- $ -- $ 2,057 $ -- $ 2,057 Current portion of long-term debt........ 1,465 6 145 318 -- 1,934 -- 1,934 Accounts payable....... 3,064 152 164 102 -- 3,482 -- 3,482 Pro forma considera- tion due stockholders.......... -- -- -- -- 16,643(b) 29,093 (29,093)(f) -- 6,150(c) 6,300(d) Accrued interest expense............... 1,215 -- 34 -- (34)(a) 1,215 -- 1,215 Accrued expenses and other liabilities........... 3,386 302 8 123 -- 3,819 -- 3,819 -------- ------ ---- ---- ------- -------- ------- -------- Total current liabilities......... 11,187 460 351 543 29,059 41,600 (29,093) 12,507 Long-term debt, less current portion........ 74,189 11 305 85 -- 74,590 (305)(f) 74,285 Other long-term liabilities............ 482 -- -- 85 -- 567 -- 567 Commitments and contingencies.......... Stockholders' equity (deficit): Preferred stock........ -- -- -- -- -- -- -- -- Common stock........... 37 -- -- -- -- 37 46(e) 83 Additional paid-in capital............... 11,854 10 1 -- (11)(a) 11,854 32,678(e) 44,532 Retained earnings (deficit)............. (28,483) 1,463 (60) 203 (1,503)(a) (28,483) -- (28,483) (103)(a) -------- ------ ---- ---- ------- -------- ------- -------- Total stockholders' equity (deficit)........... (16,592) 1,473 (59) 203 (1,617) (16,592) 32,724 16,132 -------- ------ ---- ---- ------- -------- ------- -------- Total liabilities and stockholders' equity (deficit)........... $ 69,266 $1,944 $597 $916 $27,442 $100,165 $ 3,326 $103,491 ======== ====== ==== ==== ======= ======== ======= ======== - -------- (1) See Note 3 to unaudited pro forma consolidated financial statements. 42 VIALOG CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except share and per share data) For the Year Ended December 31, 1998 Pro Forma VIALOG ------------------------------ Corp. ABCC CPI ABCI Adjustments(1) Consolidated(1) ---------- ------ ------ ------ -------------- --------------- Net revenues............ $ 46,820 $7,485 $2,522 $2,992 $ -- $ 59,819 Cost of revenues, excluding depreciation........... 24,321 2,379 1,292 1,024 -- 29,016 Selling, general and administrative expense................ 15,196 1,816 990 1,322 (460)(a) 18,864 Depreciation expense.... 2,835 154 180 206 -- 3,375 Amortization of goodwill and intangibles........ 2,490 -- -- -- 1,383 (b) 3,873 Non-recurring charge.... 1,200 -- -- -- -- 1,200 ---------- ------ ------ ------ ------ ---------- Operating (loss) income................ 778 3,136 60 440 (923) 3,491 Interest expense, net... (12,629) 9 (36) (109) -- (12,765) ---------- ------ ------ ------ ------ ---------- Loss before income tax expense............... (11,851) 3,145 24 331 (923) (9,274) Income tax expense...... (26) -- -- (125) 125 (c) (26) ---------- ------ ------ ------ ------ ---------- Net loss............... $ (11,877) $3,145 $ 24 $ 206 $ (798) $ (9,300) ========== ====== ====== ====== ====== ========== Net loss per share-- basic and diluted...... $ (3.27) $ (1.13)(d) ========== ========== Weighted average shares outstanding............ 3,632,311 8,232,311 (d) ========== ========== - -------- (1) See Note 4 to unaudited pro forma consolidated financial statements. 43 VIALOG CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (1) VIALOG CORPORATION BACKGROUND VIALOG Corporation was formed on January 1, 1996 to create a national independent provider of conferencing services, consisting primarily of operator-assisted and operator-on-demand audioconferencing, as well as video and Internet conferencing services. On February 10, 1999, VIALOG Corporation completed an initial public offering of its common stock and on that date consummated agreements to acquire three private conference service bureaus. (2) ACQUISITIONS Concurrent with the closing of the initial public offering, VIALOG Corporation acquired all of the issued and outstanding stock of A Business Conference-Call, Inc. ("ABCC"), Conference Pros International, Inc. ("CPI") and A Better Conference, Inc. ("ABCI"). The acquisitions will be accounted for using the purchase method of accounting. The following table sets forth for each acquired company the consideration paid its common stockholders. Cash(1) (in thousands) -------------- ABCC....................................................... $16,226 CPI........................................................ 6,000 ABCI....................................................... 6,200 ------- Total Consideration........................................ $28,426 ======= - -------- (1) Excludes tax reimbursements of approximately $267,000 to certain stockholders of certain of the acquired companies. The total purchase price of the acquired companies is estimated to be $29.1 million and consists of $28.4 million in cash paid to the stockholders of the acquired companies, approximately $400,000 of acquisition costs and approximately $267,000 related to tax reimbursements. Of the estimated purchase price, $1.5 million has been allocated to the identifiable assets acquired and liabilities assumed and the balance (currently estimated at $27.6 million) has been allocated to intangible assets. In management's opinion, the preliminary estimates regarding allocation of the purchase price are not expected to differ materially from the final adjustments. 44 VIALOG CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (3) UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS (a) Represents a capital distribution to ABCC shareholders, an interest distribution to the CPI shareholder, and elimination of historical equity balances of ABCC, CPI and ABCI. (b) The excess of the total purchase price for ABCC over the allocation of fair value to the net assets will be recorded as intangible assets, which is calculated based on the following assumptions: Purchase consideration.............................................. $16,226 Tax reimbursements to stockholders of ABCC.......................... 217 Direct acquisition costs............................................ 200 ------- Total purchase price.............................................. 16,643 Less: Tangible assets and liabilities of ABCC Accounts receivable............................................... 740 Property and equipment............................................ 864 Other assets...................................................... 237 Accounts payable.................................................. (152) Accrued expenses.................................................. (302) Other liabilities................................................. (17) ------- Intangible assets............................................... $15,273 ======= Intangible assets are expected to include goodwill, developed technology and assembled workforce, which will be amortized on a straight-line basis over their useful lives. The useful lives that are currently being used by the Company relating to intangible assets for similar acquisitions made by the Company are 6 years for developed technology, 13 years for assembled workforce and 20 years for goodwill. For purposes of determining the amortization of goodwill and intangible assets, the Company has used a range of useful lives of 5 to 25 years, which includes the full range of lives currently being used by the Company for similar intangible assets. The Company expects to complete a full valuation of the tangible and intangible assets. In management's opinion, the preliminary estimates regarding allocation of the purchase price and amortization periods are not expected to differ materially from the final allocation. (c) The excess of the total purchase price for CPI over the allocation of fair value to the net assets will be recorded as intangible assets, which is calculated based on the following assumptions: Purchase consideration............................................... $6,000 Tax reimbursements to stockholder.................................... 50 Direct acquisition costs............................................. 100 ------ Total purchase price............................................... 6,150 Less: Tangible assets and liabilities Accounts receivable................................................ 205 Property and equipment............................................. 382 Accounts payable................................................... (164) Other liabilities.................................................. (458) ------ Intangible assets................................................ $6,185 ====== Intangible assets are expected to include goodwill, developed technology and assembled workforce, which will be amortized on a straight-line basis over their useful lives. The useful lives that are currently being used by 45 VIALOG CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the Company relating to intangible assets for similar acquisitions made by the Company are 6 years for developed technology, 13 years for assembled workforce and 20 years for goodwill. For purposes of determining the amortization of goodwill and intangible assets, the Company has used a range of useful lives of 5 to 25 years, which includes the full range of lives currently being used by the Company for similar intangible assets. The Company expects to complete a full valuation of the tangible and intangible assets. In management's opinion, the preliminary estimates regarding allocation of the purchase price and amortization periods are not expected to differ materially from the final allocation. (d) The excess of the total purchase price for ABCI over the allocation of fair value to the net assets will be recorded as intangible assets, which is calculated based on the following assumptions: Purchase consideration............................................... $6,200 Direct acquisition costs............................................. 100 ------ Total purchase price............................................. 6,300 Less: Tangible assets and liabilities Accounts receivable................................................ 329 Property and equipment............................................. 471 Other assets....................................................... 116 Accounts payable................................................... (102) Accrued expenses................................................... (123) Debt and other liabilities......................................... (488) ------ Intangible assets................................................ $6,097 ====== Intangible assets are expected to include goodwill, developed technology and assembled workforce, which will be amortized on a straight-line basis over their useful lives. The useful lives that are currently being used by the Company relating to intangible assets for similar acquisitions made by the Company are 6 years for developed technology, 13 years for assembled workforce and 20 years for goodwill. For purposes of determining the amortization of goodwill and intangible assets, the Company has used a range of useful lives of 5 to 25 years, which includes the full range of lives currently being used by the Company for similar intangible assets. The Company expects to complete a full valuation of the tangible and intangible assets. In management's opinion the preliminary estimates regarding allocation of the purchase price and amortization periods are not expected to differ materially from the final allocation. (e) Records the cash proceeds of $32.7 million from the issuance of shares of common stock, net of the underwriting discount of $2.6 million, estimated offering costs of $1.5 million ($596,000 of such offering costs have been paid) and the repayment of debt totaling $305,000. Offering costs primarily consist of legal fees, accounting fees, underwriters' out-of-pocket expenses and printing expenses. (f) Represents payment of purchase price to former stockholders of ABCC, CPI and ABCI and payment of indebtedness to the former stockholder of CPI. (4) UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS (a) As a condition to closing the acquisitions, certain officers and employees agreed to accept reduced compensation and benefits subsequent to the acquisitions. The adjustment reflects the difference between the historical compensation and benefits of officers and employees of ABCC, CPI and ABCI and the compensation and benefits they agreed to accept subsequent to the acquisitions. 46 VIALOG CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (b) Adjustment reflects the amortization of goodwill and intangible assets, which are amortized over periods ranging from 5 to 25 years. See Notes (3) (b), (c) and (d). (c) The pro forma income tax provision has been calculated as if each of ABCC, CPI and ABCI had been included in the Company's consolidated income tax return and, therefore, was subject to corporate income taxation. (d) The pro forma loss per share is computed by dividing the net loss by the weighted average number of shares outstanding. The calculation of the weighted average number of shares outstanding assumes that the 4,600,000 shares of the Company's common stock issued in connection with the initial public offering were outstanding for the entire period. 47 REPORT OF MANAGEMENT The accompanying consolidated financial statements and related information of VIALOG Corporation and subsidiaries (the "Company") have been prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and necessarily include some amounts based on management's best estimates and judgments. Management is also responsible for maintaining a system of internal controls as a fundamental requirement for the operational and financial integrity of results. The Company has established and maintains a system of internal controls designed to provide reasonable assurance that the books and records reflect the transactions of the Company and that its established policies and procedures are carefully followed. The Company's internal control system is based upon standard procedures, policies and guidelines and organizational structures that provide an appropriate division of responsibility and the careful selection and training of qualified personnel. The Company's accompanying consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants, whose audit was made in accordance with generally accepted auditing standards. Management has made available to KPMG Peat Marwick LLP all of the Company's financial records and related data, as well as the minutes of stockholders' and directors' meetings. Furthermore, management believes that all representations made to KPMG Peat Marwick LLP during its audit were valid and appropriate. The Report of Independent Auditors appears below. Glenn D. Bolduc John J. Dion Chief Executive Officer Vice President--Finance and and President Treasurer 48 INDEPENDENT AUDITORS' REPORT The Board of Directors VIALOG Corporation: We have audited the accompanying consolidated balance sheets of VIALOG Corporation and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of VIALOG Corporation and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts February 10, 1999 49 VIALOG CORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Data) December 31, December 31, 1997 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents.......................... $ 9,567 $ 232 Accounts receivable, net of allowance for doubtful accounts of $32 and $164, respectively............ 5,686 7,391 Prepaid expenses................................... 156 425 Deferred offering costs............................ -- 596 Other current assets............................... 101 165 -------- -------- Total current assets............................. 15,510 8,809 Property and equipment, net.......................... 7,544 11,987 Deferred debt issuance costs......................... 7,324 5,429 Goodwill and intangible assets, net.................. 44,391 41,679 Other assets......................................... 314 1,362 -------- -------- Total assets..................................... $ 75,083 $ 69,266 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Revolving line of credit........................... $ -- $ 2,057 Current portion of long-term debt.................. 397 1,465 Accounts payable................................... 2,129 3,064 Accrued interest expense........................... 1,310 1,215 Accrued expenses and other liabilities............. 4,415 3,386 -------- -------- Total current liabilities........................ 8,251 11,187 Long-term debt, less current portion................. 71,539 74,189 Other long-term liabilities.......................... 175 482 Commitments and contingencies Stockholders' deficit: Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued and outstanding........... -- -- Common stock, $0.01 par value; 30,000,000 shares authorized; 3,486,380 and 3,693,672 shares, respectively, issued and outstanding.............. 35 37 Additional paid-in capital......................... 11,689 11,854 Accumulated deficit................................ (16,606) (28,483) -------- -------- Total stockholders' deficit...................... (4,882) (16,592) -------- -------- Total liabilities and stockholders' deficit...... $ 75,083 $ 69,266 ======== ======== See accompanying notes to consolidated financial statements. 50 VIALOG CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands, Except Share and Per Share Data) Year Ended December 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Net revenues................................. $ -- $ 4,816 $ 46,820 Cost of revenues, excluding depreciation..... -- 2,492 24,321 Selling, general and administrative expenses.................................... 1,308 7,178 15,196 Depreciation expense......................... -- 273 2,835 Amortization of goodwill and intangibles..... -- 306 2,490 Non-recurring charge......................... -- 8,000 1,200 --------- --------- --------- Operating income (loss).................... (1,308) (13,433) 778 Interest income (expense) net................ 1 (1,866) (12,629) --------- --------- --------- Loss before income tax expense............. (1,307) (15,299) (11,851) Income tax benefit (expense)................. 522 (522) (26) --------- --------- --------- Net loss................................... $ (785) $ (15,821) $ (11,877) ========= ========= ========= Net loss per share--basic and diluted........ $ (0.38) $ (5.48) $ (3.27) ========= ========= ========= Weighted average shares outstanding.......... 2,088,146 2,889,005 3,632,311 ========= ========= ========= See accompanying notes to consolidated financial statements. 51 VIALOG CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands, except share data) Total Common Stock Additional Stockholders' -------------------- Paid-in Accumulated Equity Shares Par Value Capital Deficit (Deficit) --------- --------- ---------- ----------- ------------- Initial investment at incorporation on January 1, 1996........ 1,332,800 $14 $ (7) $ -- $ 7 Additional shares issued in connection with initial capitalization......... 360,000 4 21 -- 25 Issuance of common stock: Contribution of common stock to capital..... (250,000) (2) 2 -- -- Outsiders by private placement dated May 8, 1996.............. 378,000 4 101 -- 105 Outsiders by private placement dated October 22, 1996..... 380,000 4 756 -- 760 Employees in lieu of payment for services............. 242,500 2 91 -- 93 Consultants in lieu of payment for services............. 177,000 2 28 -- 30 Options exercised..... 75,000 -- 2 -- 2 Options granted to consultants............ -- -- 50 -- 50 Net loss................ -- -- -- (785) (785) --------- --- ------- -------- -------- Balance at December 31, 1996................... 2,695,300 28 1,044 (785) 287 Options exercised....... 104,000 -- 2 -- 2 Conversion of 10% Subordinated Convertible Notes Payable................ 127,750 1 254 -- 255 Issuance of common stock in connection with acquisitions........... 559,330 6 3,211 -- 3,217 Warrants related to 8% Notes Payable dated February 24, 1997...... -- -- 129 -- 129 Warrants related to 12 3/4% Senior Notes Payable dated November 12, 1997............... -- -- 6,091 -- 6,091 Options granted to consultants............ -- -- 180 -- 180 Options granted to employees.............. -- -- 778 -- 778 Net loss................ -- -- -- (15,821) (15,821) --------- --- ------- -------- -------- Balance at December 31, 1997................... 3,486,380 35 11,689 (16,606) (4,882) Options exercised....... 204,792 2 104 -- 106 Options granted to employees.............. -- -- 47 -- 47 Issuance of common stock to consultant in lieu of payment for services............... 2,500 -- 14 -- 14 Net loss................ -- -- -- (11,877) (11,877) --------- --- ------- -------- -------- Balance at December 31, 1998................... 3,693,672 $37 $11,854 $(28,483) $(16,592) ========= === ======= ======== ======== See accompanying notes to consolidated financial statements. 52 VIALOG CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, ------------------------- 1996 1997 1998 ----- -------- -------- Cash flows from operating activities: Net loss............................................ $(785) $(15,821) $(11,877) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation...................................... -- 273 2,835 Amortization of goodwill and intangibles.......... -- 306 2,490 Amortization of debt issuance costs and debt discount......................................... -- 545 2,994 Provision for doubtful accounts................... -- 32 216 Deferred income taxes............................. (522) 522 -- Write-off of deferred offering costs.............. -- 377 -- Compensation expense for issuance of common stock and options...................................... 173 958 47 Non-cash portion of non-recurring charges......... -- 8,000 292 Changes in operating assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable............................... -- (576) (1,921) Prepaid expenses and other current assets......... (13) (68) (333) Other assets...................................... (7) (64) (293) Accounts payable.................................. 313 (351) 949 Accrued expenses.................................. 663 1,716 (1,124) Other long-term liabilities....................... -- 3 307 ----- -------- -------- Cash flows used in operating activities........... (178) (4,148) (5,346) ----- -------- -------- Cash flows from investing activities: Acquisitions of businesses, net of cash acquired.... -- (53,308) -- Additions to property and equipment................. (7) (454) (7,355) Deferred acquisition costs.......................... -- -- (493) ----- -------- -------- Cash flows used in investing activities........... (7) (53,762) (7,848) ----- -------- -------- Cash flows from financing activities: Advances on line of credit, net..................... -- -- 2,057 Proceeds from issuance of long-term debt and warrants........................................... -- 75,755 3,306 Payments of long-term debt.......................... -- (2,772) (676) Proceeds from issuance of common stock.............. 899 2 106 Deferred offering costs............................. (377) -- (596) Deferred debt issuance costs........................ -- (5,845) (266) ----- -------- -------- Cash flows provided by financing activities....... 522 67,140 3,931 ----- -------- -------- Net increase (decrease) in cash and cash equivalents......................................... 337 9,230 (9,335) Cash and cash equivalents at beginning of period..... -- 337 9,567 ----- -------- -------- Cash and cash equivalents at end of period........... $ 337 $ 9,567 $ 232 ===== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest.......................................... $ -- $ 72 $ 9,917 ===== ======== ======== Taxes............................................. $ -- $ 1 $ 8 ===== ======== ======== Non-cash investing and financing transactions: Conversion of 10% Subordinated Convertible Notes Payable............................................ $ -- $ 256 $ -- ===== ======== ======== Issuance of common stock in connection with acquisitions....................................... $ -- $ 3,217 $ -- ===== ======== ======== Issuance of warrants to the initial purchaser of the Senior Notes and included in deferred debt issuance costs..................................... $ -- $ 1,740 $ -- ===== ======== ======== Acquisitions of businesses: Assets acquired................................... $ -- $ 66,523 $ -- Liabilities assumed and issued.................... -- (9,096) -- Common stock issued............................... -- (3,217) -- ----- -------- -------- Cash paid......................................... -- 54,210 -- Less cash acquired................................ -- (902) -- ----- -------- -------- Net cash paid for acquisitions of businesses.... $ -- $ 53,308 $ -- ===== ======== ======== See accompanying notes to consolidated financial statements. 53 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (Amounts in Thousands, Except Share and Per Share Data) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business VIALOG Corporation ("VIALOG") was incorporated in Massachusetts on January 1, 1996 as Interplay Corporation. In January 1997, the Company changed its name to VIALOG Corporation. For purposes of these Notes to Consolidated Financial Statements, "VIALOG" means VIALOG Corporation on a stand alone basis prior to November 12, 1997 and VIALOG Corporation and its consolidated subsidiaries on and after November 12, 1997. VIALOG was formed to create a national provider of conferencing services, consisting primarily of operator- attended and operator-on-demand audioconferencing, as well as video and Internet conference services. On November 12, 1997, VIALOG closed a private placement of $75.0 million in Senior Notes due 2001 (the "Private Placement"). Contemporaneously with the closing of the Private Placement, VIALOG acquired six private conference service bureaus located in the United States (See Note 2 "Acquisitions"). Prior to November 12, 1997, VIALOG did not conduct any operations, and all activities conducted by it related to the acquisitions and the completion of financing transactions to fund the acquisitions. (b) Principles of Consolidation The consolidated financial statements include the accounts of VIALOG and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (c) Management Estimates Management of VIALOG has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (d) Revenue Recognition Revenue from conference calls is recognized upon completion of the call. Revenue from services is recognized upon performance of the service. (e) Cash and Cash Equivalents Cash and cash equivalents includes cash on hand and short-term investments with original maturities of three months or less. (f) Property and Equipment Property and equipment are recorded at cost. Depreciation of property and equipment is provided on a straight-line basis over the estimated useful lives of the respective assets. The estimated useful lives are as follows: three to ten years for office furniture, fixtures and equipment, five to ten years for conferencing equipment, and three to seven years for computer equipment. Capitalized lease equipment and leasehold improvements are amortized over the lives of the leases, ranging from three to ten years. VIALOG capitalizes costs related to software obtained for internal use. These costs are included in computer equipment and amortized accordingly. During 1996, 1997 and 1998, these costs were not significant. 54 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) (g) Goodwill and Intangible Assets Goodwill and identifiable intangible assets, which consisted of assembled workforce and developed technology, result from the excess of the purchase price over the net assets of businesses acquired. The cost approach method and the income approach method were used to value the assembled workforce and developed technology, respectively. Goodwill and intangibles are being amortized on a straight-line basis over the following periods: 6 years for developed technology, 13 years for assembled workforce and 20 years for goodwill, which represent their estimated useful lives. VIALOG measures impairment of goodwill and intangible assets by considering a number of factors as of each balance sheet date including (i) current operating results of the applicable Acquired Companies, (ii) projected future operating results of the applicable Acquired Companies, and (iii) any other material event or circumstance that indicates the carrying amount of the assets may not be recoverable. Recoverability of goodwill and intangible assets is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the Acquired Company. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. (h) Research and Development VIALOG maintains technical support and engineering departments that, in part, develop features and products for group communications. In accordance with SFAS No. 2, "Accounting for Research and Development Costs", VIALOG charges to expense when incurred (included in cost of revenues) that portion of the department costs which relate to research and development activities. Prior to the acquisition of the businesses described in Note 2 "Acquisitions", VIALOG did not conduct any research and development activities. Research and development costs for the period ended December 31, 1997 reflect the activities of the acquired businesses from November 12, 1997 through December 31, 1997 and were not significant. Research and development costs for the year ended December 31, 1998 were approximately $961,000. (i) Stock-Based Compensation Effective January 1, 1996, VIALOG adopted the provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock- Based Compensation". VIALOG has elected to continue to account for stock options at intrinsic value under Accounting Principles Board Opinion No. 25 with disclosure of the effects of fair value accounting on net income on a pro forma basis (See Note 14 "Employee Benefit Plans"). (j) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (k) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of VIALOG adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", during 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate 55 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on VIALOG's financial position, results of operations, or liquidity. (l) Loss Per Share In 1997, VIALOG adopted the provisions of Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128 requires the presentation of basic earnings per share and diluted earnings per share for all periods presented. As VIALOG has been in a net loss position for the years ended December 31, 1996, 1997 and 1998, common stock equivalents of 249,813, 896,900 and 1,994,209 for the years ended December 31, 1996, 1997 and 1998, respectively, were excluded from the diluted loss per share calculation as they would be antidilutive. As a result, diluted loss per share is the same as basic loss per share, and has not been presented separately. (m) Reporting Comprehensive Income In 1998, VIALOG adopted the provisions of Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Under this concept, all revenues, expenses, gains and losses recognized during the period are included in income, regardless of whether they are considered to be the results of operations of the period. Because VIALOG historically has not experienced transactions which would be included in comprehensive income, the adoption of SFAS No. 130 did not impact VIALOG's consolidated financial statements and no additional disclosures are required. (2) ACQUISITIONS On November 12, 1997, VIALOG acquired all of the issued and outstanding stock of Telephone Business Meetings, Inc. ("Access"), Conference Source International, Inc. ("CSI"), Kendall Square Teleconferencing, Inc. ("TCC"), American Conferencing Company, Inc. ("Americo") and Communication Development Corporation ("CDC"), and substantially all of the net assets of Call Points, Inc. ("Call Points") (together, the "Acquired Companies"). These acquisitions occurred contemporaneously with the closing of the Private Placement of a total of $75.0 million in Senior Notes due 2001 (See Note 8 "Long-Term Debt"). The acquisitions were accounted for using the purchase method. The following table sets forth for each Acquired Company the consideration paid its common stockholders in cash and in shares of common stock of VIALOG. 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. 56 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) The total purchase price of the Acquired Companies was $57.6 million and consisted of approximately $53.0 million in cash paid to the stockholders of the Acquired Companies (the "Sellers"), $500,000 of acquisition costs, the issuance of 559,330 shares of common stock to the Sellers and approximately $925,000 related to tax reimbursements. The shares of common stock were valued at $5.75 per share which represents the estimated fair market value based on arms-length negotiations with the former stockholders of the Acquired Companies. The total purchase price was allocated as follows (in thousands): 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, VIALOG repaid $2.2 million of long-term debt of the Acquired Companies. In connection with the acquisitions, VIALOG recorded a non-recurring charge of $8.0 million related to the fair value of purchased in-process research and development. The $8.0 million write-off of purchased research and development noted above represents the amount of the purchase price of the acquisitions allocated to incomplete research and development projects. This allocation represents the estimated fair value based on risk-adjusted cash flows related to the incomplete products. The acquired in-process research and development represents engineering and test activities associated with the introduction of new enhanced services and information systems. The Acquired Companies are working on projects that are essential to offering high quality, secure and reliable products including unattended audioconferencing, video and Internet conferencing, integrated voice response and broadcast fax services. Since these had not yet reached technological feasibility and have no alternative future uses, there can be no guarantee as to the achievability of the projects or the ascribed values. Accordingly, these costs were expensed as of the date of the acquisition. The operating results of the Acquired Companies have been included in the Consolidated Statements of Operations from the date of acquisition. The unaudited pro forma consolidated historical results for the years ended December 31, 1996 and 1997 below assume the acquisitions occurred at the beginning of fiscal 1996: 1996 1997 ----------- ----------- (Dollars in thousands, except per share data) Net revenues....................................... $ 28,298 $ 35,917 Net loss........................................... $ (11,529) $ (15,752) Net loss per share................................. $ (4.35) $ (4.68) The pro forma results include amortization of the goodwill and intangible assets described above, interest expense on debt assumed issued to finance the acquisitions and reductions to selling, general and administrative expenses related to certain royalties, compensation and benefits that were eliminated or reduced as a result of the 57 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) acquisitions. The pro forma results do not include the write-off of in-process research and development expenses at the date of acquisition. The pro forma results are not necessarily indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented, nor are they necessarily indicative of future consolidated results. The acquisition agreements, pursuant to which the Acquired Companies were acquired, except for Americo, limit through 1999 the Company's ability to change the location of an Acquired Company's facilities, physically merge the Acquired Company's operations with another operation, change the position of those employees who received employment agreements pursuant to the applicable acquisition agreement, reduce the workforce or terminate employees (except as related to employee performance, the contemplated reorganization of the combined sales and marketing staff and the consolidation of certain accounting functions) without the approval of a majority in interest of the former stockholders of the affected Acquired Company. Based on the term of these limitations and since the Company has been growing and adding additional employees, the Company does not believe that these limitations will have a significant impact on the future results of operations and liquidity. (3) CASH, CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS VIALOG classifies all investments with an original maturity of less than ninety days as cash equivalents and values them at cost which approximates market. VIALOG's policy is to invest cash primarily in income producing short- term instruments and to keep uninvested cash balances at minimum levels. VIALOG's financial instruments consist of cash, cash equivalents, accounts receivable, accounts payable, other accrued liabilities and long-term debt. Except for long-term debt, the carrying amounts of such financial instruments approximate fair value due to their short maturities. The fair value of the Company's long-term debt at December 31, 1998 is based on quoted market values. The fair value of long-term debt was not materially different from its carrying amount. (4) ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS Prior to the acquisitions discussed in Note 2 "Acquisitions", VIALOG had no accounts receivable. At acquisition, the accounts receivable of the Acquired Companies were recorded at fair market value. The allowance for doubtful accounts at December 31, 1997 represents the provision charged to operations for the period November 12, 1997 through December 31, 1997. Balance Net at Provision Deductions Balance Beginning Charged to From at End of Period Operations Allowance of Period --------- ---------- ---------- --------- (In Thousands) Year Ended December 31, 1998......... $ 32 $216 $(84) $164 Year Ended December 31, 1997......... $ -- $ 32 $ -- $ 32 Year Ended December 31, 1996......... $ -- $ -- $ -- $ -- 58 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) (5) PROPERTY AND EQUIPMENT Property and equipment consist of the following: December 31, -------------------- 1997 1998 ------ ------- Office furniture and equipment............................. $ 869 $ 1,392 Conferencing equipment..................................... 5,163 9,926 Computer equipment......................................... 697 2,672 Capitalized lease equipment................................ 898 747 Leasehold improvements..................................... 190 343 ------ ------- 7,817 15,080 Less: accumulated depreciation............................. (273) (3,093) ------ ------- $7,544 $11,987 ====== ======= (6) GOODWILL AND INTANGIBLE ASSETS Goodwill and intangible assets consist of the following: December 31, --------------------- 1997 1998 ------- ------- Goodwill.................................................. $41,457 $41,457 Developed technology...................................... 1,930 1,930 Assembled workforce....................................... 1,310 1,088 ------- ------- 44,697 44,475 Less: accumulated amortization............................ (306) (2,796) ------- ------- $44,391 $41,679 ======= ======= (7) REVOLVING LINE OF CREDIT On October 6, 1998, VIALOG executed a two year, $15.0 million credit facility (the "Credit Facility") with Coast Business Credit, a division of Southern Pacific Bank. The Credit Facility provides for (i) a term loan in the principal amount of $1.5 million, (ii) a term loan of up to 80% of the purchase price of new and used equipment, not to exceed $4.0 million, and (iii) a revolving loan based on a percentage of eligible accounts receivable. Loans under the Credit Facility bear interest at the higher of 7% or the Prime Rate plus 1 1/2%, and interest is based on a minimum outstanding principal balance of the greater of $5.0 million or 33% of the available Credit Facility. The Credit Facility includes certain early termination fees. The Credit Facility is secured by the assets of each of the Acquired Companies and the assets of VIALOG Corporation, excluding the ownership interest in each of the Acquired Companies. VIALOG is required to maintain compliance with certain financial ratios and tests, including a debt service coverage ratio and minimum net worth level. VIALOG is in compliance with all covenants contained in the Credit Facility at December 31, 1998. The average amount of short-term borrowings outstanding during 1998 was approximately $2.1 million with a maximum outstanding of approximately $2.7 million. The weighted average interest rate on December 31, 1998 and for the year then ended was 7.98%. 59 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) (8) LONG-TERM DEBT Long-term debt consists of the following: December 31, ------------------- 1997 1998 ------- ------- (In thousands) 12 3/4% Senior Notes Payable, due 2001, net of unamortized discount of $4,203 and $3,115, respectively ............. $70,797 $71,885 Term loans................................................ -- 3,030 Capitalized lease obligations............................. 1,044 669 Other long-term debt...................................... 95 70 ------- ------- Total long-term debt...................................... 71,936 75,654 Less current portion...................................... 397 1,465 ------- ------- Total long-term debt, less current portion................ $71,539 $74,189 ======= ======= Notes Payable On February 24, 1997, VIALOG issued $500,000 of 8% promissory notes due on the earlier of (a) ten days following the closing of an initial public offering or (b) one year from their issue date. Warrants to purchase 111,118 common shares at an exercise price of $4.50 were issued in conjunction with the promissory notes. The value of the warrants was determined using the minimum value method. The value of the warrants at the date of issuance totaled $129,000 and was amortized as interest expense. The warrants may be exercised between November, 1997 and February, 1999. In November, 1997, the promissory notes were repaid, including accrued interest, from the proceeds of the Private Placement, which was completed on November 12, 1997. In conjunction with the Private Placement, the warrants issued to the note holders were increased to a total of 153,378 in accordance with anti-dilution provisions contained in the promissory notes. Convertible Bridge Facility In October, 1997, VIALOG completed a private placement to certain of its existing investors of $255,500 of 10% subordinated convertible promissory notes due on the earlier of (a) five days after the closing of a sale of VIALOG's equity securities or debt securities for an aggregate price of $50.0 million or more, or (b) January 1, 1998. The notes were convertible at the option of the holders at any time prior to and including the due date into such number of shares of VIALOG's common stock as determined by dividing the aggregate unpaid principal amount of the notes by the conversion price of $2.00 per share, subject to adjustment pursuant to the terms of the notes. The conversion price of $2.00 per share was equal to the estimated fair market value of VIALOG's common stock on the date of issuance. In November, 1997, the notes were converted into 127,750 shares of VIALOG's common stock. Senior Notes Payable On November 12, 1997, VIALOG completed a Private Placement of $75.0 million of Senior Notes, Series A. The Senior Notes bear interest at 12 3/4% per annum, payable semi-annually on May 15 and November 15 of each year, commencing May 15, 1998. The Senior Notes are guaranteed by the Acquired Companies (see Note 18) and mature on November 15, 2001 and are redeemable in whole or in part at the option of VIALOG on or after November 15, 1999 at 110% of the principal amount thereof, and on or after November 15, 2000 at 105% of the principal amount thereof, in each case together with accrued interest to the date of redemption. In addition, there are certain other early redemption options available to VIALOG at any time on or prior to November 15, 1999 at certain premiums, as specified in the indenture pursuant to which the Senior Notes were issued (the 60 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) "Indenture"). In the event of a change in control, as defined in the Indenture, the Company may be required to repurchase all of the outstanding Senior Notes at 101% of the principal amount plus accrued interest and additional interest, if any. The Indenture contains restrictive covenants with respect to the Company that among other things, create limitations (subject to certain exceptions) on (i) the incurrence of additional indebtedness, (ii) the ability of VIALOG to purchase, redeem or otherwise acquire or retire any VIALOG common stock or warrants, rights or options to acquire VIALOG common stock, to retire any subordinated indebtedness prior to final maturity or to make investments in any person, (iii) certain transactions with affiliates, (iv) the ability to materially change the present method of conducting business, (v) the granting of liens on property or assets, (vi) mergers, consolidations and the disposition of assets, (vii) declaring and paying any dividends or making any distribution on shares of common stock, and (viii) the issuance or sale of any capital stock of the Company's subsidiaries. The Indenture does not require VIALOG to maintain compliance with any financial ratios or tests, except with respect to certain restrictive covenants noted above. The Company is in compliance with all covenants contained in the Indenture at December 31, 1998. Warrants to purchase 1,059,303 common shares at an exercise price of $.01 per share were issued in conjunction with the Senior Notes. Of the total issued, 756,645 warrants were attached to the Senior Notes and 302,658 were issued to Jefferies and Company, Inc., the initial purchaser of the Senior Notes, as part of its compensation for services rendered in connection with such offering. The value of the warrants attached to the Senior Notes was $4.4 million and was recorded as debt discount and additional paid-in capital. The value of the warrants issued, which represented additional consideration to the initial purchaser of the Senior Notes, was $1.7 million and was recorded as deferred debt issuance costs. In addition, the Company incurred commissions of $3.8 million and legal and other costs of $2.1 million. The deferred debt issuance costs are being amortized over the life of the Senior Notes. The warrants may be exercised between November, 1997 and November, 2001. The proceeds from the Senior Notes were used to complete the acquisitions (see Note 2 "Acquisitions"), repay outstanding indebtedness and fund working capital requirements. On February 12, 1998, VIALOG offered to exchange (the "Exchange Offer") Senior Notes, Series B for Senior Notes, Series A. The form and terms of the Senior Notes, Series B are identical in all material respects to the form and terms of the Senior Notes, Series A except for certain transfer restrictions and registration rights relating to the Senior Notes, Series A. The Exchange Offer terminated on March 26, 1998 with all of the Senior Notes, Series A being exchanged by investors for Senior Notes, Series B. Interest Income (Expense), Net Interest income (expense), net consists of the following: Year Ended December 31, ------------------------- 1996 1997 1998 -------------- --------- (In thousands) Interest income.................................. $ 1 $ 56 $ 233 Interest expense................................. -- (1,922) (12,862) ---- -------- --------- Interest income (expense), net................. $ 1 $ (1,866) $ (12,629) ==== ======== ========= 61 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) (9) ACCRUED EXPENSES Accrued expenses consist primarily of the following: December 31, ------------- 1997 1998 ------ ------ Accrued interest.............................................. $1,310 $1,215 Accrued payroll and related costs............................. 1,119 692 Accrued acquisition and financing related costs............... 1,550 1,122 Accrued other................................................. 1,746 1,572 ------ ------ $5,725 $4,601 ====== ====== (10) COMMITMENTS AND CONTINGENCIES VIALOG conducts its operations primarily in leased facilities under operating lease arrangements expiring on various dates through May, 2008. Certain long-term capital leases have been included in Property and Equipment and Long-Term Debt in the accompanying consolidated balance sheets. Future minimum lease payments under capital and operating leases with initial terms of one year or more are as follows: Year Ending December 31, Capital Leases Operating Leases ------------------------ -------------- ---------------- (in thousands) 1999....................................... $430 $1,170 2000....................................... 236 1,199 2001....................................... 92 1,054 2002....................................... 1 1,127 2003....................................... -- 1,137 Thereafter................................. -- 1,469 ---- ------ Total minimum lease payments............... 759 $7,156 ====== Less: Amount representing interest on capital leases............................ 90 ---- Present value of minimum lease payments at December 31, 1998......................... $669 ==== Total operating lease rental expense for VIALOG for the years ended December 31, 1996, 1997 and 1998 were $0, $198,000 and $1.5 million, respectively. (11) NON-RECURRING CHARGE The results for the year ended December 31, 1998 include a non-recurring charge of $1.2 million related to the consolidation of the Atlanta and Montgomery Operating Centers. The consolidation plan calls for the Atlanta Center to remain staffed through the early part of the first quarter of 1999, after which time the Atlanta facility will be vacated and its traffic managed by operators in the Montgomery Center as well as other Operating Centers. The Company anticipates relocating its Montgomery Center into a new leased facility by March, 1999. The non-recurring charge includes (i) $373,000 associated with personnel reductions of approximately 45 operator, customer service, technical support and general and administrative positions in the Atlanta Center, (ii) $400,000 associated with lease costs for the Atlanta facility from the exit date through the lease termination date (net of estimated sublease income), (iii) $135,000 associated with legal fees and other exit costs, (iv) $77,000 associated with the disposal of furniture and equipment in both the Atlanta and Montgomery Centers, and (v) $215,000 associated with the impairment of intangible assets (assembled workforce) in the Atlanta Center. Approximately $324,000 had been paid as of December 31, 1998. 62 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) (12) PROVISION FOR INCOME TAXES Income tax (expense) benefit for the years ended December 31, 1996, 1997 and 1998 consists of the following: Current Deferred Total ------- -------- ----- (In thousands) December 31, 1996: Federal............................................... $ -- $ 398 $ 398 State................................................. -- 124 124 ----- ----- ----- $ -- $ 522 $ 522 ===== ===== ===== December 31, 1997: Federal............................................... $ -- $(398) $(398) State................................................. -- (124) (124) ----- ----- ----- $ -- $(522) $(522) ===== ===== ===== December 31, 1998: Federal............................................... $ -- $ -- $ -- State................................................. (125) 99 (26) ----- ----- ----- $(125) $ 99 $ (26) ===== ===== ===== 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: Year Ended December 31, ------------------------- 1996 1997 1998 --------------- -------- Computed "expected" tax benefit.................... $ 445 $ 5,202 $ 4,029 State and local income taxes, net of federal tax benefit........................................... 82 918 754 Nondeductible amounts and other differences........ (5) (167) (186) Change in valuation allowance for deferred taxes allocated to income tax expense................... -- (6,469) (4,772) Other.............................................. -- (6) 149 ----- -------- -------- Tax benefit (expense)............................ $ 522 $ (522) $ (26) ===== ======== ======== 63 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) The tax effects of temporary differences that give rise to significant portion of deferred tax assets and liabilities are presented below: Year Ended December 31, -------------------------- 1996 1997 1998 --------------- --------- (In thousands) Deferred tax asset: Organizational expenditures and start-up costs... $ 522 $ 2,029 1,795 Accrual to cash accounting adjustment............ -- (162) (126) Purchased in-process research and development amortized for tax purposes over 15 years........ -- 3,040 3,031 Net operating loss carry forwards................ -- 1,563 6,198 Capital loss and charitable contribution carry forwards........................................ -- 2 3 Property and equipment........................... -- (92) (441) Bad debts........................................ -- 24 66 Original issue discount amortization............. -- 13 96 Non-recurring charge............................. -- -- 246 Deferred compensation............................ -- -- 409 Other............................................ -- 52 63 Valuation allowance.............................. -- (6,469) (11,241) ------ -------- --------- Net deferred tax asset......................... $ 522 $ -- $ 99 ====== ======== ========= VIALOG had net operating loss carryforwards of $0, $3.9 million and $13.1 million at December 31, 1996, 1997 and 1998, respectively, of which $3.9 million expires in 2013 and $13.1 million expires in 2018. Utilization of the net operating losses may be subject to an annual limitation provided by change in ownership provisions of Section 382 of the Internal Revenue Code of 1986 and similar state provisions. In assessing the realizability of deferred tax assets, VIALOG considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on management's projections for future taxable income, a valuation allowance has been established for the deferred tax assets. In accordance with FAS 109, the accounting for the tax benefits of acquired deductible temporary differences, which are not recognized at the acquisition date because a valuation allowance is established, and are recognized subsequent to the Acquisitions will be applied first to reduce to zero any goodwill and other noncurrent intangible assets related to the acquisitions. Any remaining benefits would be recognized as a reduction of income tax expense. As of December 31, 1998, $144,000 of the Company's net operating loss carryforward deferred tax asset of $6.2 million pertains to the Acquired Companies and $2,000 of the Company's $3,000 capital loss and charitable contribution carryforward deferred tax asset pertains to the Acquired Companies, the future benefit of which will be applied first to reduce to zero any goodwill and other noncurrent intangible assets related to the acquisitions prior to reducing the Company's income tax expense. (13) STOCKHOLDERS' EQUITY (a) Sale of Common Stock During 1996, VIALOG sold common stock through several private placements. The proceeds of the sales were used primarily for expenses relating to the business acquisition agreements and a proposed financing. A total of 758,000 shares of common stock were sold for aggregate net proceeds of $865,000. 64 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) (b) Common Stock Grants Between February and November, 1996, VIALOG issued a total of 419,500 shares of common stock under the 1996 Stock Plan to consultants and employees as an inducement to them to provide services to VIALOG. Compensation expense of $123,000, which represents the estimated fair market value of the stock granted, was recorded in connection with these transactions. (c) Common Stock Split On October 16, 1997, the Board of Directors approved a 2-for-1 stock split of VIALOG's common stock. All prior periods have been restated to reflect this stock split effected as a recapitalization. (d) Preferred Stock On February 14, 1997, the stockholders voted to authorize 10,000,000 shares of preferred stock. No shares of preferred stock are issued and outstanding. (e) Warrants During 1997, VIALOG issued warrants to purchase common stock in connection with certain financing transactions (see Note 8 "Long-Term Debt"). (14) EMPLOYEE BENEFIT PLANS (a) The 1996 Stock Plan On February 14, 1996, the Board of Directors and VIALOG's stockholders approved VIALOG's 1996 Stock Plan (the "Plan"). The purpose of the Plan is to provide directors, officers, key employees, consultants and other service providers with additional incentives by increasing their ownership interests in VIALOG. Individual awards under the plan may take the form of one or more of: (i) incentive stock options ("ISOs"); (ii) non-qualified stock options ("NQSOs"); (iii) stock appreciation rights ("SARs"); and (iv) restricted stock. The Compensation Committee administers the Plan and generally selects the individuals who will receive awards and the terms and conditions of those awards. The maximum number of shares of common stock that may be subject to outstanding awards, determined immediately after the grant of any award, may not exceed 3,250,000 shares as of December 31, 1997 and 1998. Shares of common stock attributable to awards which have expired, terminated or been canceled or forfeited are available for issuance or use in connection with future awards. The Plan will remain in effect until February 14, 2006 unless terminated earlier by the Board of Directors. The Plan may be amended by the Board of Directors without the consent of the stockholders of VIALOG, except that any amendment, although effective when made, will be subject to stockholder approval if required by any Federal or state law or regulation by the rules of any stock exchange or automated quotation system on which the common stock may then be listed or quoted. 65 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) The following is a summary of stock option activity: Weighted Average Shares Exercise Price ---------- ---------------- Options outstanding at December 31, 1995........... -- $ -- Granted.......................................... 1,746,132 0.29 Exercised........................................ (75,000) 0.03 Cancelled........................................ (576,000) 0.03 ---------- ----- Options outstanding at December 31, 1996........... 1,095,132 0.45 Granted.......................................... 763,849 4.14 Exercised........................................ (104,000) 0.03 Cancelled........................................ (412,580) 1.06 ---------- ----- Options outstanding at December 31, 1997........... 1,342,401 $2.40 Granted.......................................... 823,175 6.60 Exercised........................................ (215,334) 0.98 Cancelled........................................ (354,680) 4.96 ---------- ----- Options outstanding at December 31, 1998........... $1,595,562 $4.19 ========== ===== The options generally vest in equal quarterly installments over 3 years and have a 10 year term. At December 31, 1996, 1997 and 1998, 75,000, 467,771, and 551,704 options, respectively, were exercisable at weighted average exercise prices of $.2775, $1.03, and $1.79 per share, respectively. At December 31, 1998, there were 835,606 additional shares available for grant under the Plan. The following is a summary of options outstanding and exercisable at December 31, 1998: Options Outstanding Options Exercisable --------------------------------------------- ---------------------------- Number Weighted Average Number Range of Outstanding Weighted Average Remaining Exercisable Weighted Average Exercise Prices At 12/31/98 Exercise Price Contractual Life At 12/31/98 Exercise Price --------------- ----------- ---------------- ---------------- ----------- ---------------- $0.025-$0.278 319,330 $0.15 7.2 years 272,740 $0.13 $2.00 375,000 2.00 8.6 188,448 2.00 $5.75 655,182 5.75 8.9 68,616 5.75 $7.00-$10.00 246,050 8.60 9.4 21,900 8.20 --------- ------- 1,595,562 4.19 551,704 1.79 ========= ======= In 1996, VIALOG granted a total of 111,112 options to consultants. Compensation expense of $50,000 has been recorded in connection with these transactions in 1996. During 1997, modifications were made to the vesting and expiration periods of certain outstanding options. Compensation expense of $958,000 has been recorded in 1997 in connection with these modifications. VIALOG applies APB Opinion No. 25 accounting for stock issued to employees in accounting for its Plan and, accordingly, compensation cost is only recognized in the financial statements for stock options granted to employees when the fair value on the grant date exceeds the exercise price. Had VIALOG determined compensation cost based on the fair value at grant date for its stock options under SFAS No. 123, its net loss would have been increased to the pro forma amounts indicated below: 66 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) Year ended December 31, -------------------------- 1996 1997 1998 ------ -------- -------- Net loss As reported.................................... $ (785) $(15,821) $(11,877) Pro forma...................................... $ (800) $(15,901) $(12,588) Loss per share As reported.................................... $(0.38) $ (5.48) $ (3.27) Pro forma...................................... $(0.38) $ (5.50) $ (3.47) The per share weighted-average fair value of stock options granted during 1996, 1997 and 1998, respectively, were $.135, $1.00, and $4.40 for ISOs and $.37, $1.30, and $6.42 for NQSOs on the date of grant. The pro forma amounts were determined using the Black-Scholes Valuation Model with the following key assumptions; (i) a 75% volatility factor for all periods initially based on the Company's average trading price since the IPO, as well as those of comparable companies; (ii) no dividend yield; (iii) a discount rate equal to the rates available on U.S. Treasury Strip (zero coupon) bonds on the grant dates of 6.1%, 5.88% and 4.45% in 1996, 1997 and 1998, respectively, and (iv) an average option life of five years for all periods. (b) VIALOG Retirement Plan VIALOG maintains a defined contribution retirement plan (the "VIALOG Plan") under Section 401(k) of the Internal Revenue Code which is available to all eligible employees. The VIALOG Plan provides various alternative investment funds in which the employee may elect to contribute pre-tax savings on a tax deferred basis. Employee contributions to the VIALOG Plan vest with the employee immediately. (c) Access Retirement Plan Until December 31, 1997, Access, one of the Acquired Companies, maintained a defined contribution retirement plan (the "Access Plan") under Section 401(k) of the Internal Revenue Code which covered all eligible employees. On January 1, 1998, the Access Plan merged with the VIALOG Plan. (d) Employment Agreements Certain of the executive officers of VIALOG have entered into employment agreements with VIALOG which provide for severance payments in the event their employment is terminated prior to the expiration of their employment terms. The severance terms range from six months to three years, depending on the timing and circumstances of the termination. (15) RELATED PARTY TRANSACTIONS The following summarizes the significant related party transactions: (a) During 1997 and 1998, VIALOG paid approximately $1.8 million and $845,000, respectively, for legal fees to a firm having a member who is also a director of VIALOG. (b) For certain months during the years ended December 31, 1997 and 1998, one of VIALOG's stockholders provided consulting services to VIALOG for a monthly fee of $10,000. (c) TCC provides teleconferencing services to customers of a company owned by the spouse of a stockholder of VIALOG. (d) VIALOG has implemented a policy whereby neither VIALOG nor any subsidiary (which includes the Acquired Companies) will enter into contracts or business arrangements with persons or entities owned in whole or in part by officers or directors of VIALOG or any subsidiary except on an arms-length basis and with the approval of VIALOG's Board of Directors. VIALOG's bylaws require that any approval must be by a majority of the independent directors then in office who have no interest in such contract or transaction. 67 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) (16) LITIGATION A former employee of CSI, one of the Acquired Companies, has claimed in writing that he may be entitled to up to five percent of the stock of CSI, based on an unsigned paper outlining possible employment terms. Based on the $18.7 million consideration paid to CSI's stockholders upon the consummation of the acquisition of CSI by VIALOG Corporation, the value of a five percent equity interest in CSI would be approximately $934,000. CSI's position is that the only agreements with such employee were set forth in two successive executed employment agreements, each of which had a specific provision that such agreement was inclusive as to the terms of employment. VIALOG and the former stockholders of CSI believe that such claim is without merit. (17) SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION The 12 3/4% Senior Notes due November 15, 2001, in the aggregate principal amount of $75.0 million, are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company's subsidiaries. Each of the guarantors is a wholly-owned subsidiary of the Company. Summarized financial information of the Company and its subsidiaries is presented below as of and for the years ended December 31, 1997 and 1998. Separate financial statements and other disclosures concerning the guarantor subsidiaries are not presented because management has determined that they are not material to investors. 68 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) VIALOG Call Corp. Access CSI Points TCC Americo CDC Eliminations Consolidated ------- ------- ------- ------- ------ ------- ------ ------------ ------------ (In thousands) Balance Sheet Information as of December 31, 1997 Total current assets.... $11,799 $ 725 $ 431 $ 1,506 $ 556 $ 5 $ 488 $ -- $ 15,510 Property and equipment, net.................... 70 3,306 961 1,617 883 611 96 -- 7,544 Investment in subsidiaries........... 57,121 -- -- -- -- -- -- (57,121) -- Goodwill and intangible assets, net............ -- 15,899 15,202 3,872 3,945 2,970 2,503 44,391 Other assets............ 7,430 34 86 -- 12 73 3 -- 7,638 ------- ------- ------- ------- ------ ------ ------ -------- -------- Total assets........... $76,420 $19,964 $16,680 $ 6,995 $5,396 $3,659 $3,090 $(57,121) $ 75,083 ======= ======= ======= ======= ====== ====== ====== ======== ======== Current liabilities..... $ 3,145 $ 1,976 $ 471 $ 824 $ 680 $1,038 $ 117 $ -- $ 8,251 Long-term debt.......... 70,797 24 449 -- 195 74 -- -- 71,539 Other liabilities....... -- 155 -- -- -- -- 20 -- 175 Stockholders' equity (deficit).............. 2,478 17,809 15,760 6,171 4,521 2,547 2,953 (57,121) (4,882) ------- ------- ------- ------- ------ ------ ------ -------- -------- Total liabilities and stockholders' equity (deficit)............. $76,420 $19,964 $16,680 $ 6,995 $5,396 $3,659 $3,090 $(57,121) $ 75,083 ======= ======= ======= ======= ====== ====== ====== ======== ======== Statement of Operations Information for the Year Ended December 31, 1997(1) Net revenues............ $ -- $ 1,620 $ 854 $ 1,142 $ 567 $ 290 $ 353 $ (10) $ 4,816 Cost of revenues, excluding Depreciation........... -- 709 322 806 279 212 174 (10) 2,492 Selling, general and administrative Expenses............... 6,117 403 93 159 190 134 82 -- 7,178 Depreciation expense.... 10 80 60 79 27 9 8 -- 273 Amortization of goodwill and Intangibles........ -- 103 108 33 26 20 16 -- 306 Write-off of in-process research and Development............ -- 2,200 3,400 2,000 120 160 120 -- 8,000 ------- ------- ------- ------- ------ ------ ------ -------- -------- Operating loss......... (6,127) (1,875) (3,129) (1,935) (75) (245) (47) -- (13,433) Interest income (expense), net......... (1,828) (16) (12) 2 (4) (8) -- -- (1,866) ------- ------- ------- ------- ------ ------ ------ -------- -------- Loss before taxes...... (7,955) (1,891) (3,141) (1,933) (79) (253) (47) -- (15,299) Income tax expense...... (522) -- -- -- -- -- -- -- (522) ------- ------- ------- ------- ------ ------ ------ -------- -------- Net loss............... $(8,477) $(1,891) $(3,141) $(1,933) $ (79) $ (253) $ (47) $ -- $(15,821) ======= ======= ======= ======= ====== ====== ====== ======== ======== Cash Flow Information for the Year Ended December 31, 1997(1) Cash flows provided by (used in) operating activities............. $(7,072) $ 1,663 $ 407 $ 320 $ 65 $ 264 $ 205 $ -- $ (4,148) Cash flows provided by (used in) investing activities............. (54,281) 192 90 169 56 (8) 20 -- (53,762) Cash flows provided by (used in) financing activities............. 69,412 (1,415) (546) -- (75) (189) (47) -- 67,140 ------- ------- ------- ------- ------ ------ ------ -------- -------- Net increase in cash and cash Equivalents....... 8,059 440 (49) 489 46 67 178 -- 9,230 Cash and cash equivalents at the beginning of year...... 337 -- -- -- -- -- -- -- 337 ------- ------- ------- ------- ------ ------ ------ -------- -------- Cash and cash equivalents at the end of Year................ $ 8,396 $ 440 $ (49) $ 489 $ 46 $ 67 $ 178 $ -- $ 9,567 ======= ======= ======= ======= ====== ====== ====== ======== ======== Balance Sheet Information as of December 31, 1998 Total current assets.... $(3,873) $ 4,845 $ 2,492 $ 3,843 $1,620 $ (746) $ 628 $ -- $ 8,809 Property and equipment, net.................... 561 5,914 1,642 2,054 994 605 217 -- 11,987 Investment in subsidiaries........... 57,121 -- -- -- -- -- -- (57,121) -- Goodwill and intangible assets, net............ -- 15,021 14,120 3,617 3,738 2,812 2,371 -- 41,679 Other assets............ 6,351 260 79 -- 27 66 8 -- 6,791 ------- ------- ------- ------- ------ ------ ------ -------- -------- Total assets............ $60,160 $26,040 $18,333 $ 9,514 $6,379 $2,737 $3,224 $(57,121) $ 69,266 ======= ======= ======= ======= ====== ====== ====== ======== ======== Current liabilities..... $ 5,695 $ 2,052 $ 1,055 $ 1,416 $ 550 $ 337 $ 82 $ -- $ 11,187 Long-term debt, excluding current portion................ 73,814 8 209 -- 88 70 -- -- 74,189 Other liabilities....... -- 187 264 -- -- -- 31 -- 482 Stockholders' equity (deficit).............. (19,349) 23,793 16,805 8,098 5,741 2,330 3,111 (57,121) (16,592) ------- ------- ------- ------- ------ ------ ------ -------- -------- Total liabilities and stockholders' equity (deficit).............. $60,160 $26,040 $18,333 $ 9,514 $6,379 $2,737 $3,224 $(57,121) $ 69,266 ======= ======= ======= ======= ====== ====== ====== ======== ======== - ------- 1) Represents operating results of the Acquired Companies from the date of Acquisition on November 12, 1997 69 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) VIALOG Call Corp. Access CSI Points TCC Americo CDC Eliminations Consolidated -------- ------- ------ ------- ------ ------- ------ ------------ ------------ (In thousands) Statement of Operations Information for the Year Ended December 31, 1998 Net revenues............. $ -- $18,361 $7,594 $10,144 $5,936 $2,824 $2,682 $(721) $ 46,820 Cost of revenues, excluding depreciation.. 3 8,506 3,225 6,749 3,189 1,712 1,658 (721) 24,321 Selling, general and administrative expenses................ 9,972 1,318 679 626 967 1,001 633 -- 15,196 Depreciation expense..... 81 1,458 413 450 252 115 66 -- 2,835 Amortization of goodwill and intangibles......... -- 881 865 253 204 156 131 -- 2,490 Non-recurring charge..... -- -- 1,200 -- -- -- -- -- 1,200 -------- ------- ------ ------- ------ ------ ------ ----- -------- Operating income (loss)................. (10,056) 6,198 1,212 2,066 1,324 (160) 194 -- 778 Interest income (expense), net.......... (12,521) 8 (63) -- (35) (25) 7 -- (12,629) -------- ------- ------ ------- ------ ------ ------ ----- -------- Income (loss) before income taxes........... (22,577) 6,206 1,149 2,066 1,289 (185) 201 -- (11,851) Income tax expense -- (26) -- -- -- -- -- -- (26) -------- ------- ------ ------- ------ ------ ------ ----- -------- Net income (loss) $(22,577) $ 6,180 $1,149 $ 2,066 $1,289 $ (185) $ 201 $ -- $(11,877) ======== ======= ====== ======= ====== ====== ====== ===== ======== Cash Flow Information for the Year Ended December 31, 1998 Cash flows provided by (used in) operating activities.............. $(11,980) $ 3,992 $1,525 $ 459 $ 459 $ 98 $ 29 $ -- $ (5,346) Cash flows used in investing activities.... (1,065) (4,066) (1,171) (887) (363) (109) (187) -- (7,848) Cash flows used in financing activities.... 4,739 (366) (244) -- (142) (56) -- -- 3,931 -------- ------- ------ ------- ------ ------ ------ ----- -------- Net increase (decrease) in cash and cash equivalents............. (8,306) (440) 110 (428) (46) (67) (158) -- (9,335) Cash and cash equivalents at the beginning of period.................. 8,396 440 (49) 489 46 67 178 -- 9,567 -------- ------- ------ ------- ------ ------ ------ ----- -------- Cash and cash equivalents at the end of period.... $ 90 $ -- $ 61 $ 61 $ -- $ -- $ 20 $ -- $ 232 ======== ======= ====== ======= ====== ====== ====== ===== ======== (18) SUBSEQUENT EVENTS (a) Initial Public Offering On February 10, 1999, the Company completed an initial public offering for the sale of 4,600,000 shares of common stock. The net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses were approximately $32.7 million. Of the net proceeds, approximately $29.1 million was used to acquire three private conference service bureaus (discussed below). In addition, approximately $305,000 of indebtedness was paid to the former stockholder of one of the acquisitions. The remaining net proceeds of $3.3 million will be used for working capital and general corporate purposes. (b) Acquisitions On February 10, 1999, VIALOG acquired all of the issued and outstanding stock of A Business Conference-Call, Inc. ("ABCC"), Conference Pros International, Inc. ("CPI") and A Better Conference, Inc. ("ABCI"). These acquisitions occurred contemporaneously with the closing of an initial public offering of common stock of VIALOG. The acquisitions will be accounted for using the purchase method of accounting. 70 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998--(Continued) The following table sets forth for each acquired company the consideration paid its common stockholders. Cash(1) (in thousands) -------------- ABCC....................................................... $16,226 CPI........................................................ 6,000 ABCI....................................................... 6,200 ------- Total Consideration........................................ $28,426 ======= - -------- (1) Excludes tax reimbursements of approximately $267,000 to certain stockholders of certain of the acquired companies. The total purchase price of the acquired companies is estimated to be $29.1 million and consists of $28.4 million in cash paid to the stockholders of the acquired companies, approximately $400,000 of acquisition costs and approximately $267,000 related to tax reimbursements. The operating results of the acquired companies have not been included in the Consolidated Statement of Operations for the year ended December 31, 1998. The unaudited pro forma consolidated historical results for the year ended December 31, 1998 assuming the acquisitions occurred at the beginning of fiscal 1998 are as follows: Dollars in thousands except per share data --------------------- Net revenues........................................ $59,819 Net loss............................................ $(9,300) Net loss per share.................................. $ (1.13) The pro forma results include amortization of goodwill and intangible assets and reductions to selling, general and administrative expenses related to compensation and benefits that were eliminated or reduced as a result of the acquisitions. The pro forma results are not necessarily indicative of the results that would have been obtained had these events actually occurred at the beginning of the period presented, nor are they necessarily indicative of future consolidated results. 71 INDEPENDENT AUDITORS' REPORT The Board of Directors Telephone Business Meetings, Inc.: We have audited the accompanying balance sheets of Telephone Business Meetings, Inc. ("Access") as of December 31, 1995 and 1996, and the related statements of operations, stockholders' equity and cash flows for the year ended December 31, 1994, the period January 1, 1995 to April 9, 1995, the period April 10, 1995 to December 31, 1995, the year ended December 31, 1996 and for the period January 1, 1997 to November 12, 1997. These financial statements are the responsibility of Access' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Telephone Business Meetings, Inc. as of December 31, 1995 and 1996, and the results of its operations and its cash flows for the year ended December 31, 1994, the period January 1, 1995 to April 9, 1995, the period April 10, 1995 to December 31, 1995, the year ended December 31, 1996 and the period January 1, 1997 to November 12, 1997, in conformity with generally accepted accounting principles. As discussed in note 4 to the financial statements, effective April 10, 1995, Access repurchased all of the common stock of one of Access' founding stockholders, representing a 50% interest in Access. As a result of the change in control, the financial information for the periods after the change in control is presented on a different cost basis than that for the periods before the change in control and, therefore, is not comparable. KPMG LLP Washington, D.C. July 2, 1998 72 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. 73 TELEPHONE BUSINESS MEETINGS, INC. STATEMENTS OF OPERATIONS (In thousands, except share and per share data) Period Period from January 1, Period January 1, Year Ended to April April 10, to Year Ended 1997 to December 31, 9, December 31, December 31, November 12, 1994 1995 1995 1996 1997 ------------ ---------- ------------ ------------ ------------ 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. 74 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. 75 TELEPHONE BUSINESS MEETINGS, INC. STATEMENTS OF CASH FLOWS (In Thousands) Period Period from January 1, Period January 1, Year Ended to April April 10, 1995 Year Ended 1997 to December 31, 9, to December 31, December 31, November 12, 1994 1995 1995 1996 1997 ------------ ---------- --------------- ------------ ------------ 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. 76 TELEPHONE BUSINESS MEETINGS, INC. NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business Telephone Business Meetings, Inc. ("Access"), which operates under the names ACCESS Conference Call Service and ACCESS Teleconferencing International, provides telephone and video group communications services to a broad spectrum of individuals and businesses throughout the United States. Access' operations center is located in Reston, Virginia. On November 12, 1997, VIALOG Corporation acquired all of the outstanding stock of Access for cash, and Access became a wholly-owned subsidiary of VIALOG Corporation. The acquisition of Access was accounted for by the purchase method. Accordingly, all of the identified tangible and intangible assets and liabilities were recorded at their current fair market value and the excess of the purchase price over the fair value of the net assets acquired were recorded as intangible assets, which are being amortized over periods up to 20 years. Under the terms of the acquisition agreement, the stockholders of Access agreed to make an election under Section 338(h)(10) of the Internal Revenue Code in order for the acquisition to be treated as an asset purchase for tax purposes. At the time of the acquisition, the tax election of Access under the provisions of the Internal Revenue Code was changed from an S corporation to a C Corporation. As a result, Access will be subject to corporate income taxes subsequent to the date of the acquisition. (b) Use of Estimates Management of Access has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (c) Cash and Cash Equivalents Cash and cash equivalents includes cash on hand and short-term investments with original maturities of three months or less. (d) Restricted Cash Restricted cash consists of a certificate of deposit which is security for Access' commitment under its office lease and is classified as long-term in the accompanying balance sheets. (e) Property and Equipment Property and equipment are recorded at cost. Depreciation of property and equipment is provided on the straight-line basis over the estimated useful lives of the respective assets. The estimated useful lives are as follows: five to seven years for office furniture and equipment; seven years for conferencing equipment; and three to five years for computer equipment. Capitalized lease equipment and leasehold improvements are amortized over the lives of the leases, ranging from three to ten years. (f) Intangible Assets Access monitors its excess of purchase price over the fair value of interest in net assets of the former stockholders (goodwill) to determine whether any impairment of goodwill has occurred. In making such determination with respect to goodwill, Access evaluates the performance, on an undiscounted basis, of the underlying business which gave rise to such amount. Amortization of goodwill is recorded on a straight-line basis over the estimated useful life of 15 years. 77 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 ====== ====== 78 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 79 TELEPHONE BUSINESS MEETINGS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) value. The excess consideration paid over the fair market value of the interest in the net assets of the former stockholder was approximately $240,000. Concurrent with the repurchase of the shares, Access and the former stockholder entered into an agreement for consulting services and an agreement not to compete for a five-year period in exchange for total consideration of $625,000 payable in equal quarterly payments by Access of $31,000 commencing with the first quarter subsequent to the closing and continuing through April 2000. As of December 31, 1995, and December 31, 1996, $548,000, and $439,000 respectively, were due under the note payable to the former stockholder, of which $109,000, and $116,000 respectively, were current. During the period from April 10, 1995 to December 31, 1995, the year ended December 31, 1996, and the period January 1, 1997 to November 12, 1997 Access paid the former stockholder $62,000, $125,000 and $433,000, respectively, under the agreements for consulting services and not to compete. As stipulated in the business combination agreement between Access and VIALOG, $662,000 of the purchase price was paid directly to the related party to retire the note and to pay the remaining obligation under the agreement for consulting services and an agreement not to compete. During the period from January 1, 1997 to November 12, 1997 Access expensed $340,000 of the $662,000 of the purchase price paid to the related party by VIALOG. (5) EMPLOYEE BENEFITS Stock Awards During 1996, Access awarded 7.732 shares of common stock to each of two executive officers of Access. The shares are fully vested but are restricted as to transfer by each of the executive officers. In the event of termination of the executive officers' employment with Access, Access has the right at its sole option to require the executives to sell their shares back to Access and the executives have the right to require Access to repurchase their shares, all at the then determined fair market value. In the event of a public offering of Access' shares or the sale of Access, all such restrictions, rights, and options terminate. As a result of the executive officers' right to require Access to repurchase the shares upon termination of employment, the awards have been accounted for using variable plan accounting, whereby compensation expense is recognized each period for the increase, if any, in the estimated fair market value of Access' common stock. During the year ended December 31, 1996 and the period January 1, 1997 to November 12, 1997, Access recognized a total of $148,000 and $402,000, respectively, of compensation expense relating to the stock awards. Further, the liquidation value of the shares has been reflected between total liabilities and stockholders' equity in the accompanying balance sheets. In connection with the acquisition by VIALOG, as described in note 1, these shares were acquired by VIALOG. Retirement Plan Access maintains a defined contribution retirement plan (the "Plan") under Section 401(k) of the Internal Revenue Code which covers all eligible employees. Employee contributions are voluntary and vest with the employee immediately. The Plan provides for matching contributions by Access of 50 percent of employee contributions, up to certain limits as defined in the Plan. Access' matching contributions vest over the employee's period of service. Contributions by Access to the Plan were approximately $27,000, $7,000, $20,000, $42,000 80 TELEPHONE BUSINESS MEETINGS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) and $43,000 for the year ended December 31, 1994, the period January 1, 1995 to April 9, 1995, the period April 10, 1995 to December 31, 1995, the year ended December 31, 1996, and the period January 1, 1997 to November 12, 1997, respectively. (6) ACCRUED EXPENSES Accrued expenses consist of the following (in thousands): 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%. 81 TELEPHONE BUSINESS MEETINGS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 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 === 82 INDEPENDENT AUDITORS' REPORT The Board of Directors Conference Source International, Inc. We have audited the accompanying balance sheets of Conference Source International, Inc. ("CSI") as of December 31, 1995 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996 and for the period January 1, 1997 to November 12, 1997. These financial statements are the responsibility of CSI's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Conference Source International, Inc. as of December 31, 1995 and 1996 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, and the period January 1, 1997 to November 12, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts July 2, 1998 83 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. 84 CONFERENCE SOURCE INTERNATIONAL, INC. STATEMENTS OF OPERATIONS (In thousands, except share and per share data) Year Ended December 31, Period From January 1, ------------------------ 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. 85 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. 86 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. 87 CONFERENCE SOURCE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business Conference Source International, Inc. ("CSI") is a provider of group communications to a variety of customers located primarily in the United States. CSI was incorporated in February, 1992, and is headquartered in Atlanta, Georgia. (b) Sale of Business On November 12, 1997, VIALOG Corporation acquired all of the outstanding stock of CSI for cash, and CSI became a wholly-owned subsidiary of VIALOG Corporation. The acquisition of CSI was accounted for by the purchase method. Accordingly, all of the identified tangible and intangible assets and liabilities were recorded at their current fair market value and the excess of the purchase price over the fair value of the net assets acquired were recorded as intangible assets, which are being amortized over periods up to 20 years. Under the terms of the acquisition agreement, the stockholders of CSI agreed to make an election under Section 338(h) (10) of the Internal Revenue Code in order for the acquisition to be treated as an asset purchase for tax purposes. At the time of the acquisition, the tax election of CSI under the provisions of the Internal Revenue Code was changed from an S corporation to a C corporation. As a result, CSI will be subject to corporate income taxes subsequent to the date of the acquisition. In November 1997, the remaining balance of long-term debt described in note 3 was repaid in full, plus accrued interest. (c) Use of Estimates Management of CSI has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (d) Cash and Cash Equivalents CSI considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. At December 31, 1995 and December 31, 1996, certain cash deposits with financial institutions are in excess of the $100,000 Federal Depository Insurance Corporation (FDIC) guarantee. (e) Property and Equipment Property and equipment is stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments. Depreciation is calculated using accelerated methods over the estimated useful lives of the respective assets. Estimated useful lives are as follows: five years for vehicles; five to seven years for office equipment; five to seven years for bridge equipment; and five years for computer software. Equipment under capital leases is amortized using accelerated methods over the shorter of the lease term or the estimated useful life of the asset, ranging from five to seven years. (f) Income Taxes CSI has elected by consent of its stockholders to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, CSI does not pay corporate income taxes on its taxable income. Instead, the stockholders are liable for individual income taxes on CSI's taxable income. Accordingly, these financial statements do not contain a provision for income taxes. 88 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 ====== ====== 89 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. 90 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. 91 CONFERENCE SOURCE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (c) Consulting Agreement CSI has entered into a consulting agreement with a stockholder and former officer of CSI. Total payments under the agreement amount to $120,000, payable in equal monthly payments through December 1997. (d) Dispute A former employee of CSI has claimed that he may be entitled to 5% of the stock of CSI based on an unsigned paper outlining possible employment terms. CSI's position is that the only agreements with such employee were set forth in two successive executed employment agreements, each of which had a specific provision that such agreement was inclusive as to the terms of employment. CSI believes that such claim is without merit. (6) SIGNIFICANT CUSTOMERS Two customers accounted for the following percentages of revenues and accounts receivable: Percentage of Accounts Percentage of Net Revenues Receivable ------------------------------ ------------------------- Period January 1, Year Ended 1997 to December 31, November 12, December 31, ---------------- ------------ ------------------------- 1994 1995 1996 1997 1995 1996 ---- ---- ---- ------------ ----------- ----------- Customer A.......... 14% 30% 49% 47% 47% 58% Customer B.......... 14% 24% 21% 25% 26% 26% 92 INDEPENDENT AUDITORS' REPORT The Board of Directors A Business Conference-Call, Inc.: We have audited the accompanying balance sheets of A Business Conference- Call, Inc. ("ABCC") as of December 31, 1997 and 1998, and the related statements of income and retained earnings and cash flows for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of ABCC's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of A Business Conference- Call, Inc. as of December 31, 1997 and 1998 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota February 26, 1999 93 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. 94 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. 95 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. 96 A BUSINESS CONFERENCE-CALL, INC. NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business A Business Conference-Call, Inc. ("ABCC") is a provider of group communications to a variety of customers located primarily in the United States. ABCC was incorporated in 1988 and is headquartered in Chaska, Minnesota. (b) Use of Estimates Management of ABCC has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (c) Cash and Cash Equivalents Cash and cash equivalents includes deposits and short-term investments with original maturities of three months or less. (d) Property and Equipment Property and equipment is stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets. Estimated useful lives are as follows: five to seven years for office furniture and equipment: seven years for conferencing equipment; three years for computer software; and five years for vehicles. (e) Income Taxes ABCC has elected by consent of its stockholders to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, ABCC does not pay corporate income taxes on its taxable income. Instead, the stockholders are liable for individual taxes on ABCC's taxable income. Accordingly, these financial statements do not contain a provision for income taxes. (f) Revenue Recognition Revenue for conference calls is recognized upon completion of the call. Revenue for services is recognized upon performance of the service. (g) Fair Value of Financial Statements All financial statements are carried at amounts that approximate estimated fair value. (h) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of ABCC adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, during 1997. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of the statement did not have a material impact on ABCC's financial position, results of operations, or liquidity. 97 A BUSINESS CONFERENCE-CALL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (i) Earnings Per Share ABCC adopted the provisions of SFAS No. 128, "Earnings per Share," during 1997. This statement requires the presentation of basic earnings per share and diluted earnings per share for all periods presented. For the years ended December 31, 1996, 1997, and 1998, basic earnings per share were calculated based on weighted average common shares outstanding. There were no common stock equivalents outstanding for any periods presented; accordingly, basic and fully diluted earnings per share are the same. (j) Reclassifications Certain 1997 amounts have been reclassified to conform to the 1998 presentation. (2) PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): 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 (b) Operating Leases The Company leases office space under a noncancelable operating lease. The lease provides for monthly rental payments including real estate taxes and other operating costs. In addition, the Company leases certain equipment under various operating leases. Total rent expense amounted to approximately $73,000, $95,000, and 98 A BUSINESS CONFERENCE-CALL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) $99,000 for the years December 31 1996, 1997, and 1998, respectively. Future minimum lease payments under noncancelable operating leases are as follows: 1999................................................................. $60,700 2000................................................................. 22,900 2001................................................................. 1,900 2002................................................................. 400 (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. 99 A BUSINESS CONFERENCE-CALL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (b) Service Agreement During 1998, ABCC entered into service agreements for its digital network. The total expense under these agreements during 1998 was $18,000. Future payments under these noncancelable agreements are as follows: 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. 100 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 ---- --- -------- Glenn D. Bolduc(1).......... 46 Chief Executive Officer, President and Director, President--Oradell (NJ) Center, Montgomery (AL) Center, Atlanta (GA) Center and Reston (VA) Center John J. Dion................ 40 Vice President--Finance and Treasurer Vice President--Marketing and Business Robert F. Moore............. 44 Development Gary G. Vilardi............. 44 Vice President--Sales John R. Williams(2)......... 38 Vice President--Operations Michael D. Shepherd......... 35 Vice President--Wholesale Sales Clarissa A. Peterson........ 35 Vice President--Human Resources C. Raymond Marvin........... 60 Vice President Joanna M. Jacobson(1)(3).... 39 Director David L. Lougee(1)(3)....... 59 Director Richard E. Hamermesh........ 51 Director Patti R. Bisbano............ 54 Director and President--Danbury (CT) Center Edward M. Philip............ 33 Director Courtney P. Snyder.......... 49 President--Cambridge (MA) Center - -------- (1) Member of the Compensation Committee. (2) Mr. Williams recently resigned as Vice President--Operations and will be transitioning his responsibilities over the next 30 to 45 days. Upon separation from the Company, Mr. Williams is expected to provide consulting services to the Company. (3) Member of the Audit Committee. GLENN D. BOLDUC has served as Chief Executive Officer, President and a Director of the Company since October 1, 1996 and served as Treasurer from July 9, 1997 to January 13, 1999. He has also served as President of the Oradell Center since June 24, 1998, as President of the Montgomery Center since July 1, 1998, as President of the Atlanta Center since September 30, 1998 and as President of the Reston Center since March 17, 1999. From July, 1989 to September, 1996, Mr. Bolduc served as Chief Financial Officer of MutliLink, an independent supplier of audio conferencing bridges. JOHN J. DION has served as Vice President--Finance for the Company since November, 1996 and as Treasurer since January 13, 1999. Mr. Dion served as a Director from July 9, 1997 to November 12, 1997. On February 23, 1998, Mr. Dion was also appointed Vice President-Finance of each of the Operating Centers. From October, 1995 to October, 1996, Mr. Dion provided financial consultative services to a medical device manufacturer and publishing company. From August, 1985 to August, 1995, Mr. Dion served in various financial positions for DSC Communications Corporation, a manufacturer of telecommunications hardware and software. Mr. Dion's final position with DSC was Director of Accounting. ROBERT F. MOORE joined the Company on November 1, 1997 as Vice President-- Marketing and Business Development. Mr. Moore served as Vice President--Sales and Marketing for Citizens Communication Corporation, a division of Citizens Utilities, Inc. from March, 1997 to October 31, 1997. From January, 1994 to February, 1997, Mr. Moore was with Hill Holliday Connors Cosmopulos, Inc. Advertising. For the 17 years prior to that, Mr. Moore served in various sales and marketing positions with Southern New England Telephone 101 ("SNET"), the last four years of which he served as President of SNET Mobility, Inc., the cellular communications subsidiary of SNET. GARY G. VILARDI has served as Vice President--Sales of the Company since April 1, 1997. He has spent 17 years in sales and sales management and has focused on audio, video, and document conferencing sales during the last eight years. From October, 1995 to December, 1996, Mr. Vilardi was Vice President-- Sales with Video-On, Inc., a GE Capital Company specializing in video conferencing. From June, 1995 to October, 1995, he served as Eastern Regional Vice President for Network MCI teleconferencing, and from March, 1990 to June, 1995 he was Vice President of U.S. Sales for Darome Teleconferencing. JOHN R. WILLIAMS joined the Company on November 1, 1997 as Vice President-- Operations. Mr. Williams served as General Manager of the Sprint Conference Line, Sprint's audio teleconferencing service bureau business, from July, 1995 to October, 1997. Mr. Williams held positions in product development, marketing, and strategic planning in the Sprint Long Distance Division from November, 1989 to July, 1995. From June, 1984 to November, 1989 he was a National Account Manager at IBM. Mr. Williams recently resigned as Vice President--Operations and will be transitioning his responsibilities over the next 30 to 45 days. Upon separation from the Company, Mr. Williams is expected to provide consulting services to the Company. MICHAEL D. SHEPHERD joined the Company on February 2, 1998 as Vice President--Wholesale Sales. Mr. Shepherd served as Vice President of Carrier Sales at Citizens Communications Corporation, a division of Citizens Utilities Companies, Inc. from November, 1997 to February, 1998. From April, 1997 to November of 1997, Mr. Shepherd served as Director--Major Accounts (Western Region) with Citizens Communications Corporation where he was responsible for managing the business relationships with AT&T Communications, Inc., U.S. West Communications, Inc., Pacific Telesis, and several national wireless companies. From April, 1986 to February, 1995, Mr. Shepherd held various sales positions with WorldCom and MCI. CLARISSA A. PETERSON joined the Company on August 3, 1998 as Vice President--Human Resources. Ms. Peterson served as Employee Relations Manager at Global One from July, 1997 to July, 1998. From July, 1996 to July, 1997, Ms. Peterson served as Director of Human Resources for Access. From October, 1988 to February, 1996, Ms. Peterson served in various human resource positions for Superior Beverages, Inc., an Anheuser-Busch distributor. Ms. Peterson's final position with Superior Beverages, Inc. was Vice President-- Human Resources. C. RAYMOND MARVIN has served as a Vice President of the Company since December 31, 1997. He founded Access in 1987 and served as President and Chief Executive Officer of Access from its inception to December 31, 1997 and as a director of Access from its inception to November 12, 1997. JOANNA M. JACOBSON served as a consultant to VIALOG Corporation prior to, and became a Director of the Company on November 12, 1997. Since April, 1996, Ms. Jacobson has been President of Keds, a distributor of athletic footwear and a division of Stride-Rite Corporation. From February, 1995 to March, 1996, she was a partner in Core Strategy Group, a strategic marketing consulting firm. From December, 1991 to September, 1994, Ms. Jacobson was a Senior Vice President of Marketing and Product Development for Converse, Inc., a distributor of athletic footwear. DAVID L. LOUGEEE became a Director of the Company on November 12, 1997. Mr. Lougee has been a partner of the law firm of Mirick, O'Connell, DeMallie & Lougee, LLP since 1972. Mr. Lougee is also a director of Meridian Medical Technologies, Inc., a public company in the medical devices and drug delivery business. Mirick, O'Connell, DeMallie & Lougee, LLP serves as outside general counsel to the Company. RICHARD G. HAMERMESH became a Director of the Company on June 19, 1998. Dr. Hamermesh is a founder and Managing Partner of The Center for Executive Development ("CED"), an executive education consulting firm in Cambridge, Massachusetts. Prior to founding CED in 1988, he was a member of the faculty of the Harvard Business School from 1976 to 1988. Dr. Hamermesh has provided management consulting services in the areas of strategic planning, organization design, and strategic change and has been an active consultant to 102 the executive development programs of numerous corporations. Dr. Hamermesh currently serves on the Board of Directors of two public companies--BE Aerospace, Inc. and Applied Extrusion Technologies, Inc. PATTI R. BISBANO has served as President of the Danbury Center since November 12, 1997. She co-founded CDC in April, 1990 and served as President, Treasurer and as a director of CDC from its inception to November 12, 1997. Ms. Bisbano became a Director of the Company on November 12, 1997. EDWARD M. PHILIP became a Director of the Company contemporaneous with the Company's initial public offering. He has served as Chief Financial Officer and Secretary of Lycos, Inc. since December, 1995 and Chief Operating Officer since December, 1996. From July, 1991 to December, 1995, Mr. Philip was employed by The Walt Disney Company where he served in various finance positions, most recently as Vice President and Assistant Treasurer. Mr. Philip is also a director of VDI Media, Inc. COURTNEY P. SNYDER has served as President of the Cambridge Center since November 12, 1997. He founded TCC in 1987 and served as President, Chief Executive Officer and as a director of TCC from its inception until the Acquisition of TCC by VIALOG Corporation. The Company's Board of Directors is divided into three classes, with one class of directors elected each year at the annual meeting of stockholders for a three-year term of office. All directors of one class hold their positions until the annual meeting of stockholders at which the terms of the directors in such class expire and until their respective successors are elected and qualified. Ms. Jacobson and Ms. Bisbano serve in the class whose terms expire in 1999, Mr. Bolduc and Mr. Lougee serve in the class whose terms expire in 2000, and Dr. Hammermesh, elected as a Director on June 19, 1998, and Mr. Philip, whose appointment as Director commenced on February 10, 1999, serve in the class whose terms expire in 2001. Executive officers of the Company are elected annually by the Board of Directors and serve at the discretion of the Board of Directors or until their successors are duly elected and qualified. On January 6, 1998, the Board of Directors established an Audit Committee and a Compensation Committee. The Audit Committee reviews the scope and results of the annual audit of the Company's consolidated financial statements conducted by the Company's independent accountants, proposed changes in the Company's financial and accounting standards and principles, and the Company's policies and procedures with respect to its internal accounting, auditing and financial controls, and makes recommendations to the Board of Directors on the engagement of the independent accountants, as well as other matters which may come before it or as directed by the Board of Directors. The Compensation Committee administers the Company's compensation programs, including the 1996 Stock Plan, and performs such other duties as may from time to time be determined by the Board of Directors. Item 11. Executive Compensation. Director Compensation Directors who are also employees of the Company or one of its subsidiaries do not receive additional cash compensation for serving as Directors. Ms. Bisbano, a Director of the Company and the President of the Danbury Center, will be granted an option to purchase 2,500 shares of Common Stock following each annual meeting of stockholders if she then serves on the Board of Directors. Each Director who is not an employee of the Company or one of its subsidiaries has been granted options to purchase a total of 20,000 shares of Common Stock at its then fair market value. Following each annual meeting of stockholders, each non-employee Director then in office will be granted an option to purchase 5,000 shares of Common Stock. Each non-employee Director will receive a $10,000 annual retainer payable quarterly in arrears. Additionally, each non-employee Director will receive $1,000 for attendance at each Board of Directors meeting and $500 for each committee meeting (unless held on the same day as a Board of Directors meeting). Directors are also reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or committees thereof or otherwise incurred in their capacity as Directors. 103 Compensation Committee Interlocks and Insider Participation On January 6, 1998, the Company's Board of Directors established a Compensation Committee, consisting of Mr. Bolduc, Ms. Jacobson and Mr. Lougee. Mr. Bolduc also serves as the Chief Executive Officer, President and a Director of the Company. Mr. Lougee also serves as a Director of the Company and is a partner of Mirick, O'Connell, DeMallie & Lougee, llp, the Company's legal counsel. Prior to the establishment of the Compensation Committee, decisions as to executive compensation were made by the Board of Directors. From January 1, 1997 until February 21, 1997, the Board of Directors consisted of John J. Hassett, Mr. Bolduc and Thomas M. Carroll. Mr. Carroll is the brother-in-law of Mr. Hassett. On February 21, 1997, Mr. Carroll resigned as Director and was replaced by Bruce T. Guzowski. On July 9, 1997, Mr. Guzowski resigned and was replaced by John J. Dion. On November 12, 1997, Mr. Dion and Mr. Hassett resigned as Directors, and Mr. Lougee, Ms. Bisbano, Ms. Jacobson and David L. Lipsky were appointed Directors. Mr. Lipsky's term as a Director expired June 19, 1998, the date of VIALOG's shareholder meeting in lieu of annual meeting. Dr. Hamermesh was elected to succeed Mr. Lipsky as a Director on June 19, 1998. There are no compensation committee interlocks. 104 Executive Compensation The following table sets forth the compensation earned by the individual who served as the Company's President during the year ended December 31, 1998 and the Company's four most highly-compensated executive officers other than the President who were serving as executive officers on December 31, 1998 (the "Named Executive Officers"). Summary Compensation Table Long-Term Annual Compensation Compensation -------------------------- --------------------- --- Awards Payouts ---------- ---------- Securities Restricted Underlying All Other Annual Stock Options/ Other Salary Bonus Compensation Award(s) SARs Compensation Name and Principal Position ($) ($) ($) ($)(1) (#) ($) - --------------------------- ------- ----- ------------ ---------- ---------- ------------ Glenn D. Bolduc......... 261,923 0 (2) 0 40,000 0 President and CEO C. Raymond Marvin....... 251,308 0 (2) 0 100,000 0 Vice President Robert F. Moore......... 163,269 0 (2) 0 25,000 0 Vice President-- Marketing and Business Development Courtney P. Snyder...... 159,991 0 (2) 0 0 3,969(3) President--Cambridge Center Gary G. Vilardi......... 157,308 0 (2) 0 11,000 0 Vice President--Sales - -------- (1) None of the Named Executive Officers received compensation for their services in the form of restricted stock awards during the fiscal year ended December 31, 1998. However, as of December 31, 1998, each of the Named Executive Officers held restricted shares of the Company's Common Stock as follows: Value($) Named Executive Officers Restricted Shares(#) ($10.00/Share) ------------------------ -------------------- -------------- Glenn D. Bolduc..................... 25,000 250,000 C. Raymond Marvin................... 0 0 Robert F. Moore..................... 0 0 Courtney P. Snyder.................. 48,780 487,800 Gary G. Vilardi..................... 0 0 The Company has no current plans to pay dividends on the above-referenced restricted shares. (2) The aggregate amount of the Named Executive Officer's Compensation reportable under this category falls below the reporting threshold of the lesser of $50,000 or 10% of the total annual salary and bonus reported for the Named Executive Officers. (3) TCC paid an aggregate of $3,969 in premiums on two life insurance policies on the life of Mr. Snyder. Both of the policies were canceled in early 1998. 105 Employment and Noncompetition Agreements The following table sets forth a summary of the terms of the employment arrangements entered into with the Named Executive Officers. Current Name Position Salary Expires - ---- -------- ------- ------- Glenn D. Bolduc(1)...... President and CEO--VIALOG $265,000 Terminable upon 30 days notice C. Raymond Marvin(2).... Vice President--VIALOG $242,000 November, 1999 Robert F. Moore(3)...... Vice President--Marketing and Business Development $170,000 Terminable upon 30 days notice Courtney P. Snyder(4)... President--Cambridge Center $164,000 November, 2000 Gary G. Vilardi(5)...... Vice President--Sales $160,000 Terminable upon 30 days notice - -------- (1) The Company may immediately terminate Mr. Bolduc's employment agreement for "cause" as defined in the agreement. The Company and Mr. Bolduc each have the right to terminate Mr. Bolduc's employment without cause upon 30 days' prior written notice. If Mr. Bolduc's employment is terminated without cause by the Company, the employment agreement provides for a severance payment of 18 months' then current salary and the continuation of all fringe benefits for 18 months at the Company's expense after the termination of his employment. Mr. Bolduc is entitled to a monthly automobile allowance of $1,000. (2) Mr. Marvin's employment agreement provides that if Mr. Marvin's employment terminates during the term of his employment other than for cause, death or disability, he will be entitled to receive his base compensation and group insurance benefits during a period equal to the greater of (i) one year or (ii) the remainder of the term of his employment contract. (3) Mr. Moore's employment agreement provides that if Mr. Moore's employment is terminated by the Company other than for cause, disability or death, he will be entitled to receive his base compensation and group insurance benefits for a period of twelve months, subject to adjustment in the event Mr. Moore obtains new employment during the twelve-month period after the termination of his employment. Mr. Moore is entitled to a monthly automobile allowance of $500. (4) Mr. Snyder's employment agreement provides that if Mr. Snyder's employment is terminated by the Cambridge Center other than for cause, disability or death, he will be entitled to receive his base compensation and group insurance benefits during a period equal to the greater of (i) one year or (ii) the remainder of the term of the employment agreement. Mr. Snyder is entitled to a monthly automobile allowance of $400. (5) Mr. Vilardi's employment agreement provides that if Mr. Vilardi's employment is terminated by the Company other than for cause, disability or death, he will be entitled to receive his base compensation and group insurance benefits for a period of twelve months, subject to adjustment in the event Mr. Vilardi obtains new employment during the twelve-month period after the termination of his employment. Mr. Vilardi is entitled to a monthly automobile allowance of $500. 1996 Stock Plan On February 14, 1996, the Board of Directors and the Company's stockholders approved the Company's 1996 Stock Plan (the "Plan"). The purpose of the Plan is to provide directors, officers, key employees, consultants and other service providers with additional incentives by increasing their ownership interests in the Company. Individual awards under the Plan may take the form of one or more of (i) incentive stock options ("ISOs"), (ii) non-qualified stock options ("NQSOs"), (iii) stock appreciation rights ("SARs") and (iv) restricted stock. The Compensation Committee administers the Plan and generally selects the individuals who will receive awards and the terms and conditions of those awards. The maximum number of shares of Common Stock that may be issued or issuable under the Plan, determined immediately after the grant of any award, may not exceed 3,250,000 shares. Shares of Common Stock subject to awards which have expired, terminated or been canceled or forfeited are available for issuance or use in connection with future awards. As of January 1, 1999, there were 756,104 additional shares available for grant under the Plan. 106 The Plan will remain in effect until February 14, 2006 unless terminated earlier by the Board of Directors. The Plan may be amended by the Board of Directors without the consent of the stockholders of the Company, except that any amendment, although effective when made, will be subject to stockholder approval if required by any Federal or state law or regulation or by the rules of any stock exchange or automated quotation system on which the Common Stock may then be listed or quoted. The following table sets forth all options granted to the Named Executive Officers in 1998: Option Grants in Last Fiscal Year Individual Grants -------------------------------------------- % of Potential Realizable Total Value at Assumed Number of Options Annual Rates of Securities Granted to Stock Underlying Employees Exercise Price Appreciation Options in Fiscal Price Expiration for Name Granted (#) Year ($/Share) Date Option Term(4) ---- ----------- ---------- --------- ---------- --------------------- 5%($) 10%($) ---------- ---------- Glenn D. Bolduc......... 40,000 4.9 8.00(1) (3) 201,250 510,000 C. Raymond Marvin....... 100,000 12.3 5.75(2) (3) 362,000 916,400 Robert F. Moore......... 25,000 3.1 8.00(1) (3) 125,800 318,800 Courtney P. Snyder...... 0 0 0 (3) 0 0 Gary G. Vilardi......... 1,000 0.1 10.00(2) (3) 6,290 15,940 10,000 1.2 8.00(1) (3) 50,300 127,500 - -------- (1) The exercise price of these options is the initial public offering price per share. (2) The exercise price of these options is the fair market value on the date of grant as determined by the Board of Directors of the Company. The Board of Directors determined the market value of the Common Stock based on various factors, including the illiquid nature of an investment in the Company's Common Stock, the absence of any operating history, the Company's future prospects and the anticipated initial public offering. In addition, the Company periodically obtained independent valuations of the Company's Common Stock. (3) If a Named Executive Officer ceases to be employed by the Company, further vesting of the Named Executive Officer's options ceases and all vested options expire 90 days after the date such Named Executive Officer ceases to be employed by the Company. In any event, all options granted to Named Executive Officers terminate 10 years from the date of grant. (4) Amounts reported in this column represent hypothetical values that may be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compounded rates of appreciation of the Company's Common Stock over the term of the options. These numbers are calculated based on rules promulgated by the Commission and do not represent the Company's estimate of future stock price growth. Actual gains, if any, on stock option exercises and Common Stock holdings are dependent on timing of such exercise and future performance of the Company's Common Stock. There can be no assurance that the rates of appreciation assumed in this table can be achieved or that the amounts reflected will be received by the Named Executive Officers. This table does not take into account any appreciation in the price of the Common Stock from the date of grant to current date. The values shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise. 107 The following table sets forth the value of all unexercised options held by the Named Executive Officers at the end of 1998: Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values Value of Unexercised Number of Securities In-the-Money Underlying Unexercised Options at Fiscal Options at FY-End (#) Year End ($)(1) ------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Glenn D. Bolduc............. 194,587 80,413 1,463,020 262,500 C. Raymond Marvin........... 0 100,000 0 225,000 Robert F. Moore............. 30,087 64,913 168,000 252,000 Courtney P. Snyder.......... 30,900 44,100 69,525 99,225 Gary G. Vilardi............. 30,007 30,993 175,020 124,980 - -------- (1) There was no public trading market for the Common Stock on December 31, 1998. Accordingly, solely for the purposes of this table, the values in this column have been calculated on the basis of the initial public offering price less the aggregate exercise price of the options. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information regarding the beneficial ownership of the Common Stock of the Company as of March 22, 1999 by (i) each person known to the Company to beneficially own more than five percent of the outstanding shares of Common Stock, (ii) each of the Company's Directors and persons who have consented to be named as Directors (the "Named Directors"), (iii) each Named Executive Officer, and (iv) all executive officers, Directors and Named Executive Officers as a group. All persons listed have an address in care of the Company's principal executive office and have sole voting and investment power with respect to their shares unless otherwise indicated. As of March 22, 1999, the Company had outstanding 8,298,670 shares of Common Stock. Number of Shares Name Beneficially Owned(1) Percent of Class ---- --------------------- ---------------- John J. Hassett......................... 937,762 (2) 11.3 Glenn D. Bolduc......................... 268,170 (3) 3.2 Patti R. Bisbano........................ 89,676 (4) 1.1 Courtney P. Snyder...................... 85,980 (5) 1.0 David L. Lougee......................... 71,338 (6) * Robert F. Moore......................... 38,170 (7) * Gary V. Vilardi......................... 35,006 (8) * C. Raymond Marvin....................... 13,000 (9) * Joanna M. Jacobson...................... 10,000 (10) * Richard G. Hamermesh.................... 6,006 (11) * Edward M. Philip........................ 4,008 (12) * All executive officers, Directors and Named Executive Officers as a group (14 persons)............................... 761,090 9.1 - -------- * Less than 1%. 108 (1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under Rule 13d-3(d), shares not outstanding which are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. (2) Includes 837,762 shares held by Mr. Hassett and 100,000 shares held by Susan C. Hassett, the spouse of Mr. Hassett. Does not include 60,000 shares held by J. Michael Powell as Trustee for Mr. Hassett's two minor children, as to which Mr. Hassett disclaims beneficial ownership. (3) Includes 34,000 shares held by Mr. Bolduc, 204,170 shares with respect to which options held by Mr. Bolduc may be exercised as of June 1, 1999 and 30,000 shares held by Grace K. Bolduc, the spouse of Mr. Bolduc, as Trustee for their three minor children. (4) Includes 52,174 shares issued to Ms. Bisbano in connection with the Original Acquisition and 37,502 shares with respect to which options granted to Ms. Bisbano may be exercised as of June 1, 1999. (5) Includes 48,780 shares issued to Mr. Snyder in connection with the Original Acquisition and 37,200 shares with respect to which options granted to Mr. Snyder may be exercised as of June 1, 1999. (6) Includes 64,000 shares held by Mr. Lougee and 7,338 shares with respect to which options held by Mr. Lougee may be exercised as of June 1, 1999. (7) Includes 38,170 shares with respect to which options held by Mr. Moore may be exercised as of June 1, 1999. (8) Includes 35,006 shares with respect to which options held by Mr. Vilardi may be exercised as of June 1, 1999. (9) Includes an estimated 13,000 shares with respect to which options held by Mr. Marvin may be exercised as of June 1, 1999. (10) Includes 10,000 shares with respect to which options held by Ms. Jacobson may be exercised as of June 1, 1999. (11) Includes 6,006 shares with respect to which options held by Dr. Hamermesh may be exercised as of June 1, 1999. (12) Includes 4,008 shares with respect to which options to be granted to Mr. Philip may be exercised as of June 1, 1999. Item 13. Certain Relationships and Related Transactions. Glenn D. Bolduc, President and Chief Executive Officer of the Company, owned approximately five percent of the issued and outstanding common stock of MultiLink, a principal supplier of MCUs to the Company, prior to the acquisition of MultiLink by PictureTel Corporation in 1997. In 1995, 1996 and 1997, aggregate purchases of MCUs and ancillary services from MultiLink by the Operating Centers were approximately $889,000, $811,000 and $878,000, respectively. Currently, Mr. Bolduc owns less than 1% of the outstanding shares of capital stock of PictureTel Corporation. David L. Lougee, one of the Company's Directors, is a partner of Mirick, O'Connell, DeMallie & Lougee, LLP, the law firm currently retained as the Company's legal counsel. In 1998, the Company paid Mirick, O'Connell, DeMallie & Lougee, LLP an aggregate of approximately $844,000 in legal fees and expenses for legal services provided to VIALOG. TCC provides teleconferencing services to customers of a company owned by Susan C. Hassett, spouse of John J. Hassett, for which TCC recorded revenues of $175,000, $230,000 and $220,000 in 1996, 1997 and 1998, respectively. On November 6, 1997, John J. Hassett entered into a stockholder agreement with the Company that provides, among other things, that while any Senior Notes remain outstanding or any obligation of the Company or the Operating Centers (as subsidiary guarantors) with respect thereto remains unpaid finally and in full, (i) 109 with respect to all matters submitted to a vote of the stockholders of the Company regarding the appointment, election or removal of directors or officers of the Company, Mr. Hassett will vote any shares of voting stock of the Company over which he has direct or indirect voting power in the same proportion as the votes cast in favor of and against the particular matter voted upon, by all of the other stockholders of the Company, and (ii) Mr. Hassett will not serve as a director or officer of the Company or any subsidiary. For the period December, 1997 to December, 1998, John J. Hassett provided consulting services to the Company in consideration of fees totaling $90,000. The Company terminated the employment of David L. Lipsky, former President of the Oradell Center, in June, 1998. On July 22, 1998, the Company and Mr. Lipsky signed an agreement resolving a dispute regarding his employment and position at the Oradell Center. The Company agreed to pay Mr. Lipsky a sum of $309,000, less required witholdings and deductions, in satisfaction of amounts due under his employment agreement and to include Mr. Lipsky as a selling stockholder in the initial public offering with respect to the 267,826 shares of Common Stock owned by Mr. Lipsky. In exchange, Mr. Lipsky agreed, among other things, to cancel all of his vested and unvested stock options, release the Company from all claims, refrain from acquiring any voting securities of the Company for ten years, and acknowledge the termination of his employment as President of the Oradell Center and his term as a Director of the Company. Company Policy The Company has implemented a policy whereby neither the Company nor any subsidiary (which includes the Operating Centers) will enter into contracts or business arrangements with persons or entities owned in whole or in part by officers or directors of the Company or any subsidiary except on an arms- length basis and with the approval of the Company's Board of Directors. The Company's By-Laws require that any approval must be by a majority of the independent Directors then in office who have no interest in such contract or transaction. PART IV Item 14. Financial Statements, Schedules, Reports on Form 8-K and Exhibits. (a) Documents filed as part of this Form 10-K: 1.Financial Statements See index to Financial Statements under ITEM 8--Financial Statements and Supplementary Data. 2.Financial Statement Schedules All financial statement schedules have been omitted because they are not required, not applicable, or the information to be included in the financial statement schedules is included in the Consolidated Financial Statements or the notes thereto. 3.Exhibits See Exhibit Index. (b)Reports on Form 8-K The Company filed a Form 8-K on October 26, 1998 to report that the Company executed a two year, $15.0 million credit facility with Coast Business Credit, a division of Southern Pacific Bank. 110 EXHIBIT INDEX Exhibit Number Description ------- ----------- 2.1 Agreement and Plan of Reorganization By and Among VIALOG Corporation, TBMA Acquisition Corporation and Telephone Business Meetings, Inc. and C. Raymond Marvin Dated as of September 8, 1997. 2.2 Amendment to Agreement and Plan of Reorganization By and Among VIALOG Corporation, TBMA Acquisition Corporation, Telephone Business Meetings, Inc. and C. Raymond Marvin Dated as of October 20, 1997. 2.3 Letter Agreement Dated November 5, 1997 between VIALOG Corporation, Telephone Business Meetings, Inc. and C. Raymond Marvin. 2.4 Amended and Restated Agreement and Plan of Reorganization By and Among VIALOG Corporation, CSII Acquisition Corporation and Conference Source International, Inc. and Judy B. Crawford and Olen E. Crawford Dated as of September 8, 1997. 2.5 Amended and Restated Asset Purchase Agreement By and Among VIALOG Corporation, Call Points Acquisition Corporation, Call Points, Inc. and Ropir Industries, Inc. Dated as of October 17, 1997. 2.6 Amended and Restated Agreement and Plan of Reorganization By and Among VIALOG Corporation, KST Acquisition Corporation, Kendall Square Teleconferencing, Inc., Courtney Snyder, Paul Ballantine, John Hassett and Dwight Grader Dated as of September 30, 1997. 2.7 First Amendment to Amended and Restated Agreement and Plan of Reorganization By and Among VIALOG Corporation, KST Acquisition Corporation, Kendall Square Teleconferencing, Inc. and Courtney Snyder, Paul Ballantine, John Hassett and Dwight Grader Dated October 24, 1997. 2.8 Amended and Restated Agreement and Plan of Reorganization By and Among VIALOG Corporation, AMCS Acquisition Corporation and American Conferencing Company, Inc. and David Lipsky Dated as of September 30, 1997. 2.9 Amended and Restated Agreement and Plan of Reorganization By and Among VIALOG Corporation, CDC Acquisition Corporation and Communications Development Corporation and Patti R. Bisbano and Maurya Suda Dated as of September 30, 1997. 2.10 First Amendment to Amended and Restated Agreement and Plan of Reorganization By and Among VIALOG Corporation, CDC Acquisition Corporation, Communication Development Corporation and Patti R. Bisbano and Maurya Suda Dated as of October 24, 1997. 2.11+ Agreement and Plan of Reorganization by and among VIALOG Corporation, ABC Acquisition Corporation, A Business Conference-Call, Inc. and Daniel L. Barber and Robert M. Kalla dated as of May 23, 1998. 2.12++ First Amendment to Agreement and Plan of Reorganization By and Among VIALOG Corporation, ABC Acquisition Corporation, A Business Conference-Call, Inc. and Daniel L. Barber and Robert M. Kalla Dated as of June 5, 1998. 2.13+++ Second Amendment to Agreement and Plan of Reorganization By and Among VIALOG Corporation, ABC Acquisition Corporation, A Business Conference-Call, Inc. and Daniel L. Barber and Robert M. Kalla Dated as of September 28, 1998. 2.14+++ Third Amendment to Agreement and Plan of Reorganization By and Among VIALOG Corporation, ABC Acquisition Corporation, A Business Conference-Call, Inc. and Daniel L. Barber and Robert M. Kalla Dated as of December 19, 1998. 111 Exhibit Number Description ------- ----------- 2.15+++ Agreement and Plan of Reorganization By and Among VIALOG Corporation, CPI Acquisition Corporation and Conference Pros International, Inc. and Michael Burns Dated as of November 30, 1998. 2.16+++ Agreement and Plan Reorganization By and Among VIALOG Corporation, Better Acquisition Corporation, and A Better Conference, Inc. and Patricia A. Cranford and Otis Cranford and Matthew Cranford Dated as of December 30, 1998. 3.1 Restated Articles of Organization of VIALOG Corporation. 3.2 Amended and Restated By-Laws of VIALOG Corporation. 3.3 Certificate of Incorporation of Communications Development Corporation. 3.4 By-Laws of Communication Development Corporation. 3.5 Articles of Incorporation of Conference Source International, Inc. 3.6 By-Laws of Conference Source International, Inc. 3.7 Unanimous Consent of Board of Directors of Conference Source International, Inc. Amending Section 2 of Article II of the By-Laws. 3.8 Certificate of Incorporation of Telephone Business Meetings, Inc. 3.9 Regulations of Telephone Business Meetings, Inc. 3.10 Articles of Organization of Kendall Square Teleconferencing, Inc. (f/k/a Teleconversant, LTD) 3.11 Articles of Amendment of Certificate of Incorporation of Kendall Square Teleconferencing, Inc. Changing the Name of the Company from Teleconversant, Ltd. To Kendall Square Teleconferencing, Inc. 3.12 Articles of Amendment of Certificate of Incorporation of Kendall Square Teleconferencing, Inc. Deleting the Stock Transfer Restrictions in Article V in Their Entirety. 3.13 By-Laws of Kendall Square Teleconferencing, Inc. 3.14 Certificate of Incorporation of American Conferencing Company, Inc. (f/k/a AMCS Acquisition Corporation) 3.15 Certificate of Merger of American Conferencing Company, Inc. Into AMCS Acquisition Corporation Evidencing Name Change, Filed with the Secretary of State of Delaware. 3.16 By-Laws of American Conferencing Company, Inc. 3.17 Certificate of Incorporation of Call Points, Inc. (f/k/a Call Points Acquisition Corporation). 3.18 Certificate of Amendment of Certificate of Incorporation of Call Points Evidencing Name Change, Filed with the Secretary of State of Delaware. 3.19 By-Laws of Call Points, Inc. 4.1++ Form of certificate evidencing ownership of Common Stock of the Company. 4.2 Indenture Dated as of November 12, 1997 Among VIALOG Corporation, Telephone Business Meetings, Inc., Conference Source International, Inc., Kendall Square Teleconferencing, Inc., American Conferencing Company, Inc., Communication Development Corporation Inc., Call Points, Inc. and State Street Bank and Trust Company (including Forms of Series A Security and Series B Security attached to the Indenture as Exhibits A-1 and A-2, respectively). 112 Exhibit Number Description ------- ----------- 4.3 Unit Agreement Dated as of November 12, 1997 By and Among VIALOG Corporation, Telephone Business Meetings, Inc., Conference Source International, Inc., Call Points, Inc., Kendall Square Teleconferencing, Inc., American Conferencing Company, Inc., Communications Development Corporation, and State Street Bank and Trust Company (including Form of Unit Certificate attached to the Unit Agreement as Exhibit A). 4.4 Warrant Agreement Dated as of November 12, 1997 Between VIALOG Corporation and State Street Bank and Trust Company (including Form of Warrant Certificate attached to the Warrant Agreement as Exhibit A). 4.5 Security Holders' and Registration Rights Agreement Dated as of November 12, 1997 Among VIALOG Corporation and Jefferies & Company, Inc. 4.6 Registration Rights Agreement Dated as of November 12, 1997 By and Among VIALOG Corporation, Kendall Square Teleconferencing, Inc., AMCS Acquisition Corporation, Communication Development Corporation, Telephone Business Meetings, Inc., Conference Source International, Inc., Call Points Acquisition Corporation and Jefferies & Company, Inc.--see Exhibit 1.2. 4.7++++ Exchange Agent Agreement Dated as of February 9, 1998. 10.1 1996 Stock Plan of the Company. 10.2 Equipment Lease between CSI and Ally Capital Corporation Dated April 1, 1996. 10.3 Equipment Lease between CSI and The CIT Group/Equipment Financing, Inc. Dated November 11, 1996. 10.4 Equipment Lease between CSI and BSFS Equipment Leasing Dated April 8, 1996. 10.5 Equipment Lease between TCC (f/k/a Teleconversant Ltd.) and Wasco Funding Corp. Dated May 21, 1996. 10.6 Equipment Lease between TCC (f/k/a Teleconversant Ltd.) and Wasco Funding Corp. Dated July 20, 1995. 10.7 Lease between Aetna Life Insurance Company and ACCESS, as Amended, Dated December 6, 1994. 10.8 Lease Agreement between SPP Real Estate (Georgia II), Inc. and CSI Dated November 1, 1996. 10.9 Amended & Restated Employment Agreement By and Between VIALOG Corporation and Glenn D. Bolduc Dated May 6, 1997. 10.10 Employment Agreement By and Between Telephone Business Meetings, Inc. and C. Raymond Marvin Dated as of November 12, 1997. 10.11 Amendment to Employment Agreement between the Company and C. Raymond Marvin Effective as of December 31, 1997. 10.12 Employment Agreement By and Between CSII Acquisition Corporation and Judy B. Crawford Dated as of November 12, 1997. 10.13 Employment Agreement By and Between Kendall Square Teleconferencing, Inc. and Courtney Snyder Dated November 12, 1997. 10.14 Employment Agreement By and Between American Conferencing Company, Inc. and David Lipsky Dated as of November 12, 1997. 113 Exhibit Number Description ------- ----------- 10.15 Employment Agreement By and Between Communication Development Corporation and Patti R. Bisbano Dated as of November 12, 1997. 10.16 Employment Agreement By and Between the Company and William Pucci Dated as of October 1, 1996. 10.17 Employment Agreement By and Between the Company and John Dion Dated as of November 4, 1996. 10.18 Employment Agreement By and Between the Company and Gary Vilardi Dated as of April 1, 1997. 10.19 Employment Agreement By and Between the Company and Robert Moore Dated as of October 20, 1997. 10.20 Employment Agreement By and Between the Company and John Williams Dated as of October 14, 1997. 10.21++++ Employment Agreement By and Between Call Points, Inc. And Olen E. Crawford Dated as of November 20, 1997. 10.22 Stockholder Agreement By and Among John J. Hassett and VIALOG Corporation Dated as of November 6, 1997. 10.23 Form of Registration Rights Agreement between VIALOG Corporation and certain of its stockholders specified in Schedules I and II attached thereto. 10.24 Lease Between Tower Investment Group and Communication Development Corp. Dated February 23, 1990, Including Subsequent Modifications Thereto. 10.25 Lease Agreement by and Between 680-690 Kinderkamack Road and American Conferencing Company, Inc. Dated June 1997. 10.26 Lease Between Robert A. Jones and K. George Najarian, Trustees of Old Cambridge Realty Trust and Old Kendall Square Realty Trust, and Kendall Square Teleconferencing, Inc. (f/k/a Teleconversant, Ltd.) Dated February 15, 1996. 10.27 Lease Between Ropir Communications and Call Points, Inc. Commencing May 1, 1995. 10.28 Amendment to Lease Between Ropir Industries, Inc. and Call Points, Inc. 10.29 Equipment Lease between Kendall Square Teleconferencing, Inc. and Wasco Funding Corp. Dated July 31, 1997. 10.30 Sublease between Eisai Research Institute of Boston, Inc. and VIALOG Corporation Dated as of August 20, 1997. 10.31* Assignment of Lease between Telephone Business Meetings, Inc. and CMC Datacomm, Inc. dated as of March 13, 1998. 10.32** Letter Agreement between Nolan Enterprises and Communication Development Corporation Dated March 31, 1998. 10.33** Fourth Lease Modification & Extension Agreement by and between Danbury Executive Tower Investment Group Limited Liability Partnership and Communication Development Corporation Dated April 1998. 10.34** Lease between Connecticut General Life Insurance Company, on behalf of its Separate Account R, and VIALOG Corporation Dated April 7, 1998. 114 Exhibit Number Description ------- ----------- 10.35+++ Lease Agreement By and Between Executive Park, T.I.C. and VIALOG Corporation Dated as of August 3, 1998. 10.36+++ Employment Agreement By and Between VIALOG Corporation and Clarissa Peterson Dated as of August 3, 1998. 10.37*** Loan & Security Agreement Dated as of September 30, 1998 by and between Kendall Square Teleconferencing, Inc.; Conference Source International, Inc.; Telephone Business Meetings, Inc.; Call Points, Inc.; American Conferencing Company, Inc.; and Communication Development Corporation. 10.38*** Secured Term Note Dated September 30, 1998 in the principal amount of $4,000,000 delivered by Kendall Square Teleconferencing, Inc.; Conference Source International, Inc.; Telephone Business Meetings, Inc.; Call Points, Inc.; American Conferencing Company, Inc.; and Communication Development Corporation to Coast Business Credit, a division of Southern Pacific Bank. 10.39*** Secured Term Note Dated September 30, 1998 in the principal amount of $1,500,000 delivered by Kendall Square Teleconferencing, Inc.; Conference Source International, Inc.; Telephone Business Meetings, Inc.; Call Points, Inc.; American Conferencing Company, Inc.; and Communication Development Corporation to Coast Business Credit, a division of Southern Pacific Bank. 10.40*** Security Agreement Dated September 30, 1998 by and Between VIALOG Corporation and Coast Business Credit, a division of Southern Pacific Bank. 10.41*** Continuing Guaranty Dated September 30, 1998 executed by VIALOG Corporation in favor of Coast Business Credit, a division of Southern Pacific Bank. 11.1**** Statement regarding Computation of Earnings Per Share. 21.1**** Subsidiaries of the Company. 27.1**** Financial Data Schedule. - -------- All non-marked Exhibits listed above are incorporated by reference to the Exhibits to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on January 9, 1998 (File No. 333-44041). + Incoroporated by reference to the Exhibits to the Current Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934 on Form 8-K filed with the Securities and Exchange Commission on May 28, 1998. ++ Incorporated by Reference to the Exhibits to Amendment No. 1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 8, 1998 (File No. 333-53395). +++ Incorporated by Reference to the Exhibits to Amendment No. 3 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 31, 1998 (File No. 333-53395). ++++ Incorporated by reference to the Exhibits to Amendment No. 1 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on February 10, 1998 (File No. 333-44041). * Incorporated by reference to the Exhibits to Form 10-K for the fiscal year ended December 31, 1997 filed with the Securities and Exchange Commission on March 31, 1998 (File No. 333-22585). ** Incorporated by reference to the Exhibits to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 22, 1998. *** Incorporated by reference to the Exhibits to the Current Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934 on Form 8-K filed with the Securities and Exchange Commission on October 26, 1998. **** Filed herewith. 115 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VIALOG Corporation /s/ Glenn D. Bolduc By: _________________________________ Glenn D. Bolduc, President and Chief Executive Officer Date: March 26, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Glenn D. Bolduc President, Chief Executive March 26, 1999 By: __________________________________ Officer and Director Glenn D. Bolduc /s/ John J. Dion Vice President--Finance, March 30, 1999 By: __________________________________ Treasurer, Principal John J. Dion Financial Officer and Principal Accounting Officer /s/ Joanna M. Jacobson Director March 30, 1999 By: __________________________________ Joanna M. Jacobson /s/ David L. Lougee Director March 30, 1999 By: __________________________________ David L. Lougee /s/ Patti R. Bisbano Director March 26, 1999 By: __________________________________ Patti R. Bisbano /s/ Richard G. Hamermesh Director March 26, 1999 By: __________________________________ Richard G. Hamermesh /s/ Edward M. Philip Director March 30, 1999 By: __________________________________ Edward M. Philip 116